I. Introduction

Arbitration as a form of dispute resolution mechanism is again on a rise in the country over the last few years due to introduction of several key features inter alia minimum judicial intervention,1 recognition and enforceability of arbitral awards,2 speedy disposal of disputes,3 and ensuring maximum party autonomy.4 Arbitration is based on consent of the parties who enter into an agreement waiving each side's right to invoke the jurisdiction of otherwise competent courts.5 Arbitration is governed by an agreement entered into between the parties in writing as it leads parties from their respective national courts to a quasi-judicial or private body which is vested with an authority to decide the dispute. More importantly, such an agreement is fundamental in initiating and conducting arbitration proceedings as it sets out the rules and procedure governing the arbitration and also the type of disputes which will be referred to arbitration.6

The importance of an arbitration agreement, prima facie gives an impression that the agreement entered into between the parties will only be binding on the signatories. However, there may arise a situation where non-signatories to the arbitration agreement are so closely connected to the dispute that it will be unjustified to adjudicate on the dispute without the presence of such non-signatories.

Interestingly, the Indian courts have earlier ruled that extending the arbitration agreement to non-signatories may suggest imposing a duty beyond the circle of those who have agreed to arbitrate.7 While this understanding might be correct in case of a traditional commercial transaction or in a bilateral trade with clearly designated parties and their contractual obligations, but due to globalisation and complexities involved with the modern commercial trade, parties' contractual and legal relationship are more complex and sophisticated now more than ever before. Some parties are often multinationals with broad set of subsidiaries or special purpose vehicles, which may necessitate the requirement for joinder of "third parties" required for comprehensive and effective adjudication of disputes.

II. India perspective

The Arbitration and Conciliation Act, 1996 ("Arbitration Act") does not prescribe mechanism for non-signatory or third parties to be bound by an arbitration agreement. This issue was up for determination before the Supreme Court of India ("SC") in Chloro Control (I) Pvt. Ltd. vs. Severn Trent Water Purification Inc. and Ors.8 ("Chloro Controls"), which settled the position in this regard.

Factual matrix in Chloro Controls involved multiple inter-linked agreements between an Indian party and a foreign party, with shareholders agreement ("SHA") being the primary / principal agreement. Each agreement dealt with different aspect of a commercial relationship between the parties. SHA contained an arbitration clause which provided for London as the seat of arbitration and English law being the governing law. However, the question which led to passing of this landmark judgment was whether all these parties to multiple inter-linked agreements in the present case can be referred to a single arbitration despite not being signatories to the SHA which contained an arbitration clause.

The SC in this case allowed even non-signatories to be included as parties to the ICA. Additionally, SC also applied the Group of Companies Doctrine ("GOC Doctrine"). The relevant extracts of the Judgment are as under:

"66. Though the scope of an arbitration agreement is limited to the parties who entered into it and those claiming under or through them, the Courts under the English Law have, in certain cases, also applied the "Group of Companies Doctrine". This doctrine has developed in the international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non- signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates. This theory has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement. ['Russell on Arbitration' (Twenty Third Edition)].

67. This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, 'intention of the parties' is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties." (emphasis supplied)

The SC in Chloro Controls distinguished its judgment in Sukanya Holdings Pvt. Ltd. vs. Jayesh H. Pandya and Ors. ("Sukanya Holdings"),9 wherein the SC had previously held that non-signatories to the arbitration agreement cannot be referred to arbitration as there is no provision in the Arbitration Act which prescribes a mechanism in this regard. The SC (in Sukanya Holdings) also observed that referring non-signatories to arbitration would amount to laying down a totally new procedure not contemplated under the Arbitration Act.

However, later the SC clarified that Sukanya Holdings was passed in the context of Section 8 of the Arbitration Act which deals with domestic arbitrations and thus will not apply to Chloro Controls as facts in this case fell within the ambit of Section 45 of the Act which deals with ICA. As a result, the expression "person claiming through or under" used in Section 45 of the Act could be given a wider interpretation to include non-signatories within the ambit of an arbitration agreement.

III. International perspective

The Quebec Superior Court of Canada in Quebec Inc. (Team Productions) vs. Bieber,10 while relying on the agency theory held that a non-signatory to an arbitration agreement may also be bound by the law of agency, if the circumstances help in ascertaining the agency between the parties and their intention to arbitrate.

English High Court of Justice in Peterson Farms Inc. vs. C&M Farming Ltd ("Peterson Farms"),11 held that GOC Doctrine does not finds any place in English Law.

Similarly, United States Court of Appeals for the Second Circuit in Thomson-csf, S.a., vs. American Arbitration Association,12 while extending the scope of arbitration over to non-signatories, excluded the applicability of GOC Doctrine determining the same.

The High Court of Singapore in Manuchar Steel Hong Kong Ltd. v. Star Pacific Line Pvt. Ltd,13 while relying on Peterson Farms held that GOC Doctrine is not recognised as law in Singapore and nor was there a good legal basis to support its recognition.

Interestingly, the Indian judiciary's approach regarding the use of GOC Doctrine for expanding the scope of arbitration over non-signatories is in sharp contrast to the view taken in various common law jurisdictions.14 However, as of now, there exists no one size fits all rule which can be universally adopted while expanding the scope of arbitration to non-signatories in ICA. Nonetheless, a well-reasoned solution balancing the essential principles on which the arbitration lies in this regard, is a way forward and thus it will be really interesting to witness how does it pans out.

IV. Analysis and Conclusion

Extending the scope of arbitration agreement to non-signatories creates tension between two basic principles i.e. maintaining arbitration's consensual nature and maximizing the effectiveness of the award by binding related persons having some nexus to the dispute. While party autonomy is the soul of arbitration, diluting it might defeat the purpose of arbitration as it might lead us to situations where the parties which never intended to be bound by the arbitration or who had no or minimal role to play in transaction might end up landing in the arbitration proceedings. Expanding the scope of arbitration should be based on a detailed analysis of a factual position and should be restricted to cases where such inclusion is necessary in the interest of justice.

Further, it is also the responsibility of the courts in India to ensure that the GOC Doctrine is not invoked frequently and rather its application remain fact specific to inter alia scenarios of active participation of the non-signatory party or its own direct interest in the conclusion of the contract, or situations where there is a strong organisational and financial links, so as to constitute a single economic unit.15 Moreover, the Indian courts may also analyse various reasons adopted by the Courts in other common law jurisdictions especially pro-arbitration regimes such as UK and Singapore towards invoking the GOC Doctrine. Prevalence of parties' consent over mere intention or understanding to bind a party into the arbitration is one of the major deterrent for invocation of the GOC Doctrine.

Finally, in authors' opinion, parties especially entering into multi-layered agreements should make efforts to customise the arbitration agreement/clauses so as to include provision providing liberty to the parties to include its subsidiaries or affiliates which will be directly affected by the outcome of such dispute(s), as parties to the arbitration, as and when such situation arises for comprehensive adjudication. The same will not only strengthen the principle of party autonomy and consent but will also provide less room for the judiciary to intervene and decide against what was originally agreed between the parties.

Footnotes

1. Vijay Karia vs. Prysmian Cavi E Sistemi, (2020) C.A. No. 1544/2020 and C.A. No. 1545/2020 (Ind.); Renusagar Power Plant Ltd. vs. General Electric Co., (1994) AIR SC 860 (Ind.)

2. Id.

3. See Arbitration and Conciliation (Amendment) Act, No. 33 of 2019, §. 5 (Ind.)

4. Arbitration and Conciliation Act, No. 26 of 1996, §. 7,10,11 & 20 (Ind.) ; State Trading Corporation of India vs. Jindal Steel and Power Limited and Ors (2020) (Civil Appeal No 2747 of 2020)

5. GARRY BORN, INTERNATIONAL COMMERCIAL ARBITRATION 254 (3rd ed. 2014).

6. UNCITRAL Model Law on International Commercial Arbitration, 1985, Article VI; Arbitration and Conciliation Act, No. 26 of 1996, §. 44 (Ind.)

7. Sukanya Holdings Pvt. Ltd. vs. Jayesh H. Pandya and Ors., (2003) AIR SC 2252; Steelworkers vs. American Mfg. Co., 363 U.S. 564 (1960), Available at: https://supreme.justia.com/cases/federal/us/363/564/. Accessed on 26.11.2020

8. Chloro Control (I) Pvt. Ltd. vs. Severn Trent Water Purification Inc. and Ors. (2013) 1 SCC 641.

9. Supra note 3. 

10. Québec inc. (Team Productions) v. Bieber, (2017) QCCS 1100, 9302-7654 (Can.), Available at: https://www.canlii.org/en/qc/qccs/doc/2017/2017qccs1100/2017qccs1100.html, Accessed on 27.11.2020

11. Peterson Farms Inc. v. C&M Farming Ltd., [2004] EWHC 121

12. Thomson-csf, S.a., vs. American Arbitration Association, 64 F.3d 773 (2d Cir. 1994)

13. Manuchar Steel Hong Kong Ltd. v. Star Pacific Line Pvt. Ltd., [2014] SGHC 181.

14. AmeetLalchand Shah and Ors.v.Rishabh Enterprises and Ors., (2018) 15 SCC 678; Mahanagar Telephone Nigam Ltd. v. Canara Bank and Ors., (2019) SCC OnLine SC 995.

15. Dow Chemical Company & Ors. vs. ISOVER Saint Gobain, ICC International Court of Arbitration, Case number ICC No. 4131. Yearbook Commercial Arbitration, Vol. IX, 1984, pp. 131–137. Available at: www.kluwerarbitration.com, Accessed on 03.12.2020. 

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