A 5 Judge Bench of the Supreme Court of India has recently put the issue of the enforceability of an arbitration agreement against non-signatory parties to the arbitration agreement to bed, in what will be considered a landmark judgement in international arbitration fora. Whether that is for the better or worse as far as India's push towards ADR is concerned, remains to be examined. That said, with this judgement, Cox and Kings Ltd. v. SAP India Pvt. Ltd. and Anr.1 , India moves a step toward favouring arbitration as the mainstream mode of dispute resolution by essentially expanding the scope of application of arbitration agreements in general. This article limits itself to an examination of the 'Group of Companies' doctrine and its relevance in the judgement

Background of the Judgement

The root of this judgement is a reference by a 3-judge bench headed by erstwhile Chief Justice of India N.V. Ramana, to a larger 5-judge bench, in deciding the following 2 questions –

  1. Whether the phrase 'claiming through or under' in sections 8 and 11 could be interpreted to include the 'Group of Companies' doctrine.
  2. Whether the 'Group of Companies' doctrine as expounded by Chloro Controls Case2 and subsequent judgements is valid in law.

In addition to the questions formulated by the Hon'ble erstwhile Chief Justice Ramana, Justice Surya Kant referred 4 more questions to the larger bench –

  1. Whether the 'Group of Companies' doctrine should be read into section 8 of the Act, or whether it can exist in Indian jurisprudence independent of any statutory provision.
  2. Whether the 'Group of Companies' doctrine should continue to be invoked on the basis of the principle of 'single economic reality'.
  3. Whether the 'Group of Companies' doctrine should be construed as a means of interpreting implied consent or intent to arbitrate between the parties.
  4. Whether the principles of alter ego and/or piercing the veil can alone justify pressing the group of companies' doctrine into operation even in the absence of implied consent.

It bears reminding that the judgement in question holds international relevance given that the 'Group of Companies' doctrine is a hotly debated topic across the realm of international arbitration, with countries like Germany and France adopting the doctrine in their arbitration jurisprudence, while countries like U.S.A and Singapore rejecting the doctrine while citing the lack of gravity accorded to consent of the non-signatory in applying the doctrine, a troublesome trend.

That said, the Supreme Court of India has attempted rather well to reconcile the facets of consent, which is arguably the cornerstone of arbitration as we know it, and the larger considerations of equity and justice in applying the 'Group of Companies' doctrine under the Arbitration and Conciliation Act, 1996.

The 'Group of Companies' doctrine runs particularly into a roadblock when one considers the concept of separate legal personality as laid down in Salomon v. Salomon. The gist of the jurisprudence of the aforementioned case law is that the House of Lords held that the company, despite being an agent of the Salomon, was a duly incorporated company and therefore, "the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are."3 Even the idea of holding a non-signatory liable to performance under an arbitration agreement seems to be antithetical to the concept of separate legal personality as laid down in the Salomon case and adhered to by the English Courts as well as the courts of the larger majority of the common law jurisdictions.

The separate legal personality was first rejected in the case of Chloro Controls (supra) where in the Court formulated the doctrine of 'Group of Companies' in the Indian context. The basis of the Court's decision in the Chloro Controls case is the pre-existence of a defined legal relationship between the non-signatory party that is being bound to the arbitration agreement with the signatory party. Essentially, the lack of formal consent by way of a signature on the arbitration agreement was not a barrier to recourse under the arbitration agreement even if the opposite party was a non-signatory in that sense. All that was required to be established was the pre-existence of a legal relationship between the claimant and the respondent. It is worth pointing out that in Chloro Controls, the Court essentially laid down jurisprudence with respect to a motion under section 45 of the Arbitration and Conciliation Act, 1996. Thereafter, the Court expanded the scope of the jurisprudence laid down in the Chloro Controls case in subsequent decisions including the Cheran Properties4 case and the Ameet Lalchand Shah case5 where the motions were with respect to enforcement and section 8 applications respectively.

A major issue of contention in the present matter also has been the use of the language 'claiming through or under' in the Arbitration and Conciliation Act, 1996 and whether this language intends to include the 'Group of Companies' doctrine. In fact, erstwhile CJI Ramana raised this very question in the first Cox and Kings Judgement rendered by the 3-judge bench. As far as the accepted position in international fora goes, there isn't a unified view. For instance, the English Court of Appeals holds that the phraseology 'claiming through and under' does not intend to codify the 'Group of Companies' doctrine.6 On the other hand, the Australian High Court seems to concur with the Indian Supreme Court's position on extending the binding nature of an arbitration agreement even to non-signatories.7

The Final Decision

The Supreme Court's decision can be summarised in the following manner. Per the Supreme Court, non-signatories can be bound to an arbitration agreement if, from their conduct and actions, it becomes apparent that they implied their consent to be bound by the arbitration agreement in question. Thereafter, binding such a party to the arbitration agreement is an action that remains independent of the 'Group of Companies' doctrine and other doctrines of veil piercing and so on. On the contrary, the decision to bind such non-signatories to the arbitration agreement is taken on the basis of a pragmatic and modernist view of consent where the conduct of these parties would be sufficient to show their acquiescence to the agreement, even in the absence of a formal signature on the arbitration agreement itself.

The Supreme Court clarifies that the application of the 'Group of Companies' doctrine is a fact-based exercise where the tribunal or the Court must attempt to ascertain the mutual intention of the non-signatory party and the signatory party to be bound by the arbitration agreement. Therefore, the Supreme Court notes, "the principal of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine." The distinction that scholars, lawyers, and Courts need to be weary of is that of understanding that the 'Group of Companies' doctrine, along with other concepts and principles of veil piercing, single economic reality, etc. are merely factors that enable a tribunal or a court to determine mutual intention of the non-signatory and signatory parties with respect to the arbitration agreement. To this extent, the authority laid down by the Apex Court in the Canara Bank 8case is particularly on point wherein it was held that a non-signatory party can be bound by an arbitration agreement in situations where the parent company of the non-signatory, or a member of the group of companies of which the non-signatory is a part of, is a signatory to the arbitration agreement. However, for the non-signatory to be bound by such agreement, it must be shown that the non-signatory has actively been engaged in the negotiation and performance of the commercial contract. Therefore, merely being a part of the group of companies is insufficient to bind a non-signatory to an arbitration agreement. The primary threshold that must be cleared in order to achieve this is to establish the active role played by the non-signatory in the performance and negotiation of the contract continuing the arbitration agreement.

While resting their argument on the incumbent duty upon tribunals and courts to ascertain the existence or lack thereof, of consent, whether implied or express, to be bound by an arbitration agreement, the Supreme Court remarks that a modern approach that "focuses on factual analysis, complexity of commercial projects, and thereby increases the relevance of arbitration in multi-party disputes" is crucial in determining the existence of such consent.

Conclusion

The Supreme Court has streamlined the law in this regard by ruling on a myriad variety of topics pertaining to the issue, as we have discussed hereinabove. Thus, it can be construed that, non-signatories may be bound to an arbitration agreement only in exceptional circumstances where the facts of the case so warrant and not as a matter of course. The Supreme Court ruling reinforces the principle that a signatory alone is considered a party unless the facts suggests otherwise placing the responsibility of establishing the impleadment of a non-signatory on the party making request for such impleadment. The Supreme Court of India urges the adoption of the 'Group of Companies' doctrine as one factor of many others in ascertaining whether implied or express consent can be made out from the conduct of the party that is a non-signatory. Though the Supreme Court has provided much needed clarity on the circumstances in which the 'Group of Companies' doctrine can be invoked, the courts in India must not adopt an overenthusiastic approach in every matter where multiple contracts between multiple parties are involved and impleadment of non-signatories to a single, composite arbitration is sought. A detailed examination of the facts of each case on their own merits must be made and the same should be tested against the criteria as laid down.

While the present judgement seems to be a progressive step for Indian Arbitration jurisprudence, there is a real possibility that it will cause companies to adopt even more complex multi-party contracts simply to safe guard themselves from the binding nature of such arbitration agreements. Therefore, at some point, tribunals and courts will have to set a threshold for the application of veil piercing principles and whether such application would be justified given that companies are merely spinning corporate webs to avoid the mandates of the law.

Footnotes

1. 2023 INSC 1051

2. Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

3. Salomon v. Salomon, [1897] AC 22

4. Cheran Properties Limited v. Kasturi and Sons Limited and Ors.,

5. Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678

6. The Mayoralty and Commonalty & Citizens of the City of London v. Ashok Sancheti, [2008] EWCA Civ 1283,

7. Rinehart v. Hancock Prospecting, [2019] HCA 13

8. Mahanagar Telephone Nigam Ltd. v. Canara Bank (2020) 12 SCC 767

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.