SC affirms “Group of Companies’ doctrine in Indian arbitration jurisprudence
The Supreme Court held that the doctrine should be retained in Indian arbitration rules and statutes, considering its utility and determining the intention of the parties in the context of complex transactions involving multiple parties and agreements
Non-signatories of an arbitration agreement can be made party to a dispute if they are part of the same group of companies and share common intention, a Constitution bench of the Supreme Court ruled on Wednesday, putting its stamp of approval on the so-called “Group of Companies” doctrine in Indian arbitration jurisprudence.
The bench, led by Chief Justice of India Dhananjaya Y Chandrachud, held that the doctrine should be retained in Indian arbitration rules and statutes, considering its utility and determining the intention of the parties in the context of complex transactions involving multiple parties and agreements.
The five-judge bench, which also comprised justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra, maintained that the doctrine can be read into the relevant provisions of the 1996 Arbitration & Conciliation Act and that the definition of “parties” under the statute may include both signatories as well as non-signatories.
“Conduct of non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties,” said the bench, adding the existence of the “Group of Companies” doctrine is intrinsically found in the principle of “mutual intent” of the parties.
According to the Constitution bench, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory party is bound by the arbitration agreement. “On the basis of the factual evidence and application of legal doctrine, the tribunal can delve into the factual, circumstantial and legal aspects of the matter to decide whether its jurisdiction extends to the non-signatory party. In the process, the tribunal should comply with the requirements of the principle of natural justice, such as giving an opportunity to the non-signatory party to raise objections,” it said.
Sumant Nayak, Senior Partner, Desai & Diwanji said that the judgment renders a much-needed clarification on the involvement of the affiliate companies in the arbitration proceedings. “This in my view, will further smoothen the process of the arbitration hearing wherein the group companies could be involved in the arbitration proceedings as per the discretion of the arbitrator. This doctrine could also be included in the upcoming amendment of the Act,” Nayak added.
Mayank Mishra, Partner at INDUSLAW lauded the apex court for striking a nuanced and balanced approach to the invocation of the doctrine by succinctly outlining its premise. “While it was generally accepted before that non-signatories can be bound by an arbitration agreement, this judgement has given a salutary safeguard in cases involving complex transactions, multiple parties and agreements. The decision will advance the efficacy of arbitration generally as a more wholesome way to resolving disputes.”
The judgement that came over a dispute between travel company Cox and Kings and software firm SAP India is significant in deciding the future course of commercial arbitration jurisprudence in India, particularly when the doctrine is pitted against the settled concepts of consent and privity in arbitration agreements.
According to the general principle of privity of contract, only parties to an arbitration agreement are bound by its terms and conditions. However, the “Group of Companies” doctrine propounds that even non-signatories to an arbitration agreement may be bound if there seems to be a “mutual intent” of parties to bind such non-signatories.
Settling the legal position, the Constitution bench on Wednesday cited the distinction between arbitration law and obligations arising under the contract law or party autonomy. “Arbitration law works in an autonomous legal field. While the main purpose of corporate law and contract law is imputation of substantive legal liability, the main purpose behind the law of arbitration is to determine whether an arbitral tribunal has jurisdiction over the dispute arising between parties,” it said.
“Courts and tribunals cannot adopt a rigid approach to exclude all persons or entities who, through their conduct and relationship with the solitary parties, intended to be bound by the underlying contract containing the arbitration agreement...There is a need to seek a balance between the consensual nature of arbitration and the modern commercial reality where a non-signatory becomes implicated in a commercial transaction in a number of different ways,” it said.
Such a balance, the court said, can be achieved by inferring that the non-signatories, by virtue of their relationship with the signatory parties and active involvement in the performance of commercial obligations which are intricately linked to the subject matter, are not actually strangers to the dispute between the signatory parties.
“Because the “Group of Companies” doctrine is a consent-based theory, its application depends upon the consideration of a variety of factual elements to establish the mutual intention of all the parties involved. In other words, the doctrines must infer the mutual intent of both the signatory and non- signatory parties to be bound by the arbitration agreement,” said the court, clarifying the party seeking to add a non-signatory party will bear the burden of proving the “mutual intention”.
At the same time, the bench clarified that although the existence of a group of companies is a necessary condition, it is not sufficient condition to determine the intention of the parties. “Rather, the courts need to determine first the existence of a group of companies; and second, the conduct of the signatory and non-signatory parties which indicate their common intention to make the non-signatory a party to the arbitration agreement,” it added.
According to the bench, the “Group of Companies“ doctrine rests on maintaining the corporate separateness of the group of companies and therefore, while determining the common intention of the parties to bind the non-signatory to the arbitration agreement, the principle of alter ego or piercing the corporate veil cannot be made the basis for the application of the doctrine
The court said it is adopting a balanced approach without compromising on the basic principles of arbitration law, contract law and company law, to ensure that the resultant legal framework is consistent.
In May 2022, a three-judge bench had referred the matter to the larger bench for an authoritative decision on the applicability of the “Group of Companies” doctrine in Indian jurisprudence independent of any statutory provision and further if the doctrine could be read into any existing provision of the 1996 Arbitration and Conciliation Act. Another question that stood referred related to whether the jurisdiction of an arbitral tribunal could extend to non-signatories of an arbitration agreement.
The court judgment came on a dispute between travel company named Cox and Kings Ltd (C&K) and SAP India Pvt Ltd over a software licensing agreement entered into by them in 2010.
In 2015, the two companies signed three new agreements and agreed to resolve future disputes through arbitration as per the 1996 Act. However, the project to implement the new software faced difficulties, prompting C&K to reached out to SAP SE—the main branch of SAP based in Germany—for the latter’s assistance.
As the project failed to get off the ground despite repeated extensions, C&K terminated the contract in November 2016 and demanded a refund of ₹45 crores to recoup the payments made to SAP. In response, SAP India issued a notice to begin arbitration proceedings, claiming that C&K wrongfully terminated the agreement and demanded ₹17 crores as payment.
Despite its own looming bankruptcy, C&K sent a fresh notice to SAP in 2019 and initiated a fresh arbitration. This time, C&K also sent a notice to SAP SE, seeking to make it party to the arbitration, though SAP SE was not a signatory to any of the agreements. When SAP did not appoint any arbitrator, C&K approached the Supreme Court under Section 11 of the Arbitration Act and requested the court to appoint one.
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