[Manas Rohilla and Smruti Kulkarni are 3rd year B.A., LL.B. (Hons.) students at the Gujarat National Law University, Gandhinagar]
In the era of complex and multi-party transactions, the issue of whether non-signatories to an arbitration agreement can be bound by it has been largely relevant and contentious. On 6 December 2023, a five-judge constitution bench of the Supreme Court of India, in Cox and Kings Ltd. v. SAP India Pvt. Ltd., has examined the validity and applicability of the “group of companies doctrine” in the Indian context.
The aim of this post is to provide a comprehensive overview of the doctrine, the international and domestic backdrop explaining its evolution, an analysis of the recent Supreme Court’s judgment highlighting its ramifications on the Indian arbitration landscape and a way forward.
International and Domestic Backdrop
The issue of binding non-signatories to arbitration agreements has been a subject of debate and divergence in various jurisdictions. The traditional view believed that only parties who have expressly consented to an arbitration agreement can be bound by it, based on the principles of party autonomy and privity of contract. However, in the international context, several courts and tribunals have developed doctrines to bind non-signatories under exceptional circumstances.
The doctrine first originated from Dow Chemical v. Isover Saint Gobain in 1984, as articulated by an ICC tribunal. In that case, the tribunal held that a non-signatory affiliate of a signatory party could be bound by an arbitration agreement under certain conditions. These conditions included a direct relationship between the signatory and the non-signatory, a direct commonality of the subject-matter, and a composite nature of the transaction. They also considered factors such as the involvement of the non-signatory in the negotiation, performance, or termination of the contract, as well as the existence of a tight group structure or a single economic unit. This gained recognition and application in several jurisdictions, including Switzerland, Germany, England, Singapore, and the United States, where it was endorsed and applied by various courts and tribunals.
In India, before the enactment of the Arbitration and Conciliation Act, 1996 (“Act”), the courts followed a restrictive approach, limiting arbitration to the signatories of the agreement. However, after the Act was enacted, the courts adopted a more liberal approach and recognized the possibility of binding non-signatories in exceptional cases. The Supreme Court’s decision in Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc (2013) was a significant development, as it applied the group of companies doctrine in the Indian context for the first time. The Court ruled that a non-signatory could be subjected to arbitration if there was a clear intention to bind both signatory and non-signatory parties. It also relied on the phrase “claiming through or under” in the Act to expand the scope of arbitration to include non-signatories.
In subsequent decisions, such as Mahanagar Telephone Nigam Ltd v. Canara Bank, the Supreme Court further developed and refined the group of companies doctrine in the Indian context. It identified additional factors such as the participation of the non-signatory in the negotiation or performance of the contract, the principle of single economic reality, and the threshold standard of prima facie determination at the referral stage. The lack of clarity and coherence in the Indian arbitration jurisprudence on this issue has created confusion and uncertainty for the parties and the arbitrators. Therefore, there was a need for a definitive and authoritative pronouncement by the Supreme Court of India on this issue, which was finally delivered in the recent judgement.
Decoding the Observations of the Court
The present case arose out of a reference made by a three-judge bench of the Supreme Court in Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2022) where the bench doubted the correctness of the group of companies doctrine as expounded by another three-judge bench in Chloro Controls. The cardinal issues before the constitution bench were: (i) whether the Act allows joinder of a non-signatory as a party to an arbitration agreement; (ii) whether section 7 of the Act allows for determination of an intention to arbitrate on the basis of the conduct of the parties; and (iii) whether the group of companies doctrine is valid and applicable in Indian arbitration law and, if so, under what circumstances and conditions.
The bench also highlighted some subsidiary considerations, such as whether the group of companies doctrine should be read into section 8 of the Act or whether it can exist independent of any statutory provision; whether the doctrine should be invoked on the basis of the principle of “single economic reality”; whether the doctrine should be construed as a means of interpreting implied consent or intent to arbitrate between the parties; and whether the principles of alter ego and/or piercing the corporate veil can alone justify the application of the doctrine even in the absence of implied consent.
Chief Justice DY Chandrachud, who authored the main judgment, expounded that Act does not prohibit the joinder of a non-signatory as a party to an arbitration agreement, provided that there is a defined legal relationship between the non-signatory and the parties to the arbitration agreement, and that the non-signatory has consented to be bound by the arbitration agreement, either expressly or impliedly. He further clarified that section 7 of the Act does not preclude the determination of an intention to arbitrate on the basis of the conduct of the parties, as long as such conduct is evidenced in writing or by reference to a document containing an arbitration clause. The conduct of the parties must demonstrate a clear and unequivocal intention to submit to arbitration.
He established the group of companies doctrine as a valid and applicable theory in Indian arbitration law. The doctrine can be invoked to bind a non-signatory entity within a corporate group to an arbitration agreement, if the following factors are satisfied: (i) a direct relationship to the party which is a signatory to the arbitration agreement; (ii) a direct commonality of the subject-matter and the agreement between the parties being a composite transaction; (iii) the transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid, execution, and performance of supplementary or ancillary agreements for achieving the common object and collectively have a bearing on the dispute; and (iv) a composite reference of such parties will serve the ends of justice.
Justice Narsimha, who wrote a concurring judgment, found that the joinder of a non-signatory as a party to an arbitration agreement is a matter of contractual interpretation, which should be left to the arbitral tribunal to decide in the first instance, unless the court is satisfied that there is a prima facie case of no consent or intention to arbitrate on the part of the non-signatory. With respect to section 7 of the Act, he reiterated that the same should be construed in a flexible and purposive manner, to give effect to the true intention of the parties and the commercial realities of modern transactions. The conduct of the parties should be assessed objectively and contextually, to determine whether they have manifested an intention to arbitrate.
Additionally, it was also clarified the relationship and distinction between the group of companies doctrine and other doctrines and principles that have been used to bind non-signatories to an arbitration agreement, such as the alter ego doctrine, the piercing the corporate veil doctrine, and the single economic unit principle. The judgement held that the group of companies doctrine stood on its own right and did not depend on or derive from these other doctrines and principles. The judgement also held that the group of companies doctrine was not based on the concept of “persons claiming through or under” a party to the arbitration agreement, as envisaged under sections 8 and 45 of the Act. Thus, the judgment has settled the long-standing issue of binding non-signatories to arbitration agreements and has provided a comprehensive and pragmatic framework for the application of the group of companies doctrine in the Indian context
Conclusion
The judgement of the Supreme Court in Cox and Kings represents a significant milestone in the Indian arbitration jurisprudence. The judgment aligns the Indian position with international arbitration standards and practices, enhancing the credibility and attractiveness of India as an arbitration-friendly jurisdiction. The judgment’s positive ramifications include reaffirming the validity and applicability of the group of companies doctrine , recognizing its utility in complex multi-party transactions, and harmonizing Indian arbitration jurisprudence with international standards. It provides clarity and guidance for courts and tribunals in dealing with the issue, benefiting various stakeholders involved in arbitration disputes.
However, some challenges may arise, such as potential confusion and inconsistency in applying the group of companies doctrine due to its case-specific nature, and concerns about the rights and interests of non-signatory parties. Additionally, complying with foreign elements in the arbitral award can pose hurdles, particularly when dealing with foreign law, seats, or currencies. Addressing these challenges will require careful consideration and proactive measures to ensure a fair and effective arbitration process.
A balanced and nuanced approach is required from the courts, parties, and practitioners when dealing with these issues. Continuous dialogue and interaction between the Indian and international arbitration communities are essential, as well as further research and critical evaluation of the issue.
– Manas Rohilla & Smruti Kulkarni