On 6 December 2023, the Supreme Court of India in the matter of Cox & Kings v. SAP, clarified the application of the ‘Group of Companies’ doctrine in the Indian context and affirmed that a non-signatory company within a group of companies can be bound by an arbitration agreement if certain conditions are satisfied.
Sherina Petit, Mark McMahon and Vijaya Singh Gautam review the judgment.
Background
In the case of Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc (Chloro Controls) {2012}, the Supreme Court applied the Group of Companies doctrine under Indian law for the first time.
In doing so, the court interpreted the language of section 45 (Power of judicial authority to refer parties to foreign seated arbitration) of the Indian Arbitration and Conciliation Act 1996 (“Indian Arbitration Act”).
Section 45 of the Indian Arbitration Act provides that “…a judicial authority… shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration…”
The court interpreted this language to reflect a legislative intent to broaden the scope of an arbitration agreement beyond the parties to include non-signatories to an arbitration agreement. The court ruled that a non-signatory can be subjected to an arbitration agreement if there were clear intentions between the parties to bind them.
The doctrine was further developed in subsequent Supreme Court decisions (Cheran Properties Ltd v. Kasturi and Sons Ltd {2018}, Mahanagar Telephone Nigam Ltd. v. Canara Bank {2019}, and Oil and Natural Gas Corporation Ltd v. Discovery Enterprises Pvt. Ltd {2022}).
The Group of Companies doctrine recently came back into the spotlight when a three-judge bench raised concerns about the application of the doctrine. The court criticised the approach taken in the Chloro Controls case and for failing to adequately examine the meaning of the language “any person claiming through or under” as it appears in section 8 (Power to refer parties to arbitration where there is an Indian seated arbitration), section 35 (Finality of arbitral awards) and section 45 (Power of judicial authority to refer parties to foreign seated arbitration) of the Indian Arbitration Act. The case was referred to a larger bench to decide on the correctness of the law laid down in the Chloro Controls case and the validity of the Group of Companies doctrine under Indian law.
Decision
The Supreme Court in the case of Cox & Kings v. SAP {2023}, examined Indian and foreign jurisprudence to determine the validity of the Group of Companies doctrine and define its shape under Indian law.
The five-judge bench unanimously accepted the application of the Group of Companies doctrine. In doing so:
- The court adopted a modern approach to consent to accommodate the commercial realities of composite transactions involving several interconnected agreements and parties.
Section 7 (definition of “Arbitration agreement”) of the Indian Arbitration Act mandates an arbitration agreement to be in writing, but there is no compulsory requirement that it should be signed by the parties. As per the Indian Arbitration Act, the arbitration agreement could be evidenced in an exchange of communications or telegrams. Consequently, even a non-signatory can be made a party to an arbitration agreement if they have consented to it. The court emphasised that this was not a case of extending an arbitration agreement to third parties but rather of identifying the genuine or “veritable” parties to the dispute.
- The court clarified that the Group of Companies doctrine cannot be applied based on the principle of piercing the corporate veil.
It was held that the principle of alter ego/piercing of the corporate veil disregards corporate separateness and the intentions of the parties. In contrast, the Group of Companies doctrine facilitates determining the true parties to the arbitration agreement without interfering with the legal personality of the entity in question.
- The court concluded that 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) (definition of “party”) and section 7 (definition of “arbitration agreement”) of the Indian Arbitration Act.
- The court reiterated the guidelines set out in the decision of Oil and Natural Gas Corporation Ltd v. Discovery Enterprises Pvt. Ltd for the application of the Group of Companies doctrine:
- “The mutual intent of the parties;
- The relationship of a non-signatory to a party which is a signatory to the agreement;
- The commonality of the subject matter;
- The composite nature of the transactions; and
- The performance of the contract.”
It was held as a result, the Group of Companies doctrine cannot be invoked on the basis of the principle of “single economic reality”.
- The court set aside the reasoning in Chloro Controlsinsofar as it traced the existence of the Group of Companies doctrine to the phrase “claiming through or under“. The court held that the typical scenarios where a person or entity can claim through or under a party are assignment, subrogation and novation, and a person “claiming through or under” can assert a right in a derivative capacity.
- The court said that at the referral stage (whether under section 8 {Power to refer parties to arbitration where there is an arbitration agreement} or section 11 {Appointment of Arbitrators} of the Indian Arbitration Act), the court shall limit itself to the prima facie question of the existence of an arbitration agreement and shall leave it for the tribunal to decide whether the non-signatories are bound by the arbitration agreement.
Commentary
This case provides useful guidance on the application of the Group of Companies doctrine and the interpretation of consent under Indian law. Businesses involving complex transactions, multiple parties and contracts should, therefore, bear in mind that non-signatories can be bound to the arbitration agreement if it meets the Group of Companies doctrine’s threshold as established by the Indian Supreme Court. Any such non-signatory company should be mindful of their participation in the negotiation or performance of a contract without just reasons so that their intention to not be bound by an arbitration agreement is well reflected through their actions.
In the present case, the Indian Supreme Court reasoned that the applicability of the Group of Companies doctrine is a factual element the court or tribunal will consider when analysing the consent of the parties. During this factual determination, the court has previously cautioned parties, lawyers and judges against being overzealous in binding a non-signatory party solely because they are part of a corporate structure.
Sherina Petit, Head of Stewarts’ International Arbitration Practice and India Practice, comments:
“The judgment transitions the restrictive interpretation of consent to a pragmatic and modern one. This is a bold step by the Indian Supreme Court to harmonise arbitration as a dispute resolution mechanism to keep up with contemporary commercial realities.
“The impact of this judgment is not limited to the Indian jurisprudence but will be of persuasive value to the common law jurisdictions. It will be interesting to observe whether the international community will accept or reject the modern interpretation of consent. This could be a start to reconciling the Group of Companies doctrine in several jurisdictions.”
We will continue to monitor and assess further development on the Group of Companies doctrine for our clients.
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