This article is written by Valluri Viswanadham. This article seeks to go into the intricacies of the ‘group of companies’ doctrine and address its various judicial interpretations. It will also visit the international perspective to understand the concept in depth. This article intends to showcase an emphasised understanding of the group of companies doctrine.

Table of Contents

Introduction

The long-running conflict surrounding the ‘group of companies’ doctrine, which challenges the fundamental tenets of arbitration law (such as party autonomy, privity of contract, and consensus ad idem), and company law (including separate legal personality and corporate veil), has finally come to an end after a landmark ruling by the Honourable Supreme Court of India. This judicially evolved doctrine received the final stamp from the Apex Court after receiving validation in this latest ruling. 

According to this doctrine, non-signatory affiliates may be included as parties to an arbitration agreement signed by a company within the same group of companies, provided the conditions demonstrate the mutual intent of the involved parties to bind both the signatory and non-signatory parties. The 5-judge Constitution Bench clarified several principles of this doctrine through its unanimous judgement in the case of Cox & Kings (2023). While this decision is being lauded as a progressive step within the expanse of arbitration law, the law is still evolving. 

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This article aims to analyse how the ‘group of companies’ doctrine came to be across different legal systems and assess its implications for Indian arbitration law.

What is group of companies doctrine

The ‘group of companies’ doctrine is a legal principle used in international arbitration and corporate law. It recognises the interconnectedness of companies within a corporate group. It is a legal fiction that treats separate legal entities as a single economic entity for the purposes of resolving disputes in arbitration. According to this doctrine, a non-signatory company within a corporate group can be bound by an arbitration agreement that is signed by some other company within that same group. Simply put, the activities and agreements of one company within the group may be used to ascertain the rights and obligations of the other members of the group. 

This doctrine becomes especially relevant when dealing with complex corporate structures, such as when multiple companies within the same corporate group are involved in the same, similar, or related disputes. It is recognised and accepted in various jurisdictions around the world. It extends duties and responsibilities beyond the intricacies of separate legal entities within a corporate group,which consequently enables courts to lift the corporate veil and make a corporation liable for the obligations of another within the same organization.This doctrine acknowledges that companies within a group commonly work as a single economic entity, sharing resources and strategic direction. 

However, this unity can sometimes be misused to protect independent organisations from legal duties and responsibilities. The rationale behind the ‘group of companies’ doctrine is that, without it, corporate groups could exploit the doctrine of separate legal entities to evade duties and exploit creditors, employees, and shareholders, among others.

Conditions involved 

The ‘group of companies’ doctrine is applicable under specific conditions. It is only when these conditions are fulfilled that the doctrine applies. In other words, these conditions help determine whether a non-signatory company would be bound by an arbitration agreement signed by a company within the same corporate group.

Non signatories to an arbitration agreement can be bound by certain conditions mentioned below:

Common intention

The companies involved in a dispute, whether signatories or non-signatories, must share a clear and common intention that they agree to be bound by the arbitration agreement. Such intent can be recognised from their conduct, interactions, and the type of their relationship with the subject matter of the dispute. 

Interconnectedness and equitable estoppel

For the application of the ‘group of companies’ doctrine, the transactions in question, involving signatory companies and non-signatory companies, must be closely related or interconnected. Then, there is the concept of equitable estoppel, which compels the non-signatories to participate in arbitration if their participation in disputes is closely connected with the terms of the original contract. This helps accelerate the closure of similar claims.

Third-party beneficiary

Non-signatory beneficiaries of a contract can enforce the arbitration provision to guarantee they receive the intended remedies and benefits as outlined in the contract.

Agency or alter ego

Non-signatories may be obligated to arbitrate if they are intimately involved with signatories because of the practical reality of their interconnected activities and interests. This could occur if a non-signatory operates as an agent or alters the ego of a signatory.

Significance of the doctrine

The doctrine acknowledges that a group of companies functions as a single economic unit even though they are separate entities. This recognition of the unity of economic entities is crucial, especially in cases where the actions of one company can impact others within the group. The group of companies doctrine justifies courts piercing this corporate veil and holding the group responsible as a whole for the actions of its individual members. Moreover, in contractual relationships, the doctrine affects the interpretation and enforcement of agreements. 

Courts apply this doctrine by considering the group’s overall responsibilities and actions rather than focusing only on the actions of individual entities within the group. This, in turn, ensures that the dispute resolution process is fair and efficient. It also helps save time and resources, as it prevents multiple and/or parallel proceedings from taking place. This doctrine is also important in cross-border transactions involving corporations with subsidiaries in different countries. It helps determine the scope of responsibility despite the border changes, especially in cases where domestic laws may vary. By recognising the interconnectedness of corporate entities across borders, this doctrine does its job of promoting consistency and ultimately fairness in the resolution of disputes arising from international business transactions.

Necessity of the doctrine

The group of companies doctrine is a vital element of arbitration law. It becomes an important factor where the existence of specific styles of corporate structure plays a defining role in determining the common intent of the parties to make the non-signatory a party to the arbitration agreement. The dominant involvement of a non-signatory company within the group in the performance and facilitation of contractual obligations initiated by other signatory companies of the group is an indicator that the non-signatory party has also agreed to arbitrate.

The group of companies doctrine is needed because it gives the court the option to extend the objective intentions of the parties in determining their various objective and subjective intentions, both before and after the contract’s execution. By including the non-signatory entities within the scope of arbitration agreements, the group of companies doctrine contributes to the effectiveness of such agreements by preventing parties within the corporate group from using subsidiary litigation to avoid arbitration.

However, criticisms with regard to the group of companies doctrine are mainly related to the contractual aspects and the scope of arbitration. This is because clear intent and explicit consent are required for submitting disputes to arbitration, rather than going to domestic courts. In order for the arbitration proceedings to get started, a valid and legitimate arbitration agreement becomes the source document. Without the arbitral agreement, there can be no arbitration proceeding. 

At this point, critics argue that only those parties who signed the arbitral agreements, expressing their explicit intent, must be bound by such proceedings. As per critics, there will be a rise in hardships if the arbitration agreement is extended to the parties who have performed and negotiated the contract but have not signed it. Such scenarios generally occur when only one or some of the companies within a corporate group have signed an arbitral agreement. In such cases, courts of law and arbitral tribunals face the same problem regarding the inclusion of non-signatory companies from the same group in arbitral agreements.

However, this is exactly why the group of companies doctrine was evolved and applied—to address the above-mentioned situation. This doctrine widens the scope of arbitration agreements to non-signatory companies within the same corporate group as signatories. It justifies the binding nature of non-signatory subsidiaries to arbitration proceedings based on the legal relationships and interconnectedness among entities within the same corporate group. By ensuring that disputes involving allied entities are resolved within the same arbitration proceedings, the doctrine operates to encourage the success of arbitration proceedings. It also recognises the fiscal and technical pragmatics of modern corporate structures, where subsidiaries often function as united parts of a larger corporation. The courts recognise and apply the group of companies doctrine on a case-to-case basis to address complexities and promote an efficient and fair dispute resolution process.

Evolution of group of companies doctrine

The group of companies doctrine has evolved over the years to finally reach its modern form. However, its evolution can be traced back to the landmark judgement given by the International Chamber of Commerce (ICC) in the case of Dow Chemical France v. Isover Saint Gobain France (1984). This decision marks the beginning of the development of this doctrine and has been discussed below in great detail.

France

The origin of the group of companies doctrine is closely linked to various arbitral awards rendered in France. A seminal case among these is an interim award issued by the International Chamber of Commerce (ICC) in the Dow Chemicals case. This ruling established that non-signatory parties could be bound by arbitration agreements if they satisfied certain conditions. While this decision was rendered by the ICC, it was somewhat influenced by the established legal principles that prevailed in France at that time. This is made clear by the fact that, under French law, an arbitration agreement may include a non-signatory party if all parties to the agreement had a joint intention to be bound by its terms. Intent and consent are evaluated on the basis of the parties’ conduct during the negotiation, performance, and termination stages of the contract that contains the arbitration agreement.

In this case, two subsidiaries of Dow Chemical Company (USA), namely, Dow Chemical A.G. and Dow Chemical Europe, executed contracts with Isover Saint Gobain (Isover) for the dispensation of thermal insulation. These contracts stipulated that any subsidiary company of Dow Chemical could fulfil the dispensation responsibilities outlined in the contracts. Moreover, these contracts contained a clause specifying that in case of any dispute, issues would be referred to arbitration.

Accordingly, throughout the business dealings with the parties, Dow Chemical France, another subsidiary of Dow Chemical Company, which was not a party and did not sign the above-mentioned contracts, fulfilled the dispensation responsibilities in place of its sister companies. When disputes arose regarding the performance of the contracts, Dow Chemical A.G., Dow Chemical Europe, Dow Chemical France, and Dow Chemical Company (the parent company) initiated arbitration proceedings against Isover before the ICC. 

Isover questioned the jurisdiction of the ICC on the ground that two of the four companies—Dow Chemical France and Dow Chemical Company—were not parties to the contracts and had not signed the dispensation contracts consisting of the arbitration clauses.

The ICC, in its interim award, rejected the above argument on jurisdiction. It opined that even though each independent member of the Dow Chemical Group had a discrete legal identity, it was mandatory for the ICC to assess the components and circumstances surrounding the business dealings among the involved parties. The ICC Tribunal concluded that Dow Chemical Company (USA) and Dow Chemical France were parties to the original contracts and could legitimately petition for arbitration against Isover. This conclusion was based on the significant roles played by both companies in negotiating the dispensation contracts. Dow Chemical Company, as the parent company, was the possessor of all related trademarks utilised by its subsidiaries in the absence of any licencing agreements, which was vital for finalising the deal. Meanwhile, Dow Chemical France was predominantly accountable for fulfilling the responsibilities of its sister companies under the said dispensation contracts. 

The ICC held that all these circumstances specified that the signatory parties to the dispensation contracts had impliedly accepted the involvement of the above-specified non-signatory parties as a part of the entire business dealing.

The ICC Tribunal further observed that all these factors indicated that the signatories to the dispensation contracts had impliedly consented to the aforementioned non-signatories being part of the entire business transaction. The ICC Tribunal also took into consideration certain international trade usages, specifically the existence of a company group, i.e., the Dow Chemical Group, of which the four claimants were members. In view of these considerations, the ICC Tribunal concluded that the Dow Chemical Group operated as a ‘single economic reality’. It held that the arbitration clause in the contracts unequivocally applied to other companies within the group. This application was by virtue of the involvement of these companies in the performance, negotiation, and termination of contracts containing the said clauses, in accordance with the mutual intention of all parties to the transactions.  These companies were deemed to be veritable parties to the contracts or to have been principally concerned by them, and consequently, the disputes to which they may give rise. 

In the Dow Chemical case, the ICC introduced three tests for the application of the group of companies doctrine, namely:

  • The involvement of parties, who are non-signatories to a contract, in the negotiation,  performance, and termination of contract;
  • The existence of a group of companies that will lead to ‘single economic reality’; and
  • The common intent of all parties to the contract is to bind non-signatories to the arbitration agreement. 

This ruling was challenged by Isover, however, the Paris Court of Appeal dismissed this challenge to the interim award. It agreed with the ICC’s ruling. 

Switzerland

In Swiss Law, parties can accept being bound by an arbitration agreement, either expressly or impliedly. Such acceptance is governed by Article 178(1) of the Swiss Private International Law Act, 1987, which states that an “arbitration agreement must be made in writing or any other means of communication allowing it to be evidenced by text.”

In A., B., & C. v. D. and the State of Libya (2019), there was an agreement involving a Turkish joint-venture and its two shareholder companies for the construction of a water pipeline in Libya. The agreement, which ended in 2006, was with a Libyan state entity established by the Libyan government to manage the project. The agreement contained an arbitration clause stipulating that any disputes would be resolved by arbitration before a tribunal of three arbitrators seated in Geneva, under the ICC Rules of Arbitration. However, the State of Libya did not sign the agreement.

The claimants completed 70% of the work, but were stopped by the Libyan Civil War in 2011, and the work never restarted. In 2015, the claimants filed a request for arbitration against the State of Libya. Libya objected to the arbitral tribunal’s jurisdiction, arguing that it did not sign the arbitration agreement. The arbitral tribunal was convinced and awarded them more than USD 40 million for the work they had completed. However, the tribunal was not convinced that the Libyan state was bound by the arbitration agreement. 

The claimants appealed to the Swiss Federal Tribunal to set aside the specific portion of the tribunal’s award that stated it had no jurisdiction over the Libyan State.

The Swiss Federal Tribunal, while dismissing the appeal, stated that the claimants failed to show any circumstances from which it could be concluded that Libya had agreed to the arbitration clause by participating in the execution of the agreement. The Tribunal highlighted that the arbitration clause within a clause bounds only the contracting parties. However, in some situations, it can also bind non-signatories. A third party may be joined to the arbitration agreement if it constantly interferes with the performance of a contract and demonstrates a legitimate intention to be bound by such an agreement.

Even though this requirement applies only to the declarations of intention of the parties to the arbitration agreement, the binding effect on third parties is governed by the applicable substantive law. The distinction regarding the form requirement applies under Article 178(1) of the Swiss Private International Law Act implies that whether third parties are bound by an arbitration agreement is a question of contractual interpretation, with the legitimate intention of the parties being a decisive factor.

United States of America

The Federal Arbitration Act (FAA) of the United States of America makes no mention of including  non-signatory parties to arbitration agreements. However, US courts have, since time immemorial, relied on fundamental principles of contract law to bind non-signatories to such agreements.

In the case of Sunkist Soft Drinks, Inc. v. Sunkist Growers Inc (1993), Sunkist Soft Drinks (SSD), a wholly-owned subsidiary that had previously signed a licence with Sunkist Growers Incorporated (SGI), was purchased by Del Monte Corporation in 1984. There was an arbitration clause in this agreement. When disagreements emerged in 1987 over how SSD performed under the terms of the licence, Del Monte attempted to force Sunkist to arbitrate the problems on the grounds that Sunkist was required by contract to do so. While Sunkist acknowledged that SSD and it had an arbitration agreement, it contended that Del Monte, not being a signatory to the agreement, was not in a position to enforce arbitration. The district court did, however, grant Del Monte’s request to compel arbitration. In accordance with the arbitration clause and the norms of the American Arbitration Association (AAA), the arbitration proceeded with the parties choosing arbitrators and agreeing on a neutral third arbitrator. The arbitrator for Sunkist dissented from the two-to-one ruling in favour of Del Monte by the arbitration panel. Del Monte subsequently requested that the district court uphold the award, while Sunkist moved to have it revoked on the grounds that Del Monte’s arbitrator had engaged in improper behaviour. The district court denied Sunkist’s move to vacate and upheld Del Monte’s award. Despite Sunkist’s appeal, the district court’s verdict was upheld by the United States Court of Appeals for the Eleventh Circuit. The appeal court decided that an arbitration clause in a contract might be enforced by someone who did not sign it. It further decided that when the claims were directly related to the underlying contractual responsibilities, a party could not avoid arbitration on the grounds that the opposing party was not a signatory. This ruling upheld arbitration agreements’ enforceable even in situations where one party is not a signature, so long as the claims are directly related to the original contract.

In Bridas v. Government of Turkmenistan (2003), Bridas, an Argentinian corporation, entered into a joint venture agreement (JVA) with Turkmenneft, a production association formed by the Government of Turkmenistan, for conducting hydrocarbon operations in Turkmenistan. Disputes were to be resolved through arbitration according to ICC rules, with English law governing the agreement. Bridas initiated arbitration when Turkmenistan ordered work suspension in 1995. The tribunal ruled Turkmenistan was subject to arbitration and found in Bridas’s favour, awarding damages totaling $495 million. Bridas sought confirmation of the award in court, which Turkmenistan and Turkmenneft opposed, arguing lack of jurisdiction, manifest disregard of the law, and excessive damage calculation. The district court upheld the award, leading Turkmenistan and Turkmenneft to appeal, raising similar issues. According to the United States Court of Appeals for the Fifth Circuit, it is not always decided to bind a parent using the alter ego doctrine. The corporate veil is not easily lifted by courts, even when they are respectful of the robust arbitration policy. Only two situations exist in which piercing the corporate veil to hold an alter ego accountable for the actions of its instrumentality would be permissible: (1) the owner had total control over the corporation with regard to the transaction in question; and (2) the use of that control to perpetrate fraud or other wrongdoing that caused harm to the party requesting the piercing. It was incorrect of the district court to base its decision just on the presence of corporate formalities and the lack of a combination of directors and money. Determinations about the alter ego are primarily fact-based and necessitate taking into account the entirety of the environment in which the instrumentality operates. No one factor can be the deciding factor. The long list of circumstances courts have established to inform alter ego decisions should make this clear. The district court made a mistake when it neglected to consider every facet of the partnership between the Government and Turkmenneft.

In the case of GE Energy Power Conversion France SAS v. Outokumpu Stainless USA (2020), Outokumpu, the current owner of a steel manufacturing plant in Alabama, sued GE Energy over failing motors that were supplied for the plant’s cold rolling mills. These motors were parts of the contracts negotiated by ThyssenKrupp Stainless USA (Outokumpu’s predecessor) and F.L. Industries, while GE Energy was a subcontractor that supplied the motors as per the contracts. Any potential disputes arising between the signatories were to be resolved through arbitration, as the contracts included an arbitration clause. One of the motors failed within two years of being attached, causing Outokumpu losses of in tens of millions of dollars. Outokmpu, thus, sued GE Energy to indemnify those losses. 

The issue, in this case, was whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) prevents a non-signatory to an international arbitration agreement from compelling arbitration by invoking domestic doctrines. The District Court considered both Outokumpu and GE Energy as parties to the contracts and allowed the arbitration proceedings to take place. However, the Eleventh Circuit Court of Appeals reversed this decision. It did not apply the domestic doctrine on the ground that it conflicted with the requirement of signatures under the New York Convention. 

The Circuit Court observed that Article II of the New York Convention contains a strict requirement that the parties “actually sign” the arbitration agreement in order to compel arbitration. Thus, it ruled that only the signatories to an arbitration agreement could enforce the arbitration; and GE Energy was not a signatory.

Finally, the US Supreme Court reversed the Eleventh Circuit Court’s decision. It observed that Article II of the New York Convention does not prohibit contracting states from referring parties to arbitration agreements under domestic laws. It concluded that the New York Convention does not lay down a systematic pattern to exclude the use of domestic law in enforcing arbitration agreements. 

Singapore

In Singaporean law, the group of companies doctrine is not recognised when determining if an arbitration agreement extends to non-signatory parties. 

In the case of Manuchar Steel Hong Kong Limited v. Star Pacific Line Pte Ltd. (2014), the plaintiff requested a pre-enforcement report to conclude if Star Pacific Line and SPL Shipping constituted a group of companies. The aim of this petition was to start enforcement of proceedings against Star Pacific Line for two arbitral awards that Manuchar had obtained in London against SPL Shipping. The petition relied on the group of companies doctrine accepted in some jurisdictions, where separate companies with distinct juristic personalities functioned as one. 

The judge dismissed the application, holding that the single economic entity concept was not recognised under Singaporean law and there was no good legal background to recognise it. The Singapore High Court rejected the application of the group of companies doctrine to bind non-signatories to an arbitration agreement. The High Court opined that the group of companies doctrine is antithetical to the rationale of consent underlying an agreement to go for arbitration. The Court observed that executable responsibilities cannot be burdened on parties who are non-signatories to the arbitration agreement. 

United Kingdom

Section 82(2) of the English Arbitration Act, 1996 states that a party to an arbitration agreement includes any person claiming under or through a party to the agreement. Section 5 requires an arbitration agreement to be in writing and, according to Section 5(2)(a), in particular, it is not necessary for the parties to sign the arbitration agreement. In such cases, English courts need to evaluate whether a non-signatory party is bound by an arbitration agreement within this framework.

In Peterson Farms Inc. v. C&M Farming Limited (2004), C&M Farming initiated a claim for damages against Peterson Farms for losses incurred by entities within the C&M group, some of which had not signed the arbitration agreement. The arbitral tribunal relied on the group of companies doctrine to hold that C&M Farming executed the contract in place of the whole C&M group, and therefore, it could claim all losses incurred by the group entities arising from the execution and performance of the contract with Peterson. However, the Commercial Court, upon appeal, judged that the chosen law for the agreement was similar to English law, which excluded the group of companies doctrine. Therefore, English law does not accept extending an arbitration agreement to non-signatory parties under this doctrine.

In Dallah Real Estate and Tourism Holding Company v. The Ministry of Religious Affairs (2010), the Government of Pakistan, along with Dallah Real Estate and Tourism Holding Company, executed a Memorandum of Understanding (MOU) for building houses in Mecca, Saudi Arabia. Subsequently, another agreement was executed between Dallah and the Awami Hajj Trust, which the Pakistani government had established through an ordinance. However, the trust was nullified because the Ordinance was not introduced in Parliament, and no new Ordinance was promulgated. Dallah Real Estate initiated proceedings against the Pakistani government. The Supreme Court of the United Kingdom observed that there was no joint intent among the parties. It opined that there was no evidence to prove that the conduct of the Pakistani government showed it considered itself a party to the agreement.

Application of group of companies doctrine in India

The law in India is a multicoloured mosaic of laws, decisions from the courts, and regulations, rather than a straightforward, black-and-white picture. Understanding its nuances requires a thorough grasp of both the letter and the spirit of the law. The group of companies doctrine acts as a compass in this situation, assisting both companies and courts in determining the real nature of corporate responsibilities and associations. 

At the global level, this doctrine has seen varied acceptance, interpretation, and application. For instance, the English and Singaporean courts have shown reluctance when it comes to adopting the group of companies doctrine, whereas jurisdictions like France have been more than welcoming. Now it is time to understand and analyse the development of this doctrine from an Indian perspective. 

Not overlooking the human factor, we know that every corporate entity is made up of individuals whose lives are closely related to the success of a company’s business—workers, stockholders, and customers. The real test of the group of companies doctrine in India is its ability to deliver fair outcomes while balancing the interests of all the concerned parties.

Statutory Provisions Related to the doctrine

The Arbitration and Conciliation Act, 1996 does not specifically address the group of companies doctrine, but it is acknowledged and squarely addressed in the below provisions

Section 2 (1) (h)

This provision mentions parties to arbitration agreement, the word “party” mentioned in above provision pertains specifically to any person or organisation that has signed an arbitration agreement. This means that for the purposes of the Act, “parties” are defined as those who have jointly decided to settle their differences via arbitration as opposed to regular court proceedings and this is interpreted to mean parties, whether they are signatory or not, are to be governed by this section

Section 35

This provision talks about parties who refer to the arbitration are bound by the arbitral award on the parties and persons claiming under them, respectively. The term “parties and persons claiming under them” in section 35 refers to both those who are actively involved in the arbitration process and those who are related to them legally and may be impacted by the arbitrator’s decision. This provision guarantees that parties who are not directly involved in the issue will also be bound by the arbitral ruling, giving arbitration-based dispute resolution a sense of closure and clarity.

Judicial approach

The primary intention behind adopting the ‘group of companies’ doctrine in India was to prevent the multiplicity of disputes in cases involving several parties and multiple contracts. 

This evolution began with various landmark judgments, such as Sukanya Holdings Pvt. Ltd vs Jayesh H. Pandya & Anr Holdings (2003) and Chloro Controls, where the courts largely accepted the group of companies doctrine. However, there were disagreements in the interpretation and application of the doctrine, leading to inconsistencies. This issue was finally settled by the Supreme Court in the Cox and Kings case.

Sukanya Holdings Pvt. Ltd v. Jayesh H. Pandya (2003)

Facts

In this case, Sukanya Holdings and Respondent nos. 1 and 2 executed a partnership agreement in 1992 to develop land owned by Ms. Jaykirti Mehta. This partnership gave rise to various disputes, leading to Ms. Mehta’s retirement and subsequent agreements. The appellant alleged financial mismanagement by the Respondents during the construction and sale of the property. As a result, disputes escalated, and suits were filed for the dissolution of the partnership. The appellant referred the matter to arbitration, but the High Court rejected the application, citing the involvement of multiple parties beyond the original contract.

Issue

  • Whether a civil suit can be referred to arbitration in respect of matters covered by an arbitration agreement even if the suit covers matters beyond the arbitration agreement?

Judgement

The Supreme Court held that the language used in Section 8 of the Arbitration and Conciliation Act, 1996 states that “in a matter which is the subject matter of an arbitration agreement,” the Court is mandated to refer the parties to arbitration. Therefore, the suit should be “a matter” that the parties have agreed to refer to and that is covered by the arbitration agreement. However, if a suit is related to a matter that is outside the purview of an arbitration agreement and involves parties who are not signatories to the arbitration agreement, then Section 8 does not apply. The phrase “a matter” means that the entire subject matter of the suit should be subject to the arbitration agreement.

Chloro Controls P. Ltd. v. Severn Trent Water Purification Inc. (2012)

Facts

In this case, Chloro Controls and Severn Trent Water Purification Inc. formed a joint venture company to market and dispensate chlorination equipment. The related companies of both, Chloro Controls and Severn Trent Water Purification Inc., were also involved in the joint venture. Consequently, all the parties executed various agreements, including a shareholders agreement containing an arbitration clause. Not all parties to the contract were signatories to all the agreements, including the shareholders agreement. 

When disputes arose, Severn Trent Water Purification, Inc. sought to terminate the joint venture. Chloro Controls filed an application before the High Court seeking a declaration to restrain the foreign companies from terminating their responsibilities under the agreements. Severn Trent Water Purification Inc. requested that the dispute be referred to arbitration, arguing that the agreements would bind the non-signatories due to the composite nature of the transaction. A single-judge bench of the High Court of Bombay accepted the application of the Indian company, but was dismissed by the Division Bench of the High Court. Chloro Controls then appealed to the Supreme Court.

Issues

  • Whether, in agreements signed between different parties where some contain an arbitration clause, the clause can include parties who are non-signatories?

Judgement

The Supreme Court held that, according to the wording of Section 45, the term “any person” shows legislative intent to widen the scope beyond just the signatory parties to the arbitration agreement, allowing for the inclusion of non-signatory parties. The court noted that such non-signatory parties must claim “through or under the signatory party”. The Supreme Court accepted that arbitration is applicable between a signatory to an arbitration agreement and a third party or non-signatory showing up in the form of a party.  

The Court explained that the group of companies doctrine has evolved in courts and tribunals globally. It binds a non-signatory subsidiary or sister company within the same functional and corporate group as the signatory party to an arbitration agreement, provided there was a mutual intention of all the parties. The Court emphasised that the intention of the parties is an important principle in applying the group of companies doctrine.

Cheran Properties Limited v. Kasturi And Sons Limited (2018)

Facts

In this case, the fully owned subsidiary of Kasturi & Sons Limited, the Sporting Pastime India Limited, executed an agreement for the transfer of shares with KC Palanisamy, Kasturi & Sons Limited, and another entity. According to the agreement, Sporting Pastime India Limited would transfer shares to Kasturi & Sons Limited, out of which 90% would be sold to KC Palanisamy and its nominees, including Cheran Properties Limited, which received 95% of KCP’s 90% shares. Disputes arose between the parties, and the matter was settled by way of arbitration. The arbitral tribunal ordered Kasturi & Sons Limited to pay Rs. 3,58,11,000 along with an interest rate of 12% p.a. on an amount worth Rs. 2,55,00,000. Additionally, the tribunal directed KC Palanisamy and Sporting Pastime India Limited to return the documents of share and title certificates. 

KC Palanisamy challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that it did not sign the agreement, and thus the arbitral award could not be enforced against it. The challenge was dismissed by the Madras High Court. Kasturi & Sons Limited then initiated proceedings against Cheran Properties Limited, a nominee of KC Palanisamy, to perform the award, which directed the transmission of shares. The National Company Law Tribunal (NCLT) observed that Cheran Properties Limited was indeed a nominee of KC Palanisamy and held shares on its behalf.

Subsequently, the National Company Law Appellate Tribunal (NCLAT) dismissed the appeal filed against the order of the NCLT, leading to this appeal before the Supreme Court of India.

Issues 

  • Whether an arbitral award is binding upon Cheran Properties Limited, which is a non- signatory to the agreement?

Judgement

The Supreme Court relied on Section 35 of the Arbitration and Conciliation Act, which states that an arbitral award is binding on the provi”. This phrase implicitly acknowledges the group of companies doctrine, indicating that an arbitral award can bind not only the signatories but also any individual or entity whose authority or power is sourced from and is treated equally with a party to the proceedings. This expression should be interpreted broadly to include those who claim under the award, regardless of whether they were a party to the arbitration agreement or the arbitration proceedings. The key question, therefore, is when a non-signatory to an arbitration agreement can be considered as “claiming under” a party. 

The Court expanded on the principles and types of relationships that could include a non-signatory as a party. The first type includes legal relationships that recognise the transfer mechanisms of contractual rights, based on implicit consent and equity. The second type involves relationships such as agent and principal, dominant authority, piercing the corporate veil, joint venture projects, succession, and estoppel, grounded in the force of applicable law. The third type consists of a group of companies. The legal source to connect an arbitration agreement entered by a company within a group of companies with its non-signatory subsidiaries is common intention. This common intention must indicate that the arbitration agreement  was intended to bind both the non-signatory and signatory entities within the corporate group. 

The Hon’ble Supreme Court explained that even though a non-signatory was not part of arbitration proceedings, it was not an acceptance of its assumption of responsibility. A non-signatory may not attend the arbitration proceedings but may still be governed by arbitral proceedings.

Ameet Lalchand Shah  v. Rishabh Enterprises (2018)

Facts

In this case, the parties involved in the contract entered into four intertwined agreements, all related to the construction of a solar plant. The provisions of these agreements were such that they were considered part of the main agreement, which, along with two other agreements, contained an arbitration clause. However, the fourth agreement, specifically regarding the construction of the solar plant, did not include an arbitration clause. Both the Single Bench and Division Bench of the Delhi High Court opined that despite the presence of different agreements involving several parties, these agreements were interconnected and related to a single commercial project. 

Issue

  • Whether all four agreements are sufficiently interconnected to refer the parties to arbitration despite one agreement lacking an arbitration clause?

Judgement

The Supreme Court found that this was a composite transaction involving multiple parties in a single project, which was executed through several contracts to cover all parties by the arbitration clause in the main agreement. The Court determined that all agreements were interconnected, and thus the dispute should be resolved by arbitration. The Court observed that when there is a broad group with similar operational and fiscal links functioning as a single economic entity, the group of companies doctrine could be applied.

Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited (2019)

Facts

In this case, Reckitt Benckiser (India) Private Limited wanted to include the parent company, Reynders Belgium, of Reynders Label Printing India Private Limited, in an arbitration application filed in the Supreme Court under Section 11 of the Arbitration and Conciliation Act. Reckitt Benckiser (India) Pvt. Ltd. and Reynders Label Printing India Pvt. Ltd. had executed an agreement in May 2014 for the supply of packaging materials during the pre-negotiations stage and for the affiliates of Reckitt Benckiser (India) Private Limited. 

During the pre-negotiation period, Reckitt Benckiser (India) Pvt. Ltd. had supplied a draft agreement, along with a code of conduct and anti-bribery policy, to Reynders Label Printing (India). This email was reverted by Mr. Fredrick Reynders, the promoter of Reynders Etiketten NV (Respondent 2), which is one of the group companies of Reynders Label Printing Group and was formed and governed by the laws of Belgium.

Issues

  • Whether Reynders Belgium could be impleaded as a party to the arbitration proceedings despite being a non-signatory to the arbitration agreement, merely because it is a part of the same ‘group of companies’ as Reynders India?

Judgement

The Supreme Court observed that the burden was on Reckitt India to prove that Reynders Belgium was a party to the agreement and had the intent to be bound by the arbitration agreement. This intent was necessary even if it was for the legitimate aim of ensuring responsibilities for any acts or omissions by Reynders India that might cause damage to Reckitt India. It should compensate Reckitt India for such damages and losses caused by the acts and omissions of its subsidiary. 

The Court opined that Reckitt India failed to prove that Reynders Belgium was a party to the agreement or that it had intent to be bound by the arbitration agreement. The Court further explained that Reynders Belgium was a non-signatory to the arbitration agreement and in fact, it did not have any legitimate relation to the negotiation process after the agreement was formed. The Supreme Court found that Mr. Frederik Reynders, who was involved in the negotiations, was an employee of Reynders India and was not at all related to Reynders Belgium. Therefore, Reynders Belgium had no causal connection to the negotiations or the arbitration agreement. 

The Supreme Court concluded that just because Reynders Belgium and Reynders India belong to the same group, it does not hold any justification regarding the implication of Reynders Belgium in the arbitration proceedings.

Mahanagar Telephone Nigam Limited v. Canara Bank and Ors. (2019)

Facts

In this case, in 1992,  bonds valued at over Rs. 425 crore were issued to MTNL. In the same year, MTNL put bonds worth over Rs. 200 crores with CANFINA, using fixed deposits to trade these bonds, shares, and securities in the secondary market. Only a small portion of these bonds were placed by MTNL when, because of a securities scam, an enormous shift took place, which brought down the secondary market. Consequently, CANFINA held bonds worth Rs. 150 crore along with accrued interest but could only pay back Rs. 50 crore. MTNL decided not to pay the interest on these bonds as it was owed Rs. 150 crore.

Canara Bank, the parent company of CANFINA, purchased bonds issued by MTNL from CANFINA with a face value of Rs. 80 crore and requested MTNL to transfer the bond registration to Canara Bank. After MTNL rejected the proposal, Canara Bank cancelled all bonds and the interest due on them. Canara Bank then filed a writ petition in Delhi High Court challenging the cancellation of bonds and the interest due. The Delhi High Court heard the arguments and ordered all parties to go to arbitration. Accordingly, Canara Bank drafted an arbitration agreement and sent it to MTNL, but MTNL failed to respond. Canara Bank then requested to restore the writ petition, naming only MTNL and itself as parties.

Subsequently, as accepted by both parties, a sole arbitrator was appointed by the High Court. Before the arbitral proceedings, the arbitrator sent notice to CANFINA, which was objected to by Canara Bank. The sole arbitrator accepted the objection and refused to implead CANFINA in the arbitral proceedings, a decision upheld by the Delhi High Court. Aggrieved by this, MTNL approached the Supreme Court.

Issues

  • Whether CANFINA can be impleaded in the arbitral proceedings?

Judgement

The Supreme Court opined that after MTNL gave its approval to refer the disputes to arbitration before the Delhi High Court, it cannot now cry foul that there was no formal written agreement to refer the parties to arbitration. The Court held that a non-signatory party can be bound by an arbitration agreement under the group of companies doctrine. This doctrine applies when the conduct of the parties indicates clear consent from both signatory and non-signatory parties to be bound by the arbitration agreement. 

The Supreme Court further observed that resolving the disputes only between MTNL and Canara Bank, in the absence of CANFINA, would not be legitimate. This is because the original negotiations and transactions between MTNL and CANFINA (who was the original purchaser of the bonds) were the  source of the transaction. Disputes arose when MTNL terminated the bonds due to incomplete payment of the entire consideration.

There was a direct and legitimate connection between the issuance of the bonds, their transfer by CANFINA to Canara Bank, and their termination by MTNL, which was the reason for the dispute among the three parties. Therefore, CANFINA was undoubtedly an important and necessary party to the arbitration. The transaction was tripartite in nature, and to get the final resolution of the dispute, all three parties should be a part of the arbitration.

Oil and Natural Gas Corporation Limited v. M/S Discovery Enterprises Private Limited & Another (2022)

Facts

In this case, Discovery Enterprises Private Limited executed a contract with ONGC in 2016, which included a clause for settling disputes through arbitration. According to the contract, Discovery Enterprises was required to pay Rs. 63.88 crore as defaults to ONGC. Based on the arbitration clause, ONGC commenced arbitral proceedings against both, Discovery Enterprises Private Limited and Jindal Drilling and Industries Limited, a group company, to recover the Rs. 63.88 crore in pending dues. Although Jindal Drilling was not a signatory to the contract, it was impleaded as a party on the grounds that Jindal Drilling and Discovery Enterprises formed a single economic entity. 

Aggrieved by this, Jindal Drilling countered by seeking its removal from the proceedings because it was a non-signatory to the contract containing the arbitration clause, and thus, not bound by the agreement. ONGC contended that Discovery Enterprises acted as an agent of Jindal Drilling. It was argued that there was a functional and corporate unity between these two companies. During the pending arbitral proceedings, ONGC filed an application for the finding and evaluation of relevant documents to demonstrate that Discovery Enterprises was indeed an agent of Jindal Drilling. 

The arbitral tribunal passed an interim award, ruling that Jindal Drilling was a non-signatory to the agreement and hence could not be impleaded as a party to the proceedings. ONGC challenged the interim award before the Bombay High Court, which upheld the tribunal’s decision. ONGC appealed to the Supreme Court.

Issues

  • Whether Jindal Drilling and Industries Limited had an economic unity with Discovery Enterprises Private Limited and could hence be made a party to the arbitration proceedings?

Judgement

The Supreme Court adopted the group of companies’ doctrine and held that a non-signatory can be bound by an arbitration agreement if there exists a group of companies and the signatory parties have participated in conduct or expressed an intent to bind the non-signatories to the arbitration agreement. The Court outlined the elements that must be considered to determine if a non-signatory is bound by an arbitration agreement: mutual intent among the parties, a legal relationship between the non-signatory and signatory parties, commonality of subject matter in the execution and performance of the contract, and a transaction of composite scope. Most importantly, the contract must be performed by the non-signatory. 

The Supreme Court dismissed the interim award on the grounds that the tribunal did not evaluate whether the group of companies doctrine applied to the given case. The first arbitral tribunal overlooked this crucial aspect, which could have had an impact on the matter when determining whether Jindal Drilling had corporate and functional unity with Discovery Enterprises Private Limited and whether it could be made a party to the arbitration proceedings.

Recent developments surrounding group of companies doctrine

Determining whether the group of companies doctrine has an independent existence under arbitration law or if it must rely on corporate law concepts, such as breaching the corporate veil, is where analysis begins. The core of the latest Cox & Kings decision emphasises that, regardless of the non-signatories’ explicit acceptance or adoption of the contractual conditions, the doctrine is grounded on a consent-based approach. This approach finds non-signatories to have agreed to be parties to the arbitration agreement because of particular circumstances. In this regard, it is evident that the group of companies doctrine is based on arbitration law rather than causing any significant disruption to long-standing corporate law standards.

Cox and Kings Limited v. SAP India Private Limited & Another (2023)

Facts

In this case, the travel company, Cox and Kings Ltd., entered into a software licensing agreement with SAP India Pvt. Ltd. in December 2010. In October 2015, Cox and Kings started developing its own e-commerce platform, prompting SAP India to come up with an offer for the installation of new software. The parties entered into three new agreements to utilise SAP’s ‘Hybris Solution’ software. Although SAP India assured that the new software was 90% compatible with Cox and Kings’ current software and that only an extra 10 months were needed to make up the remaining 10%, there were difficulties. One of the agreements included an arbitration clause. Both companies agreed to refer any disputes to arbitration under the Arbitration and Conciliation Act, 1996, in the Indian city of Mumbai. 

After facing challenges regarding the implementation of Hybris software and mishaps, Cox and Kings approached SAP SE, the main branch based in Germany and requested their aid. SAP SE gathered a group of international experts and actively participated in the project. However, the project didn’t meet its objectives, even though there were repeated extensions. This led Cox and Kings to terminate the contract in November 2016 and demand a refund of Rs. 45 crore to reimburse the considerations paid to SAP until now. SAP India, in response, issued a notice to begin arbitration proceedings, contending that Cox and Kings unilaterally terminated the agreement and counter-claimed for Rs. 17 crore. 

The arbitration proceedings were postponed in November 2019 by the National Company Law Tribunal as Cox and Kings were facing other legal problems in the form of insolvency proceedings. Despite this, Cox and Kings sent a notice to SAP to start a fresh arbitration, this time also involving SAP SE, Germany, as a party, even though it was not a party and did not sign any of the agreements. 

When SAP did not prefer to appoint any arbitrator, Cox and Kings approached the Supreme Court under Section 11 of the Arbitration Act, contending that the Supreme Court should appoint one. They argued that SAP SE, Germany, could be included as a party to the arbitration even though they are non-signatories. Cox and Kings contended that SAP SE, Germany, bore full responsibility for the project and gave their implicit consent to be bound by the arbitration agreement. Further, SAP India is a subsidiary of and is fully owned by SAP SE, Germany, the parent company. In May 2022, a three-judge bench, presided over by the then Chief Justice of India, N.V. Ramana, referred the case to a five-judge Constitution Bench to address key questions regarding the doctrine. Specifically, the Bench sought clarity on when the doctrine applied to the Arbitration Act. Further, it questioned whether the jurisdiction of an arbitral tribunal could extend to parties who are non-signatories. 

Issues

  • Whether the phrase ‘claiming through and under’ in Sections 8 and 11 of the Arbitration and Conciliation Act can be interpreted to include the group of companies doctrine?
  • Whether the group of companies doctrine should be viewed as a means for interpreting the implied consent or intent to arbitrate between the parties?
  • Whether the group of companies doctrine should continue to be invoked on the basis of ‘single economic reality’?
  • Whether the application of the group of companies doctrine can be justified based on alter ego and/or piercing the corporate veil alone, even in the absence of implied consent?

Arguments

Petitioner

The petitioners argued that the term “party” as defined under Section 2(1)(h) of the Arbitration and Conciliation Act cannot be narrowed down only to the signatories to an arbitration agreement. The definition should be widely interpreted to also include non-signatories in its purview, depending on the facts and circumstances of the case. Section 7 of the Arbitration Act states that the scope of the legal relationship between the parties may be non-contractual in nature, and Section 7(4)(b) allows a non-signatory to be bound by an arbitration agreement if they have indicated their approval to be bound by the agreement through written communication. Therefore, the group of companies doctrine should be applied by the arbitral tribunal, considering the wide scope of Section 7. It was further contended that the legislature had specifically amended Section 8 of the Arbitration Act by adding the expression, “any person claiming through or under” to identify the genuineness of non-signatories acting through or on behalf of the signatory parties.

Respondent

The Respondents argued that the expression “claiming through or under” under Section 8 of the Arbitration Act cannot be the basis for applying the doctrine. Arbitration agreements are based on the important concept of mutual consent among the parties to refer disputes coming out of their defined legal relationship to arbitration. It would be totally against the idea of party autonomy to bind a non-signatory party to an arbitration agreement without determining their consent. They argued that the term “party” in an arbitration agreement is ideally different from the concept of “person claiming through or under” a party. The latter stipulates the idea of a derivative cause of action where a non-signatory party assumes the rights and responsibilities of the signatory party rather than asserting its own independent rights under the agreement. The terms like ‘tight group structure’ and ‘single economic unit’ should not serve as standalone justifications to invoke the group of companies doctrine. Merely being under the ownership, control, or supervision of the signatory party does not automatically bind a non-signatory party to the arbitration agreement.

Judgement

First, the Court dismissed the idea that the group of companies doctrine could be derived  from the phrase “claiming through or under” as seen in the Chloro Controls case. The Court emphasised that this term only applies to companies acting in a derivative capacity, asserting a right or being subjected to a responsibility that it has derived from a party to the arbitration agreement rather than acting in their own right. Therefore, the term could not serve as ground for applying to the group of companies because its intent is to determine whether a signatory company can be made a party to the arbitration agreement in its own right. 

The Supreme Court discussed the principles of party autonomy and the contractual nature of an arbitration agreement. It was noted that the signature of a party or their agreement to the terms is the most profound example of clear intent and consent to refer disputes to arbitration. The necessity of a written arbitration agreement does not override the possibility of binding non-signatory parties, especially in cases where a defined legal relationship exists between the signatory and non-signatory parties. Further, the Court highlighted that a written contract does not necessarily imply that parties put their signatures on the document stipulating the terms and conditions of the agreement.

The Court, while expanding the definition of “parties”, opined that Section 2(1)(h), read along with Section 7 of the Act, includes both signatory and non-signatory parties. It underscored the necessity of a written arbitration agreement under Section 7, which does not entail the possibility of binding non-signatory parties. The Supreme Court emphasised that a “party” need not necessarily be a signatory to the arbitration agreement or the disputed contract. This is in line with international law, where a signature is not the sole necessity for the application of an arbitration agreement. 

The Court referred to Article 7(3) of the UNCITRAL Model Law, which states that an arbitration agreement should be in writing and may be entered even orally or in written form, thereby terminating the necessity of signatures or an exchange of messages between the parties. The Court held that the group of companies doctrine is based on the consent of parties and its application relies on various factual elements to establish the mutual intention of all the parties involved. It affirmed that under common law, a party could not be bound by an arbitration agreement merely by virtue of the fact that it had a legal or financial relationship if it was in the same company group as the signatory entity to the arbitration agreement.

The Court further clarified that while Section 7 mandates the arbitral agreement to be in  written form, it does not prohibit a non-signatory party from being included in the agreement, thus allowing for the application of the  group of companies doctrine. The arbitral agreement ought to be in writing, however, signing it is not mandatory. The essence of the requirement of the written form is to ensure documented acceptance by the parties to refer their potential disputes to arbitration. Moreover, the Court also explained that the inquiry, as contemplated under Section 7(4)(b) includes various forms of written agreements, including letters, telegrams, and electronic means, thereby accommodating the group of companies doctrine within its ambit. 

The Court went on to clarify the legislative purpose behind Section 7, which permits parties to submit any disagreement resulting from a legal relationship to arbitration, but the written arbitration agreement was necessary. It clarified that for the nexus between the parties under Section 7, it should meet the principles of the Indian Contract Act, 1872. As per this Act, contracts can be expressed or implied, and they are inferred from the behaviour and duties of the concerned parties. Non-signatories can be identified when individuals or groups show intention and consent to be bound by the arbitration agreement through their actions or conduct.

The Court further emphasised that a legal and financial nexus between the non-signatory and signatory parties cannot be the sole reason to implement the group of companies doctrine. It clarified that this doctrine cannot be applied only on the basis that the companies belong to the same financial nexus. This is because the unity in the subject matter signifies that the behaviour of the non-signatory party ought to be interpreted subject to the issues of the arbitral agreement. Understanding this element is vital to proving that the non-signatory party accepted to arbitrate as part of a specific unit. But it was observed that there was an explicit or implicit consent from the non-signatory party to be bound in the arbitral proceedings. 

The Court explained that the doctrine based on consent is different from doctrines such as piercing the corporate veil or the alter-ego doctrine, as they are specifically non-consensual in nature and contrary to the fundamental principles of the group of companies doctrine. The Court clarified that the application of the doctrine does not infringe on the distinct juristic personalities of entities within a corporate group. 

The Court further noted that a non-signatory party bound by an arbitral agreement can be recognised as a party in its own right. It may apply for interim measures from Indian courts under Section 9 of the Arbitration and Conciliation Act. However, the Court stated that a non-signatory party can seek interim measures only when the arbitral tribunal determines that the non-signatory party is indeed a necessary party to the arbitration agreement. The Court justified that courts should not intervene, leaving the decision to the arbitral tribunal to judge the application of the group of companies doctrine. 

Aftermath of Cox and Kings

After the landmark verdict in the case of Cox and Kings in December 2023, there have been important and simultaneous judgements by both the Bombay and Delhi High Courts interpreting the group of companies doctrine.

Vingro Developers Pvt. Ltd. v. Nitya Shree Developers Pvt. Ltd. (2024)

In Vingro Developers Pvt. Ltd. v. Nitya Shree Developers Pvt. Ltd. (2024), Vingro Developers executed a Builder Buyer Agreement with Nitya Shree Developers for the construction of a residential township, which included an arbitration agreement. The directors of Nitya Shree Developers had signed the agreement as its authorised representatives. There were disputes regarding the execution of the agreement, as Nitya Shree Developers did not hand over the possession to Vingro Developers, prompting the latter to seek reimbursement.

Vingro Developers filed a petition under Section 11 of the Arbitration & Conciliation Act, 1996, against Nitya Shree Developers and its directors. The Delhi High Court referred to the Supreme Court’s decision in Cox and Kings, keeping the focus on the joint intention of all parties involved in binding non-signatories to an arbitration agreement. The Delhi High Court stated that in this case, there was no mention of consent and intent to infer that the directors of the company were bound by the arbitration agreement. It held that just because a director signed the contract on behalf of the company, it does not mean there was a joint intention to bind the said director equally to the signatory. 

The Delhi High Court rejected the application of the group of companies doctrine in this context. It observed that the relationship between the Respondents under Section 182 of the Indian Contract Act, 1872, is in the nature of a principal-agent relationship. As mentioned under Section 230 of the Contract Act, an agent cannot be personally bound by contracts entered into on behalf of its principal. 

Cardinal Energy and InfraStructure Private Ltd. v. Subramanya Construction and Development Co. Ltd. (2024)

In this case, the parties executed a Memorandum of Understanding (MoU) that included an arbitration clause. Subramanya Construction and Development initiated arbitration, and the Bombay High Court appointed a sole arbitrator. Subsequently, Subramanya Construction and Development, along with Respondent no. 2, filed an application under Order 1, Rule 10 of the Code of Civil Procedure, 1908 to include Cardinal Energy and Infrastructure in the arbitral process. However, Respondent no. 3 objected, contending that only the High Court could ask for such inclusion and not the arbitral tribunal. Despite this, the Tribunal issued notices to Cardinal Energy. 

An interim award was announced to all parties on January 5, 2024, after a hearing on January 2, 2024. The petitioners then appealed to the High Court. They contended that the arbitration tribunal did not possess any authority to bind the non-signatory parties. The Bombay High Court, referencing the verdict in Cox and Kings, held that the jurisdiction of the Arbitral Tribunal to apply the ‘group of companies’ doctrine does not depend on a specific request for the inclusion of non-signatories in a Section 11 application. It stated that the absence of such a request does not prohibit the jurisdiction of the Arbitration Tribunal to apply the group of companies doctrine. 

The Bombay High Court observed that the Arbitral Tribunal’s interpretation of the group of companies doctrine cannot be set aside merely for the reason that there was no request to implead non-signatory parties under Section 11 of the Arbitration and Conciliation Act. The High Court explained that under Section 16 of the Arbitration and Conciliation Act, the Arbitration Tribunal has the authority to decide on issues of jurisdiction, including those related to non-signatory parties to an arbitration agreement. 

Conclusion 

The Supreme Court’s landmark decision in the case of Cox and Kings provides a clear framework for the application and limitations of the group of companies doctrine in India. The Court has restructured the elements of the doctrine to ensure it applies only when the common intention of all involved parties to bind the non-signatory party by the arbitral agreement is established. The Court emphasised that consent is a legitimate and essential route to focus on disputes which consist of many parties and numerous contractual transactions which are yet to be resolved in arbitration. This verdict strikes a balance between the  fundamental principle of consent in arbitration and the pragmatics of modern corporate transactions, where a non-signatory may become involved in various ways. The Court’s clarification on the limitations of the group of companies doctrine sets a precedent that may encourage other countries to follow the same path.

Frequently Asked Questions (FAQs)

What is an arbitration agreement?

An arbitration agreement is a form of contract that enables parties to resolve disputes without the court’s intervention. It is generally included as a clause in contracts but may also exist as a separate document. Under this agreement, parties refer their disputes arising from their defined legal relationship to an arbitral tribunal. According to the Arbitration and Conciliation Act, 1996, the arbitration agreement must be in writing.

What factors are required to apply the ‘group of companies’ doctrine to non-signatories?

Several factors determine whether a non-signatory is bound by an arbitration agreement or not. Firstly, there must be mutual intent among the parties. Secondly, a legal relationship between the non-signatory and signatory parties must exist. Thirdly, there should be commonality of subject matter in the execution and performance of the contract, and the transaction must be of a composite scope. Most importantly, the contract must be performed by the non-signatory.

Does the definition of ‘parties’ under the Indian Arbitration and Conciliation Act include non-signatory parties?

Yes, the definition of ‘parties’ under Section 2(1)(h) includes both signatory as well as non-signatory parties. The necessity of a written arbitration agreement does not impede the possibility of binding non-signatory parties. A party does not need to be a signatory to the arbitration agreement or the disputed contract to be considered a party.

What are the main functions of the group of companies doctrine?

The doctrine mainly recognises a group of companies operating as a joint economic unit despite the fact that they are distinct entities. This interconnectedness means that the actions of one entity can affect other entities in the same  group. The doctrine practically allows courts to pierce the corporate veil and hold the  whole group jointly liable for the behaviour and conduct of its entities and individuals. In cases of contractual relationships, the group of companies doctrine impacts the interpretation and enforcement status of agreements.

What are some practical circumstances where the group of companies doctrine may be applied?

The group of companies doctrine may be applied in practical circumstances, such as cases that involve the irregular transfer of shares among the group companies to evade the creditors, sham transactions (which are for the purpose of defrauding the creditors), and when the parent company uses an affiliate or sister company as a mere façade to commit irregularities or financial mishaps. 

Is the group of companies doctrine unanimously accepted everywhere in the world?

Even though the group of companies doctrine is accepted in India by the Honourable Supreme Court, it is not accepted in countries like Singapore, whereas in some countries, it is applied based on the facts and circumstances of the case. The interpretation and application of the group of companies doctrine, vary from country to country and the doctrine is not accepted unanimously in every part of the world.

References

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