India – SC Rules On Applicability Of Doctrine Of ‘Group Of Companies’ In Arbitration Jurisprudence.

Introduction 

Consent by way of consensus-ad-idem and party autonomy are so deeply entrenched as the foundational or grundnorm principles of arbitration, that any material deviation therefrom is likely to pose challenges. One such challenge is the introduction of the doctrine of ‘group of companies’ in the jurisprudence of Indian arbitration, whereunder an arbitration agreement is extended, under certain conditions, to even non-signatory companies of the same group. In the words of Dr. Justice Dhananjaya Y. Chandrachud, Hon’ble CJI, it is “a modern theory which challenges the conventional notions of arbitration law.” 

The ‘group of companies’ doctrine was first recognised by the Apex Court in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc.[1] (“Chloro Controls”), with certain set conditions, which came to be called as the “mutual intentions” test.This was later upheld by the Apex Court in a plethora of judgements, although with varied approaches. 

While the earlier SC judgments had strongly embraced the doctrine as a tool to bind non-signatories, the correctness of its applicability was put to final litmus test in Cox & Kings Ltd. v. SAP India (P) Ltd.[2] (“Cox & Kings”). A three-Judge SC bench, led by the former CJI, Hon’ble Mr. Justice N.V. Ramana, delved into the various aspects surrounding the applicability of the doctrineand itsrelationship with the settled legal principles of corporate law and contract law, inter alia, ‘piercing the corporate veil’, party autonomy, privity of contract and requirement of written/ express consent to arbitration agreement. 

Former CJI N.V. Ramana’s majority Judgement (co-signed by Hon’ble Mr. Justice A.S. Bopanna) expressed concerns regarding the doctrine on the ground that it is premised more on economic efficiency rather than law. Nonetheless, the three-Judge Bench (including the concurring opinion by Hon’ble Mr. Justice Surya Kant) was of the view that reference to a larger Bench was necessary to decide the contours of the doctrine and to find its imprint in the Indian Arbitration and Conciliation Act, 1996 (“Act”), specifically the interpretation of the phrase “claiming through or under” as appearing under Sections 8, 35, and 45 of the Act. Thus, Cox & Kings wasreferred to a five-Judge Constitution Bench, which gave its verdict on December 6, 2023, finally settling the conundrum surrounding the doctrine by positively upholding its validity and applicability in Indian arbitration jurisprudence. 

Tracing the origin – international stance 

The Supreme Court is aware that to authoritatively determine the validity and applicability of the doctrine, it ought to be in tune with internationally accepted principles. Thus, the Court has traced the origin of the doctrine to the following jurisdictions: 

• In France, the Dow Chemicals Case[3] was the first to hold that a non-signatory may be bound by an arbitration agreement entered into by another entity of the same group if there was common intention of all the parties and the non-signatory appears to be a veritable party to the contracts on the basis of their involvement in the negotiation, performance and termination of the contracts.  
• The English Courts have generally taken a conservative approach, favouring strict adherence to the doctrine of privity. The English law envisages that even non-signatory parties may be bound by an arbitration agreement, but only if they are claiming under or through the original party to the agreement. Under English law, an arbitration agreement is extended to non-signatory parties on the basis of traditional contractual principles and doctrines such as agency, novation, assignment, operation of law and merger and succession. 
• The US courts do not expressly rely on the group of companies doctrine, but have often used general principles of contract law such as incorporation by reference, assumption, agency, veil piercing or alter ego, and arbitral estoppel for binding non-signatories to arbitration agreements. 

Thus, the Supreme Court observed that international jurisdictions, in some form or the other, have moved beyond the formalistic requirement of consent to bind a non-signatory to an arbitration agreement, and thus even the Indian Arbitration Act should be interpreted in a manner that is consistent with the internationally prevailing approaches. 

Findings of the Supreme Court 

Consent 

The Supreme Court observed that the issue of who is a “party” to an arbitration agreement is primarily an issue of consent and made the following observations: 

• Arbitration is a matter of contract, and an arbitration agreement, being a creature of contract, is also bound by the general principles of contract law. Thus, the contractual principles of privity of contract, consensus ad idem, express and implied consent, etc., form the essential basis of constituting a valid arbitration agreement. 
• The issue of binding a non-signatory to an arbitration agreement is more of a fact-specific aspect. 
• Under the Indian contract law, it is posited that actions or conduct can be an indicator of consent of a party to be bound by a contract and this principle of implied consent equally applies to an arbitration agreement. 
• The term “non-signatories”, instead of the traditional “third parties”, seems the most suitable to describe situations where consent to arbitration is expressed through means other than signature or express stipulation. 
• The phenomenon of group companies is the modern reality of economic life and business organisation. Often, a company signing the contract, containing the arbitration clause, is not the one negotiating or performing the underlying contractual obligations. In such situations, emphasis on formal consent will lead to the exclusion of such non-signatories from the ambit of the arbitration agreement, leading to fragmentation of disputes and multiplicity of proceedings. 

Adhering to requirements under Section 7 of the Act and definition of “party” 

The Supreme Court has held that for an arbitration agreement to be valid and enforceable, it must meet the requirements laid down under Section 7 of the Act, which contains two aspects: 

1.  

• Substantive aspect: The legislative intent underlying Section 7 is that any legal relationship, including relationships where there is no contract between the persons or entities, whose actions or conduct has given rise to a relationship, could form a subject matter of an arbitration agreement. 
• Formal aspect: Section 7(3) stipulates the requirement of a written arbitration agreement. Section 7(4) lays down three circumstances under which arbitration agreement can be said to be in writing:  
• if it is signed by the parties; 
• if it is contained in an exchange of letters, telex, telegrams or other means of telecommunication, including communication through electronic means, which provide a record of the agreement; 
• if it is contained in an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. 

The SC has observed that above three circumstances are geared towards determining the “mutual intention of the parties” to be bound by an arbitration agreement. 

Consequently, the SC has also observed that Section 2(h), read with Section 7 of the Act, does not expressly require the “party” to be a signatory to an arbitration agreement. Accordingly, the Apex Court has conclusively settled the position as follows: 

• The definition of “parties” under Section 2(1)(h), read with Section 7 of the Act includes both signatory as well as non-signatory parties. 
• Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement; 
• The group of companies doctrine 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. 
• The underlying basis for application of the group of companies doctrine rests on maintaining the corporate separateness of group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement; 
• The group of companies doctrine concerns only parties to the arbitration agreement and not the underlying commercial contract. Consequently, a non-signatory could be held to be a party to the arbitration agreement without becoming a formal party to the underlying contract. 

Relevant factors 

The SC has held that to apply the group of companies doctrine, the courts have to consider all the cumulative factors as laid down in Discovery Enterprises[4], which are: 

• Mutual intent of parties; 
• Relationship of a non-signatory to a signatory; 
• Commonality of the subject matter; 
• Composite nature of the transaction; and 
• Performance of the contract. 

The SC has observed that the primary test to apply the doctrine is by determining the intention of the parties on the basis of the underlying factual circumstances. Such intention can be gauged from the circumstances that surround the participation of the non-signatory party in the negotiation, performance, and termination of the underlying contract containing such agreement. Further, the nature or standard of involvement of the non-signatory in the performance of the contract should be positive, direct, and substantial and not merely incidental. 

The Court has also observed that the burden is on the party seeking joinder of the non-signatory to the arbitration agreement to prove a conscious and deliberate conduct of involvement of the non-signatory, based on objective evidence. 

“Claiming through or under” 

The SC has held that its approach in Chloro Controls, to the extent that it traced the group-of-companies doctrine to the phrase “claiming through or under”, was erroneous and against the well-established principles of contract law and corporate law. Consequently, the SC conclusively settled the position as follows: 

• that the persons “claiming through or under” can only assert a right in a derivative capacity that is through the party to the arbitration agreement; 
• the typical scenarios where a person or entity can claim through or under a party are assignment, subrogation and novation; 
• the persons claiming through or under do not possess an independent right to stand as parties to an arbitration agreement, but as successors to the signatory parties’ interest; 
• mere legal or commercial connection is not sufficient for a non-signatory to claim through or under a signatory party. 

As a corollary, the SC has observed that the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement. The group of companies doctrine is used to bind the non-signatory to the arbitration agreement so that it can agitate the benefits and be subject to the burdens that it derived or is conferred in the course of the performance of the contract. 

Other findings 

• The principle of “single economic entity” cannot be used as the sole basis to invoke the group-of-companies doctrine. 
• The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group-of-companies doctrine. 
• Section 9 allows a “party” to approach the court to seek interim measures and does not use the phrase “claiming through or under”. The Supreme Court has held that once a non-signatory is determined to be a veritable party to the arbitration agreement by court or tribunal, such non-signatory party can also apply for interim measures under Section 9 of the Act. 
• When a non-signatory person or entity is arrayed as a party at Section 8 or Section 11 stage, the referral court should prima facie determine the validity or existence of the arbitration agreement, and leave it for the arbitral tribunal to decide at the stage of Section 16 on whether the non-signatory is bound by the arbitration agreement. 

Conclusion 

The SC has embraced the doctrine as being instrumental in the transition from a restrictive express consent-based approach to a more flexible approach in attaching necessary relevance to implied consent for binding a non-signatory to arbitration agreement. Further, the SC has harmonised the divergent strands of law emanating from the judgments in Cheran Properties[5], Canara Bank[6] and Discovery Enterprises, and held that the observations pertaining to the group-of-companies doctrine were rendered in the facts and circumstances of each case. 

Thus, the judgment aims to make further progress in the course of evolution of arbitration law, without discarding the previous rulings and taking each of the judgments, beginning with Chloro Controls to Cox & Kings, as adding further dimensions to the theory already propounded by earlier judgments. 

The judgment conclusively holds that the group-of-companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of parties in the context of complex transactions involving multiple parties and multiple agreements. 

For further information, please contact:

Vikash Kumar Jha, Partner, Cyril Amarchand Mangaldas

vikashkumar.jha@cyrilshroff.com

[1] Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 [2012 INSC 436]. 

[2] Cox and Kings Ltd v. SAP India Pvt Ltd., (2022) 8 SCC 1, para 54 [2022 INSC 523] 

[3] Dow Chemical v. Isover Saint Gobain, ICC Case No. 4131, 23 September 1982. 

[4] ONGC v. Discovery Enterprises Pvt Ltd., (2022) 8 SCC 42 [2022 INSC 483]. 

[5] Cheran Properties Ltd v. Kasturi and Sons Ltd., (2018) 16 SCC 413 

[6] Mahanagar Telephone Nigam Ltd. v. Canara Bank, (2020) 12 SCC 767