Consent by parties is the foundation of any arbitration. Usually, this consent is expressed in an arbitration agreement which binds the formal signatories to the contract. However, in certain circumstances, the court or tribunal may extend the arbitration clause to include a party other than a signatory to the arbitration clause.
As early as in 1984, the ICC while passing an award in Dow Chemical v. Isover-Saint-Gobain1 held that in order to be bound by the arbitration clause, the nonsignatory companies must have played a vital role in 'conclusion, performance or termination' of the contract. The tribunal further held that mere corporate ties between different companies was not enough to bind non-signatories to a single arbitration.
Subsequently in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Ors.2 , the Supreme Court held that arbitration agreement will bind only the parties which have entered into it, different cause of actions against different parties cannot be bifurcated into a single arbitration.
However, the said position changed when the Supreme Court in Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. and Ors.3 , applied the doctrine of 'Group of Companies' to bind non-signatories to an arbitration agreement. The Supreme Court distinguished the said judgment from Sukanya Holdings on the basis that the former judgment dealt with Section 8 of the Arbitration and Conciliation Act, 1996 (Act) while the Chloro dealt with Section 45 of the Act, wherein the words "person claiming through or under" in Section 45, would mean to take within its ambit multiple and multiparty agreement in exceptional cases.
67 "This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, 'intention of the parties' is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties."
69 "In a case like the present one, where origin and end of all is with the Mother or the Principal Agreement, the fact that a party was non-signatory to one or other agreement may not be of much significance. The performance of any one of such agreements may be quite irrelevant without the performance and fulfillment of the Principal or the Mother Agreement. Besides designing the corporate management to successfully complete the joint ventures, where the parties execute different agreements but all with one primary object in mind, the Court would normally hold the parties to the bargain of arbitration and not encourage its avoidance. In cases involving execution of such multiple agreements, two essential features exist; firstly, all ancillary agreements are relatable to the mother agreement and secondly, performance of one is so intrinsically inter-linked with the other agreements that they are incapable of being beneficially performed without performance of the others or severed from the rest. The intention of the parties to refer all the disputes between all the parties to the arbitral tribunal is one of the determinative factors."
Since Chloro Controls dealt with Section 45 of the Act, it was debated whether non-signatory parties could ever be bound by an arbitration agreement in a reference under Section 8 of the Act. This ambiguity was removed by the Arbitration and Conciliation (Amendment) Act, 2015 (the Amendment Act), wherein the following words were included in Section 8, 'a party to the arbitration agreement or any person claiming through or under him' were included to replace the word 'party'.
Subsequently, in Ameet Lalchand Shah and Ors. vs. Rishabh Enterprises and Ors.,4 it was held that in case where several parties are involved in a single commercial project executed through several agreements/contracts then in such a case, all the parties can be covered by the arbitration clause in the main agreement. The Supreme Court by passing the said judgment, adopted a wider interpretation and diluted the principle laid down in Sukanya Holdings.
Another big concern of parties to arbitration was addressed by the Supreme Court in Cheran Properties Limited vs. Kasturi and Sons Limited and Ors.5 The court held that even an arbitral award may be binding on a third-party if such party falls within the meaning of 'parties and persons claiming under them' under Section 35 of the Act. The court further explained that since law has evolved, the modern business transactions are often effectuated through multiple layers and agreements. There may be transactions within a group of companies. The circumstances in which the parties have entered into the agreement may reflect an intention to bind both signatory and non-signatory entities within the same group. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance.
The court, in Reckitt Benckiser (India) Private Limited vs. Reynders Label Printing India Private Limited and Ors,6 while applying the principle laid down in Cheran Properities, held that unless the non-signatory's intention to be bound by the arbitration agreement can be established, such non-signatory cannot be referred to arbitration. The court held as follows:
"...If the main plank of the applicant, that Mr. Frederik Reynders was acting for and on behalf of respondent No.2 and had the authority of respondent No.2, collapses, then it must necessarily follow that respondent No.2 was not a party to the stated agreement nor had it given assent to the arbitration agreement and, in absence thereof, even if respondent No.2 happens to be a constituent of the group of companies of which respondent No.1 is also a constituent, that will be of no avail. For, the burden is on the applicant to establish that respondent No.2 had an intention to consent to the arbitration agreement and be party thereto, maybe for the limited purpose of enforcing the indemnity clause 9 in the agreement, which refers to respondent No.1 and the supplier group against any claim of loss, damages and expenses, howsoever incurred or suffered by the applicant and arising out of or in connection with matters specified therein. That burden has not been discharged by the applicant at all. On this finding, it must necessarily follow that respondent No.2 cannot be subjected to the proposed arbitration proceedings."
This position was further examined in Mahanagar Telephone Nigam Ltd. v. Canara Bank and Ors.7 , wherein the court laid down the circumstances in which 'Group of Companies' doctrine can be invoked and allowed impleadment of a non-signatory party to single composite arbitration by invoking the 'Group of Companies' doctrine. The following conditions were laid down:
a) There should be an intention to bind the signatory as well as the non- signatory group companies to the arbitration agreement;
b) The non-signatory company has either:
i) Been engaged in the negotiation or the performance or the termination of the contract; or
ii) Made statements expressing its intention to be bound by the contract;
c) The non-signatory has a direct relationship with the signatory party or the parties are involved in the execution of a composite transaction, i.e., a transaction with a common or shared business objective which would not be possible without the participation of the nonsignatory party.
d) The 'Group of Companies' doctrine may also be invoked by the courts if it can be established that the signatory and non-signatory parties have strong organizational and financial links so as to constitute 'a single economic unit'.
Hence, it is clear that the 'group of companies' doctrine is an exception to the rule of privity of contract i.e., the arbitration agreement between parties. The doctrine is also an exception to Section 7 of the Act as per which an arbitration agreement must be in writing, thereby being enforceable only against parties who are signatories to the agreement. Thus, a non-signatory can be made bound to an arbitration agreement only in exceptional circumstances.
Footnotes
1 ICC Award No. 4131, YCA 1984, at 131.
2 (2003) 5 SCC 351.
3 (2013) 1 SCC 641.
4 (2018) 15 SCC 678.
5 (2018) 16 SCC 413.
6 (2019) 7 SCC 62.
7 2019 SCC OnLine SC 995.
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