India: Supreme Court Upholds The Validity Of The 'Group Of Companies Doctrine' In Indian Arbitration Jurisprudence

INTRODUCTION

The awaited judgment of a five-judge constitution bench of the Supreme Court of India on the validity of the 'Group of Companies' doctrine in Indian arbitration jurisprudence was passed on 6 December 2023 ("Cox & Kings II")¹ .

This doctrine provides that an arbitration agreement, entered into by a company within a group of companies, may bind non-signatory affiliates if the circumstances are such as to demonstrate a mutual intention of the parties to bind both signatories and non-signatories.

A three-judge bench of the Apex Court in Cox and Kings Limited v. SAP India Private Limited and Anr. (2022) 8 SCC 1 ("Cox & Kings I") had questioned the validity of this doctrine in its application to Indian arbitral jurisprudence, primarily on the grounds that it interferes with party autonomy, the principles of privity of contract and distinct corporate personality under company law. The three-judge bench was of the view that this doctrine was premised more on economic efficiency rather than any legal basis. They also questioned the correctness of the law laid down by the Supreme Court in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc.and Ors.² ("Chloro Controls") and the cases that followed it.

Accordingly, various questions of law on the application of the Group of Companies doctrine, were referred to the Constitution Bench, including the interpretation of the phrase "claiming through or under" appearing in Sections 8 and 453of the Arbitration and Conciliation Act, 1996 (the "Arbitration Act").

The Constitution Bench observed that the Group of Companies doctrine is well-entrenched in Indian case law and arbitration jurisprudence. The Court upheld the validity of this doctrine and found it appropriate to retain it in India, albeit within the contours of mutual consent and intent of parties to a commercial bargain. The Supreme Court has, therefore, clarified that "parties" under the Arbitration Act include both signatories and non-signatories, and that the conduct of a non-signatory is a good indicator of their consent to be bound by the arbitration agreement. The Supreme Court has clarified that this determination is best left to the arbitral tribunal and courts at the referral stage will only be required to prima facie rule on whether the non-signatory is a real / true party to the arbitration agreement.

ANALYSIS BY THE CONSTITUTION BENCH

The Constitution Bench heard arguments over the course of five days. The judgment was authored by the Justice D.Y. Chandrachud, Chief Justice of India and was accompanied by a concurring opinion delivered by Justice P.S. Narasimha.

EXAMINATION OF THE EXISTING JUDGMENTS OF THE SUPREME COURT

The Court analysed the landmark judgment on the Group of Companies doctrine in India, i.e., Chloro Controls, which was decided by a bench of three judges of the Supreme Court, and the cases prior to Chrloro Controls. Judgments prior to Chloro-Controls had emphasised the significance of formal consent of the parties and found that parties to an agreement are limited to its signatories. However, in Chloro Controls the Supreme Court adopted a less formalistic approach and found that non-signatories could be bound by the arbitration agreement so long as they were claiming "through or under" a signatory. Choloro Controls involved the question of whether an arbitration agreement found in a principal agreement could apply to ancillary agreements to bind parties to those ancillary agreements, even though they were not parties to the principal agreement. The Supreme Court in Chloro Controls found in the affirmative but held that this would apply only in "exceptional cases" where all the agreements are "intrinsically linked" with each other and the transaction is of a "composite nature" i.e., where performance of the main agreement is not feasible without aid, execution and performance of the supplementary or ancillary agreements.

The Constitution Bench in Cox & Kings II upheld the premise in Chloro Controls insofar as a non-signatory could be held to be a party to the arbitration agreement based on the mutual intention of the parties, gathered from circumstances, such as the composite nature of the transaction, direct commonality of subject matter, and direct relationship of the non-signatory to the signatory parties. However, the Constitution Bench found that there was a fundamental legal error in Chloro Controls to the extent that it traced the Group of Companies doctrine to the phrase "claiming through or under" the signatory. The Constitution Bench found that a person asserting a right through or under a signatory party would do so in a derivative capacity (such as through assignment, subrogation and novation) and not in its own right. This, the Supreme Court observed, was in contrast to the Group of Companies doctrine, where a non-signatory is held to be a "party" to the arbitration agreement in its own right. To this extent, the Constitution Bench found that Chloro Controls was in error.

FACTORS TO CONSIDER IN DETERMINING WHETHER A PERSON IS A NON-SIGNATORY

The Constitution Bench found that once it is determined that the entity is part of the same group, the next step is the determination of whether there is a mutual intention of the parties to bind the non-signatory to the arbitration agreement. This, it observed, is a fact-specific exercise. The Supreme Court relied on its previous decision in Oil and Natural Gas Corporation Ltd v. Discovery Enterprises Private Limited4 ("Discovery Enterprises") which had laid down various factors that courts or arbitral tribunals should consider in determining whether a particular person is a non-signatory party. These included the following:

(i) The mutual intent of the parties;

(ii) The relationship of a non-signatory to a party which is a signatory to the agreement;

(iii) The commonality of the subject-matter;

(iv) The composite nature of the transaction; and

(v) The performance of the contract.

The Constitution Bench in Cox v Kings II affirmed Discovery Enterprises and held that participation in the underlying contract is the most important factor. Other factors to be considered are "the commonality of the subject matter" and "composite nature of the transactions".

The Constitution Bench categorically held that membership in the same group of companies/presence of strong organizational links (as determined pursuant to Indian companies' laws) is not by itself sufficient to invoke the Group of Companies doctrine. The "presence of strong organizational links and financial links" between the signatory and non-signatory parties are just one of the factors to be considered.

STATUTORY BASIS OF THE GROUP OF COMPANIES DOCTRINE UNDER INDIAN LAW

In determining the statutory footing of the Group of Companies doctrine, the Court placed emphasis on Section 2(1)(h) of the Arbitration Act that defines a "party" to mean a party to an arbitration agreement. Emphasis was also placed on section 7(1) of the Arbitration Act, which defines an "arbitration agreement" as an agreement in writing between the parties to submit to arbitration all or certain disputes which have arisen/may arise in respect of a "defined legal relationship". The Court held that section 2(1)(h) read with section 7(1) of the Arbitration Act do not expressly require a party to the arbitration agreement to be a signatory, and the basis of binding a non-signatory to an arbitration in fact stems from a harmonious reading of section 2(1)(h) along with section 7 of the Arbitration Act.

It is worth noting that Justice Narasimha, in his concurring judgment, holds that the Group of Companies doctrine is subsumed within Section 7(4)(b) of the Arbitration Act, which provides that an arbitration agreement should be "in writing" even if it is contained in an exchange of letters or other means of communication which provide a record of the agreement. Therefore, a referral court, while considering the claim of a non-signatory for reference, or an objection of a non-signatory to inclusion in an arbitration, will primarily examine the record of the existence of an arbitration agreement under Section 7(4)(b). Justice Narasimha also holds that the determination of the existence of an arbitration agreement and its parties are inextricably connected with one another.

COMPARATIVE ANALYSIS

The Constitution Bench found the earliest recognition of the Group of Companies doctrine was in France in an arbitration under the rules of the International Commercial Court (ICC) known as Dow Chemicals⁵ . In Dow Chemicals the non-signatory party was recognised to have played a preponderant role in the "negotiation, performance, and termination of the contract" and therefore held to be bound by the agreement to arbitrate. The Constitution Bench assessed the treatment of the doctrine under the arbitration laws of jurisdictions such as Switzerland, England, Singapore and United States. The Court stated that any determination on the Group of Companies doctrine ought to be in line with internationally accepted principles. Whilst the doctrine is prevalent in the jurisprudence of France, Switzerland and the United States, the Constitution Bench observed that the English courts have adopted a more conservative approach, preferring instead to rely on traditional contractual principles of agency, novation, assignment, operation of law, and merger and succession to determine the parties to an arbitration agreement. Singaporean courts have rejected the Group of Companies doctrine entirely. The Constitution Bench found that most foreign jurisdictions that recognise the doctrine have moved away from a formalistic approach to determining consent to arbitrate and have embraced a more fact-specific approach.

INTERIM RELIEFS UNDER SECTION 9 OF THE ARBITRATION ACT

Another important aspect touched on by the Constitution Bench is the anomalous situation created by the incorrect understanding of the term "claiming through or under", that appears in sections 8 and 45 of the Arbitration Act, by the court in Chloro Controls. Based on that court's interpretation, a Non-signatory may seek a referral to arbitration under Sections 8 or 45 of the Arbitration Act but will not be at liberty to approach the court for interim relief under section 9⁶ which allows a "party" to approach the court for interim relief and not a party claiming "through or under" a signatory. Considering its finding that a non-signatory may be considered a party in its own right, the Constitution Bench clarified that once a tribunal determines that a non-signatory is a "party" to the arbitration agreement under section 2(1)(h) of the Arbitration Act, such party can apply for interim relief under Section 9 of the Arbitration Act.

PIERCING THE CORPORATE VEIL

On the issue of piercing the corporate veil, which is often conflated with the doctrine of Group of Companies, the Constitution Bench clarified that the latter is essentially a consent based theory (and therefore similar to doctrines such as agency, assignment, assumption and guarantee as these doctrines are also a means of identifying parties' common intention to be bound by the arbitration agreement) as opposed to the principle of piercing the corporate veil which rests on overriding considerations of justice and equity. The Constitution Bench clarified that "the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine". The Constitution Bench also set out the contours of the doctrine under Indian law and held that the existence of a close/strong commercial relationship between two parties is not by itself sufficient to identify a non-signatory party.

The Court found that a direct benefit of applying the Group of Companies doctrine is that it minimizes the chances of satellite litigation by non-signatory parties within a group. It held that this doctrine is a useful one, leading to effective and complete resolution through arbitration, especially in India, with its large number of family run businesses.

KEY TAKEAWAYS AND WAY FORWARD

The decision brings much required clarity on the aspects of non-signatories participating in arbitration proceedings, both where a signatory party seeks joinder of a non-signatory party and where the non-signatory party itself seeks invocation of the arbitration agreement. The Supreme Court has now unambiguously laid down that the doctrine of Group of Companies does apply in the Indian arbitral context and is neither antithetical to party autonomy nor to the settled principle of distinct corporate personality under company law. At the same time, by upholding that ultimately the common intention of parties to bind non-signatory is of primacy, the Supreme Court put to rest the controversies surrounding adding non-signatories to arbitral proceedings merely on the basis that a signatory and a non-signatory to an arbitration agreement function as a single economic unit or are under a common control. Significantly, the Supreme Court has clarified that this scrutiny and examination is best left to the arbitral tribunal, and courts at the referral stage will only be required to prima facie rule on whether the non-signatory is a real / true party to the arbitration agreement.

The Supreme Court has considered the application of the Group of Companies doctrine at the referral stage and has indicated that an objection either by a non-signatory or by a signatory on the joinder of the non-signatory would have to be determined on the touchstone of Section 16(1) of the Arbitration Act which embodies the principle of kompetenz-kompetenz.⁷ However, where a non[1]signatory is sought to be made a party seeks to intervene in on-going proceedings, at what stage can such applications be entertained by arbitral tribunals, remains to be seen. Similarly, once an arbitration agreement is invoked for reference of disputes between signatory parties, whether this reference can be expanded in the course of the arbitration without a separate invocation, may also arise as an issue, in the days that follow Cox & Kings II. Lastly, while the Supreme Court has distinguished "a person claiming through or under" from "a party to the arbitration agreement" courts may soon need to expound on the maintainability of proceedings to challenge an award by, or enforcement proceedings against, a non-signatory who has not been included/participated in arbitral proceedings, based on the Group of Companies doctrine.

A point that may have to be developed in subsequent cases is the exact standard of review that is required on the part of the referral court. At paragraph 164 of its judgment, the Constitution Bench states that the referral court will be required to "prima facie" rule on whether the non-signatory is a veritable party to the arbitration agreement or not. The Court recognised that this may be a complex determination and must be based on factual evidence albeit the decision is ultimately left to the arbitrator. However, even at the referral stage, the court must delve into the factual and legal aspects of the relationship between the signatory and non-signatory to arrive at a prima facie view. This may, in certain cases, for example, where the corporate group structure is a complex one, be a time[1]consuming process. Even though the court's prima facie view is not binding on the arbitral tribunal, such tribunal would rely heavily on the material before the referral court and is, in most instances, unlikely to arrive at a different determination.

Another aspect which may require further judicial scrutiny is the right of a non-signatory to seek relief under Section 9 of the Arbitration Act. While the Supreme Court has not examined this aspect in detail, it has briefly observed that a non-signatory can approach the court under section 9 of the Arbitration Act to seek urgent interim measures upon a determination by the arbitral tribunal that such a non-signatory is a party to the arbitration agreement. However, since a majority of Section 9 applications are filed before the constitution of the arbitral tribunal, the locus of a non-signatory to claim relief under Section 9 when the tribunal is yet to be constituted may need to be tested in the judicial pronouncements which will follow.

Be that as it may, the decision in Cox & Kings II will serve as a guiding benchmark for arbitral tribunals and courts to include non-signatory parties in arbitral proceedings. As the Supreme Court has correctly observed, this would promote efficacy of arbitration agreements and stymie satellite litigation by non-signatory parties. It may also lend further clarity on the doctrine of consolidation of arbitration proceedings under Indian law. On the other hand, the doctrine may be problematic from the perspective of the non-signatory party who may find themselves dragged into arbitration proceedings they did not contemplate at the time of entering the transaction. Apart from having clear cost and time implications for the non-signatory, being pulled into seemingly unrelated arbitration proceedings may mean that confidentiality of arbitral proceedings may be compromised. In our view, going forward, contracting parties will be well advised to examine scenarios where they themselves and their group companies (i.e., proposed non-signatories) may be included in arbitral proceedings on the yardstick of the Group of Companies doctrine. It may, in such scenarios, be worth assessing whether it is beneficial to actually include the group companies in question as signatory parties to avoid future controversies / prolonged determination on their status. It also remains to be seen whether courts will recognise clauses in contracts excluding the application of the Group of Companies doctrine. As the doctrine is based on party consent, courts may answer this in the affirmative.

Footnotes

1 A link to the judgment can be found here: https://main.sci.gov.in/supremecourt/2020/21647/21647_2020_1_1501_48956_Judgement_06-Dec-2023.pdf

2 (2013) 1 SCC 641

3 Section 8 of the Arbitration Act deals with the power of courts to refer parties to arbitration in India seated Arbitrations; Section 45 deals with a similar power of the courts in an arbitration seated outside India to which Part II of the Act applies.

4 (2022) 8 SCC 42

5 Dow Chemical v. Isover Saint Gobain, Interim Award, ICC Case No. 4131, 23 September 1982

6 Section 9 of the Arbitration Act provides for various interim measures of protection that may be granted by a court at any stage before the formation of the arbitral tribunal, or during arbitration proceeding, up until the time the award is enforced.

7 Section 16(1) of the Arbitration Act provides that jurisdictional objections are to be heard and determined by the arbitral tribunal itself and, to that end, provides that the arbitration agreement is independent of the other terms of the contract. Similarly, the section provides that if a contract is found to be null and void, this will not, in and of itself, mean that the arbitration clause is also invalid.