Two SC orders reset crucial principles on arbitration

Both SC judgments on arbitration law are landmark and authoritative with clarificatory declarations in the arbitration jurisprudence of India.

In December, the Supreme Court (SC) delivered two separate judgments clarifying two important aspects of arbitration law. Both are important because different judges with smaller benches had ruled differently on these issues, which had been the law in the last few years.

The Supreme Court (Sonu Mehta/HT PHOTO)

The first issue relates to the concept of “group of companies”. The question raised was whether the associated companies in a group shall also be bound by the terms if one of the companies has signed an “arbitration agreement” with the other entity. This issue became contested after 2013 when the SC stated that the group of companies doctrine was relatable to making claims through or under the signatory company.

Different jurisdictions across the world have applied the applicability of the group of companies doctrine by applying different corporate law principles and interpretations. In the five judges’ judgment (Cox and Kings Ltd. vs SAP India Pvt Ltd. and Anr), while agreeing with the detailed view of the Chief Justice of India (CJI) DY Chandrachud, justice PS Narasimha, recorded in a separate order that acceptance of this doctrine is “highly contested across jurisdictions”. Some jurisdictions have adhered to the “separateness” of the corporate identity of a company and some others have gone on the line that non-signatories can be made party to the arbitration agreement based on their conduct, manifesting implied consent. A third category of jurisdictions uses both consensual and non-consensual legal principles to determine whether a non-signatory is a party to an arbitration agreement. In that background, it was important for our courts to decide what should be the basis of applying the concept of a group of companies while forcing a non-signatory company to be bound by an arbitration agreement.

Clarifying this issue, the SC in Cox and Kings has declared that while referring the cases to arbitrations, the conduct of the non-signatory parties of the group could be a factor in checking their consent. To decide if a non-signatory should be a party, additional factors such as direct relationship with the signatory parties, commonality of subject matter, composite culture of transaction and performance of the contract shall have to be taken into account. At the same time, the apex court has also clarified that the concept of a “single economic unit” of the group cannot be the sole basis for invoking this doctrine and forcing an arbitration agreement on a non-signatory company.

This judgment has placed the group of companies’ doctrine to circumstance and facts. No doubt, the advocacy of contesting parties has the potential to create a circumstantial puzzle at all three stages of arbitration. At the initial stage, the courts are likely to take the prima facie view and many disputes will go for adjudication before the arbitral tribunal, which then will finally decide as to whether on the substance of the matter the award should bind the non-signatory group of companies. Consequently, the scope of adjudication of the arbitral tribunal in a fixed time and the examination of the award by supervisory courts in appeal shall have one more substantive issue to decide.

The other case mentioned at the start of the article was decided by a seven-judge bench, the order was written by the CJI with a concurring opinion of justice Sanjiv Khanna. The issue involved was whether the arbitration agreement, which is an instrument, is a valid or an unenforceable document, if not stamped as per the stamp laws. This issue had earlier been examined by a five-judge bench, which produced four opinions. A majority of three judges had held that an unstamped instrument containing an arbitration agreement was void and hence not enforceable in law.

The present judgment by seven judges has unanimously decided that such agreements are not rendered void or unenforceable only because it is not stamped or inadequately stamped as non-stamping is a curable defect and objections about non-stamping of the agreement shall fall within the ambit of the arbitral tribunal. In other words, the initiation of the arbitral process cannot be stopped due to non-stamping of the agreement. This issue will be examined in the arbitration and at that stage, the claiming party shall have to cure the defect by placing a proper stamp on the agreement, if the claiming party has to take the benefit of the arbitration process to pursue its claim for final adjudication.

Now the position is like passing an award. Many awards are stamped according to their value at the time of pronouncing. Many awards are signed on nominal stamp value but that does not make the award illegal and the issue of affirmation of complete value of stamp duty is addressed at the time of executing the same.

Both these judgments are landmark and authoritative with clarificatory declarations in the arbitration jurisprudence of India. The emerging global preference of opting for this alternative method of adjudication of commercial litigation may or may not be impacted because of these judgments. But one thing is for sure. The arbitral tribunal’s jurisdiction and scope of work are set to increase.

MR Shamshad is advocate-on-record, the Supreme Court of India. The views expressed are personal