By Dr Charu Mathur, Advocate-on-Record, Supreme Court of India
Application of Group of Companies Doctrine to Non-signatories to Arbitration Agreement in India
The Indian Supreme Court, in the case of Cox & Kings Ltd. v. SAP India Pvt. Ltd. & Anr, [1]has affirmed that non-signatories to an arbitration agreement may be treated as parties to an arbitration under the ‘Group of Companies’ doctrine within the Indian legal framework.
The Group of Companies doctrine essentially allows the inclusion of a non-signatory company, which is part of a group of companies linked through formal or informal structures under the control of a parent company, as a party to an arbitration agreement if a shared intent to include such a company is evident. This intent can be inferred from various factors, such as the company’s involvement in contract negotiations, its participation in the performance or termination of the contract. Critics of this doctrine argue that it contravenes established legal principles such as privity of contract, the distinct legal personality of corporate entities, and party autonomy. However, proponents assert that the doctrine is based on the parties’ consent and offers advantages, such as preventing the multiplicity of proceedings and avoiding the fragmentation of disputes.
Originating in France, the Group of Companies doctrine gained acceptance in Indian jurisprudence over a decade ago when a three-judge bench of the Supreme Court, in Chloro Controls v. Severn Trent Water Purification Inc.[2] (Chloro Controls), held that a non-signatory group company could be bound by an arbitration agreement if a mutual intention to that effect could be discerned. Nonetheless, the application of this doctrine has been inconsistent across Indian courts. acknowledging these inconsistencies, a three-judge bench of the Supreme Court in Cox & Kings Ltd. v. SAP India Pvt. Ltd. & Anr [3] (2022 Cox & King) )questioned the legal foundation and scope of the doctrine in India and referred the matter to a larger bench of five judges for further determination.
The Constitution Bench recognized that group companies are a “modern reality of economic life and business organization,” often established for purposes such as facilitating international trade, minimizing tax liabilities, and limiting the liability of the parent corporation. After examining the origins and application of the Group of Companies doctrine across various jurisdictions, the Bench relied on Article 7 of the UNCITRAL Model Law and Article 2 of the New York Convention to conclude that the term “parties” under Section 2(1)(h) read with Section 7 of the Indian Arbitration and Conciliation Act, 1996, can encompass both signatories and non-signatories. The Bench emphasized that the decisive factor is whether both the signatories and the non-signatory intended to be bound by the arbitration agreement.
Gauging Intent
Acknowledging that the Group of Companies doctrine is fundamentally based on consent, the Constitution Bench advocated for a modern approach in determining ‘consent,’ taking into account commercial realities. It held that the conduct of a non-signatory could suggest implied consent to be bound by the underlying contract. Extending this consent to the arbitration agreement is a legal fiction designed to reflect commercial realities, such as different companies participating in various stages of contract negotiation, execution, and performance. The Bench held that a tribunal or court must consider several factors cumulatively when determining whether a non-signatory is a party to the arbitration agreement:
(i) the mutual intent of the parties;
(ii) the relationship of the non-signatory to the signatory party;
(iii) the commonality of the subject matter;
(iv) the composite nature of the transaction; and
(v) the performance of the contract, as established in the 2022 Supreme Court judgment in ONGC Ltd. v. Discovery Enterprises (P) Ltd., (2022) 8 SCC 42
Hit the road the running
The Kompetenz-Kompetenz principle is central to ensuring the smooth progression of arbitration proceedings, as it empowers arbitral tribunals to rule on their own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. Section 8 of the Indian Arbitration and Conciliation Act, 1996, reinforced this by mandating only a prima facie examination of the existence of an arbitration agreement by the referral court at the referral stage.
However, challenges arise when a non-signatory is sought to be referred to arbitration, introducing complexities that could obstruct the referral process. The primary concern in such cases is the determination of whether the non-signatory can be considered a party to the arbitration agreement, which necessitates an examination of the relationship between the parties, the non-signatory’s role in the performance of the agreement, and other elements indicating consent. Taking cognizance of this red flag which has the potential for delays and judicial intervention at the referral stage, the Constitution Bench has provided clear directives. It directed that referral courts should refrain from delving into the complex issue of joinder of non-signatories at the referral stage. Instead, this task was left for the arbitral tribunal to determine. This approach of minimal court interference facilities the swift constitution of the arbitral tribunal and the commencement of arbitration proceedings.
Interim Relief for non-signatories
Section 9 of the A&C Act,1996 deals with interim relief. This raises an important question if the non-signatories are entitled to claim interim relief and more importantly at what stage. Constitution bench ruled that a non-signatory can be treated as a “party” under the Indian Arbitration Act, provided that the arbitral tribunal determines their status as such. This determination typically involves a detailed examination, possibly including the taking of evidence, to ascertain whether the non-signatory is indeed bound by the arbitration agreement. A non-signatory can seek interim relief from a court under Section 9 of the Arbitration Act only if its status is determined as a party. Practically speaking, this is a challenge for non-signatories, as on one hand their suit u/s 8 or 45 of the A&C Act can be dismissed on the grounds of the “existence” of an arbitration agreement prima-facie binding on it and on the other hand, the arbitral tribunal will certainly take some time to determine its status. This further complicates things for non-signatories, as they cannot invoke emergency arbitration and seek relief as his status is not yet determined. One possible way to get out of this situation is that the arbitrator provides provisional interim relief to non-signatory, subjecting it to the determination of the status. This approach preserves the integrity of the arbitration process while accommodating the practical needs of the parties involved.
It is to be noted that the doctrine of group of companies cannot be applied at first instance at the execution stage.
The Constitution bench decision in Cox and King may be in line with some international practise, however in my opinion it oversteps certain core issues of arbitration. First, it disturbs the balance of autonomy of parties; Second- it burdens the arbitrator with additional task of determining status of non-signatory; third it creates hurdles for non-signatories to seek interim relief and even at the enforcement stage if an order is passed against a non-signatory, then he will have to run pillar to post to seek relief. To my mind, the better approach would be to let legislature legislate on the initial referral stage of the arbitration proceedings rather than bind the entire arbitration eco-system with judicial directives.
[1] Cox & Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1
[2] Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641
[3] Cox & Kings Ltd. v. SAP India (P) Ltd., (2022) 8 SCC 1