Group Of Companies Doctrine Can Be Applied To Bind Non Signatory To An Arbitration Agreement: Supreme Court

The Supreme Court, in a judgment delivered on Wednesday (27 April 2022), explained the 'Group of companies' doctrine which postulates that an arbitration agreement entered into by a company within a group of companies, can bind its non-signatory affiliates or sister concerns if the circumstances demonstrate a mutual intention of the parties to bind both the signatory and affiliated, non-signatory parties.

The court observed that a non-signatory may be bound by the arbitration agreement where: (i) There exists a group of companies; and (ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.

The bench comprising Justices DY Chandrachud, Surya Kant and Vikram Nath held that the following factors have to be considered to apply the doctrine:

(i) The mutual intent of the parties

(ii) The relationship of a non-signatory to a party which is a signatory to the agreement

(iii) The commonality of the subject matter

(iv) The composite nature of the transaction

(v) The performance of the contract

Background

In this case, the Arbitral Tribunal in a matter between Oil & Natural Gas Corporation Limited (ONGC) and Discovery Enterprises Private Limited (DEPL) and others, in its interim award, held that, Jindal Drilling and Industries Limited (JDIL) was not a party to the arbitration agreement and must be deleted from the array of parties. The interim award was challenged in an appeal which was dismissed by the impugned judgment. Appeal filed under Section 37 of the Arbitration and Conciliation Act was dismissed by the Bombay High Court. Aggrieved, ONGC approached the Apex Court.

Contentions

Before the Apex Court, the appellant ONGC contended inter alia that DEPL and JDIL constitute one single commercial entity and that ONGC is hence entitled by law to compel JDIL to participate in the arbitration proceedings so as to enforce the award against it. That, the interim award has been rendered purely on the premise that a non-signatory to the arbitration agreement cannot be impleaded as a party. That, the group of companies doctrine is applicable in this case. On the other hand, the respondents contended that the group of companies doctrine cannot be invoked to indict JDIL for the alleged acts and omissions of DEPL.

Group of Companies Doctrine

The bench noted that the principle for binding non-signatories by application of the group of companies doctrine has been invoked in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors  (2013) 1 SCC 641 b. Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors; (2018) 16 SCC 413 and c. MTNL v. Canara Bank & Ors. (2020) 12 SCC 767. The court observed:

Commentators have noted that a signed written agreement to submit a present or future dispute to arbitration does not exclude the possibility of an arbitration agreement binding a third party. A non-signatory may be bound by the operation of the group of companies doctrine as well as by the operation of the principles of assignment, agency and succession.  A party, which is not a signatory to a contract containing an arbitration clause, may be bound by the agreement to arbitrate if it is an alter ego of a party which executed the agreement. This constitutes a departure from the ordinary principle of contract law that every company in a group of companies is a distinct legal entity. A non-signatory may be bound by the arbitration agreement where: (i) There exists a group of companies; and (ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.

In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors: (i) The mutual intent of the parties; (ii) The relationship of a non-signatory to a party which is a signatory to the agreement; (iii) The commonality of the subject matter; (iv) The composite nature of the transaction; and (v) The performance of the contract. Consent and party autonomy are undergirded in Section 7 of the Act of 1996. However, a non-signatory may be held to be bound on a consensual theory, founded on agency and assignment or on a non-consensual basis such as estoppel or alter ego. 

The bench noted that by failing to consider the application for discovery and inspection, the Tribunal  foreclosed itself from inquiring into whether there was sufficient material to establish the application of the group of companies doctrine.

"The failure of the Arbitral Tribunal to allow for discovery and inspection goes to the root of the process in as much as it disabled ONGC from pursuing its fundamental claim based on the application of the group of companies doctrine.", the court said.

Thus the court held that the interim award of the first Arbitral Tribunal stands vitiated because of: (i) The failure of the arbitral tribunal to decide upon the application for discovery and inspection filed by ONGC; (ii) The failure of the arbitral tribunal to determine the legal foundation for the application of the group of companies doctrine; and (iii) The decision of the arbitral tribunal that it would decide upon the applications filed by ONGC only after the plea of jurisdiction was disposed of.

Case details

Oil and Natural Gas Corporation Ltd. vs Discovery Enterprises Pvt. Ltd | 2022 LiveLaw (SC) 416 | CA 2042 of 2022 | 27 April 2022

Coram: Justices DY Chandrachud, Surya Kant and Vikram Nath 

Counsel for the Appellant : ASG K M Nataraj assisted by Somiran Sharma and K.R.Sasiprabhu

Counsel for the Respondent : Sr. Adv Shyam Divan  assisted by Milind Sharma 

Headnotes

Arbitration and Conciliation Act, 1996 ; Section 2(h) , 7,8, 16 - Group of companies doctrine - An arbitration agreement entered into by a company within a group of companies, can bind its non-signatory affiliates or sister concerns if the circumstances demonstrate a mutual intention of the parties to bind both the signatory and affiliated, non-signatory parties - A non-signatory may be bound by the arbitration agreement where: (i) There exists a group of companies; and (ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory - In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors: (i) The mutual intent of the parties; (ii) The relationship of a non-signatory to a party which is a signatory to the agreement; (iii) The commonality of the subject matter; (iv) The composite nature of the transaction; and (v) The performance of the contract. (Para 18 , 23,  26)

Arbitration and Conciliation Act, 1996 ; Section 16, 34,37 - An appeal lies to the Court from the decision of the Arbitral Tribunal that it lacks jurisdiction - Parliament has not specifically constricted the powers of the court while considering an appeal under clause (a) of sub-section (2) of Section 37 by the grounds on which an award can be challenged under Section 34 - In the exercise of the appellate jurisdiction, the court must have due deference to the grounds which have weighed with the tribunal in holding that it lacks jurisdiction having regard to the object and spirit underlying the statute which entrusts the arbitral tribunal with the power to rule on its own jurisdiction - The decision of the tribunal that it lacks jurisdiction is not conclusive because it is subject to an appellate remedy under Section 37(2)(a). However, in the exercise of this appellate power, the court must be mindful of the fact that the statute has entrusted the arbitral tribunal with the power to rule on its own jurisdiction with the purpose of facilitating the efficacy of arbitration as an institutional mechanism for the resolution of disputes. (Para 34 - 39)

Arbitration and Conciliation Act, 1996 ; Section 16 - Party taking the plea of absence of jurisdiction is required to establish the grounds on which it set about to establish its plea. (Para 49)

Summary:  Appeal against Bombay HC judgment which dismissed appeal against interim award of the Arbitral tribunal holding that  JDIL was not a party to the arbitration agreement and must be deleted from the array of parties -  Allowed - The interim award of the Arbitral Tribunal stands vitiated because of: (i) The failure of the arbitral tribunal to decide upon the application for discovery and inspection filed by ONGC; (ii) The failure of the arbitral tribunal to determine the legal foundation for the application of the group of companies doctrine; and (iii) The decision of the arbitral tribunal that it would decide upon the applications filed by ONGC only after the plea of jurisdiction was disposed of.

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