Arbitration Agreement Can Bind Non-Signatories: Supreme Court Upholds 'Group Of Companies' Doctrine

A Constitution Bench of the Supreme Court on Wednesday (December 6) held that an arbitration agreement can bind non-signatories as per the "group of companies" doctrine. 

"The 'group of companies' doctrine must be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements," the Court observed.

 A bench comprising Chief Justice of India DY Chandrachud, Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra delivered the verdict (Cox and Kings Ltd v. SAP India Pvt Ltd).

Non-Signatories can be bound

The Court held that it is not necessary that only persons who are signatories to the arbitration agreement will be bound by the arbitration agreement.

Requirement of a written arbitration agreement does not mean that non-signatories will not be bound by it, provided there is a defined legal relationship between the signatories and the non-signatories and that the parties intended to be bound by it by the act of conduct.

"The signature of party in agreement is the most profound expression of consent of person to submit to jurisdiction. However, the corollary that persons who have not signed aren't part of agreement may not always be correct," CJI DY Chandrachud stated while pronouncing the judgment.

Non-signatories, by virtue of their relationship with the signatory parties and their commercial involvement in the subject matter, are not total strangers to the arbitration agreement, the Court held.

Conclusions

The conclusions of the judgment pronounced by CJI DY Chandrachud are as follows :

a. The definition of parties under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act 1996 includes both signatory and non-signatory parties.

b. The conduct of non-signatories could be an indicator of  their consent to be bound by the arbitration agreement.

c. The requirement of  a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.

d. Under the Arbitration Act, concept of parties is distinct from the concept of parties "claiming through or under" a party to an arbitration agreement.

e. The underlying basis for the application of the 'group of companies' doctrine rests on maintaining the corporate separateness of the group of companies while determining the common intention of the parties to bind non-signatories to the arbitration agreement.

f. The principle of 'alter ego' or 'piercing the corporate veil' cannot be made the basis for the application of the group of companies doctrine.

g. The principle of 'group of companies' has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act.

h. To apply the 'group of companies' doctrine, the courts or tribunals have to consider all the cumulative factors as laid down in Discover Enterprises. Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine.

i. The persons claiming "through or under" can only assert rights in a derivative capacity.

j. The judgment in Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc is erroneous to the extent it held that 'non-signatories' can be roped in by invoking the phrase "parties claiming through or under" as the said phrase is used to bind successors-in-interest of party in a derivative capacity.

k. The 'group of companies' doctrine must be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements.

l. At the referral stage, the referring court must leave it to the Arbitral Tribunal to decide whether non-signatories are bound by the arbitration agreement.

Justice Narasimha penned a separate but concurring judgment.

 In May 2022, a three judge bench led by the then CJI NV Ramana had referred the matter to a larger bench after observing that some aspects of the "group of companies" doctrine required reconsideration, doubting the the decision in Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc and subsequent decisions following it.  In Mahanagar TelephoneNigam Ltd. v. Canara Bank, (2020) 12 SCC 767, it was observed that the group of companies doctrine can be utilized to bind a third party to an arbitration, if a tight corporate group structure constituting a single economic reality existed.

The reference happened in an application filed under Section 11 of the Arbitration Act by Cox and Kings Ltd(CKL) seeking the appointment of arbitration in an international commercial arbitration in a dispute related to SAP India Private Ltd. The issue was where the German holding company of SAPIPL could be roped in to arbitration.

The referring bench noted that the group of companies doctrine must be applied with caution and mere fact that a non­-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the non­-signatory.

Stating that the ratio in Chloro Controls is based on economic convenience rather than correct application of law, the Court referred the aspect of interpretation of 'claiming through or under' as occurring in amended Section 8 of the Arbitration Act qua the doctrine of group of companies to a larger Bench.