Arbitration Agreements Can Bind Non-Signatories: SC Upholds Applicability Of 'Group Of Companies' Doctrine

The Supreme Court has upheld the applicability of the 'group of companies' doctrine in India.

Notably, the Bench of Chief Justice of India DY Chandrachud, Justice Hrishikesh Roy, Justice PS Narasimha, Justice JB Pardiwala and Justice Manoj Misra observed that it is not necessary that only persons who are signatories to the arbitration agreement will be bound by the arbitration agreement.

In that context, it was said that, "It is presumed that the formal signatories to an arbitration agreement are parties who will be bound by it. However, in exceptional cases persons or entities who have not signed or formally assented to a written arbitration agreement or the underlying contract containing the arbitration agreement may be held to be bound by such agreement. As mentioned in the preceding paragraphs, the doctrine of privity limits the imposition of rights and liabilities on third parties to a contract. Generally, only the parties to an arbitration agreement can be subject to the full effects of the agreement in terms of the reliefs and remedies because they consented to be bound by the arbitration agreement. Therefore, the decisive question before the courts or tribunals is whether a non-signatory consented to be bound by the arbitration agreement. To determine whether a non-signatory is bound by an arbitration agreement, the courts and tribunals apply typical principles of contract law and corporate law. The legal doctrines provide a framework for evaluating the specific contractual language and the factual settings to determine the intentions of the parties to be bound by the arbitration agreement."

The Court also clarified that the principle of "alter ego" or "piercing the corporate veil" cannot be the basis for applying this doctrine, and said that, "The principle of alter ego disregards the corporate separateness and the intentions of the parties in view of the overriding considerations of equity and good faith. In contrast, the group of companies doctrine facilitates the identification of the intention of the parties to determine the true parties to the arbitration agreement without disturbing the legal personality of the entity in question. Therefore, the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine."

In this case, the Apex Court examined the validity of the 'Group of Companies' doctrine in Indian arbitration jurisprudence. The doctrine suggests that an arbitration agreement entered into by one company within a group may bind non-signatory affiliates based on mutual intention.

A three-judge Bench, led by Chief Justice Ramana, had expressed doubts about the doctrine's application in India, questioning its economic efficiency basis over legal principles. Chief Justice Ramana referred the matter to a larger bench to clarify the interpretation of certain phrases in the Arbitration Act.

The Supreme Court arrived at the following conclusions:

a. The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties;

b. Conduct of the non-signatory parties 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, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;

e. The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the nonsignatory party to the arbitration agreement;

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

g. 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;

h. To apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). 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 a right in a derivative capacity;

j. The approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;

k. The group of companies doctrine should 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 referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and

m. In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

Cause Title: Cox and Kings Ltd. vs SAP India Pvt. Ltd. & Anr., [2023 INSC 1051]

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