Principle Of 'Alter Ego' Or 'Piercing Corporate Veil' Not The Basis For 'Group Of Companies' Doctrine : Supreme Court

While approving the 'group of companies' doctrine in the arbitration law jurisprudence, the Supreme Court clarified that the principle of "alter ego" or "piercing the corporate veil" cannot be the basis for applying this doctrine.

The Constitution Bench comprising Chief Justice of India DY Chandrachud, Justice Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra was answering a reference which doubted the "group of companies" doctrine which allows non-signatory companies to be bound by arbitration agreement.

The judgment, authored by CJI Chandrachud, explained that the "group of companies" doctrine does not dilute the separate corporate identity of different companies; its application is based on the conduct of non-signatories, which indicate an intention to be bound by the arbitration agreement.

"The principle of alter ego disregards the corporate separateness and the intentions of the parties in view of the overriding considerations of equity and good faith. In contrast, the group of companies doctrine facilitates the identification of the intention of the parties to determine the true parties to the arbitration agreement without disturbing the legal personality of the entity in question," the Court explained.

"Therefore, the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine," the Court stated. 

Factors to be considered for application of group of companies doctrine.

The participation of the non-signatory in the performance of the underlying contract is the most important factor to be considered by the courts and tribunals. The conduct of the non-signatory parties is an indicator of the intention of the non-signatory to be bound by the arbitration agreement. The intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances that surround the participation of the nonsignatory party in the negotiation, performance, and termination of the underlying contract containing such agreement. 

The non-signatory's participation in the negotiation, performance, or termination of the contract can give rise to the implied consent of it being bound by the contract.

For detailed report about the judgment, refer here.