India: Binding Non-Signatories To An Arbitration Through The Group Of Companies' Doctrine

Last Updated: 9 September 2019
Article by Ashima Obhan and Shivam Patanjali

It has been well established that consent from parties is a prerequisite to an arbitration.This characteristic of an arbitration ensures that it is only the parties to an arbitration agreement that would be the parties between who arbitration shall commence against. However, over time we have seen different doctrines or legal theories developed such as the group of companies'doctrine, the concept of agency, the reliance theory1, that have been used to make a non-signatory a party to an arbitration.

What is the Group of Companies' Doctrine?

Each company being a separate legal entity has separate legal rights and liabilities. Even if a company is an affiliate, it still retains its characteristic of being a separate legal entity. Therefore, an agreement made by one company of the same group cannot be binding on another company that is an affiliate of the parent concern. However, through the group of companies' doctrine  an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates2.

The group of companies' doctrine was first established through the case of Dow Chemical v.Isover Saint Gobain3 In India, the group of companies' doctrine was first invoked by the Supreme Court in the case of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.4, with respect to an international commercial agreement.Through this article, we shall be discussing a recent decision of the Supreme Court in Mahanagar Telephone Nigam Ltd. vs. Canara Bank & Ors.5whereby the group of companies'doctrine was invoked by the Supreme Court to bind a non-signatory to the arbitration.


In 1992, Mahanagar Telephone Nigam Limited ("MTNL") floated 17% non-cumulative secured redeemable bonds worth Rs. 425 crores. On February 10, 1992, after executing a Memorandum of Understanding with Can Bank Financial Services Limited ("CANFINA"), MTNL placed bonds worth Rs.200 crores with CANFINA through the form of a fixed deposit ("Bonds").CANFINA paid around Rs. 50 crores of the fixed deposit, however, since the balance amount was yet to paid, MTNL serviced the Bonds to a partial extent.

Soon after the Bonds were subscribed, there was an outbreak of a security scam which led to a collapse of the secondary market in shares, security, and bonds. One of the consequences of the security scam was that CANFINA was facing a liquidity crunch and as a result, Canara Bank, being the parent concern of CANFINA, purchased a face value ofRs. 80 crores worth of Bonds issued by MTNL from CANFINA. Canara Bank upon purchasing the Bonds from CANFINA requested MTNL to register the Bonds in their name, however MTNL refused to do the same. It was only on February 16, 2019, that MTNL informed Canara Bank that it had registered a part of the Bonds having a face value of Rs. 40 crores in favour of CANFINA, however, MTNL had retained the bond instruments due to a failure on part of CANFINA to deposit the balance money. Subsequently, MTNL cancelled the Bonds on October 20, 1993 on the ground that that the letters of consideration were with CANFINA.  Being aggrieved by the actions of MTNL, Canara Bank filed a Writ Petition to challenge the cancellation of the Bonds, wherein CANFINA was arrayed as a proforma party.

High Court Proceedings and Alternate Remedies

The High Court initially dismissed the Writ Petition on the ground that the parties had a recourse to alternate remedies and asked the Union of India to resolve the dispute as per the decision of O.N.G.C. v. Commissioner of Central Excise6. Due to the other alternate remedies available to the parties to resolve their dispute, the Writ Petition was never adjudicated upon initially, and the parties were given the liberty to revive the Writ Petition in the event that the parties were not able to resolve their dispute through the use of the alternate remedies. One of the alternate remedies that the parties had resorted to was the Committee of Disputes, which the parties were referred to by the High Court on May 30, 2008. The Committee of Disputes was of the opinion that all three parties must take the recourse of arbitration due to the different interlinked transactions between them and execute an arbitration agreement under the Arbitration and Conciliation Act, 1996 ("Act") to resolve the dispute expeditiously. Canara Bank even prepared a draft arbitration agreement, which had CANFINA, MTNL and Canara Bank as the parties to the agreement and waited for MTNL to execute the agreement.

In the meantime, the Supreme Court through the decision of Electronics Corporation of India Ltd. v. Union of India & Ors.7 overruled the decision of O.N.G.C. v. Commissioner of Central Excise  and as a result the Writ Petition was finally revived after Canara Bank moved an application to revive the same. During the proceedings before the High Court, the parties agreed to refer the matter to arbitration on September 16, 2011 and a sole arbitrator was appointed on October 21, 2011. The sole arbitrator issued a notice to all three parties, however, Canara Bank raised an objection before the arbitrator with regards to the joinder of CANFINA as a party to the arbitration. The arbitrator passed an interim award wherein it was held that since CANFINA was not present before the High Court on September 16, 2011, when the parties were referred to arbitration, and as a result CANFINA had not agreed to be a party to the arbitration.

Joinder of CANFINA

One of the issues to be considered by the Supreme Court was the joinder of CANFINA as a party to the arbitration. The Supreme Court reaffirmed the fact that a non-signatory affiliate  maybe made party to an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement if the non-signatory affiliate was either engaged in the negotiation or performance of the contract, or made statements indicating its intention to be bound by the contract. It was clarified that to invoke the group of companies' doctrine there should either be a direct relationship between the non-signatory affiliate and the party which is a signatory to the arbitration agreement; there should be direct commonality of the subject matter; a composite nature of the transaction8; and where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality.

In the given case, CANFINA was a wholly owned subsidiary of Canara Bank and the dispute between the parties had arisen out of a transaction between CANFINA and MTNL with regards to the Bonds, which was purchased by Canara Bank. Therefore, there was a clear and direct nexus between the parties. Further, upon the examination of CANFINA's conduct, it was found that CANFINA had participated in the proceedings before the High Court as well as the Committee of Disputes and it was only on two occasions, i.e. on September 16, 2011 and October 21, 2011 that the counsel for CANFINA was not present before the High Court. Another factor that played on the Supreme Court's mind was that when the draft arbitration agreement was prepared by Canara Bank, even CANFINA was listed as a party and that the objection to CANFINA being a party to the arbitration was raised by Canara Bank and not CANFINA itself. Therefore, it was evident through the conduct of the parties that there was an intention to have CANFINA as a proper and necessary party to the arbitration and the matter was remitted to the arbitrator to finally adjudicate upon the issue.


The group of companies' doctrine has been regarded as a controversial doctrine for one of the sole reasons that is against the principle of party autonomy, i.e. consent from each party to submit to arbitration to resolve the dispute. Even though the group of companies' doctrine has been used by Indian courts in the past9, it is through the decision of the Supreme Court to invoke the group of companies' doctrine in Mahanagar Telephone Nigam Ltd. vs. Canara Bank & Ors  that it has been made clear the different circumstances under which the group of companies' doctrine would be invoked and even more importantly the focus of courts to look at the conduct of the parties especially when there was no written arbitration agreement in place while invoking the doctrine.


1 Blackaby, Nigel. Redfern And Hunter on International Arbitration. Oxford ; New York :Oxford University Press, 2015.

2 (2013) 1 SCC 641

3 1984 Rev Arb 137; 110 JDI 899 (1983).

4 (2013) 1 SCC 641

5 Civil Appeal Nos. 6202-6205 of 2019 (Arising out of SLP (Civil) Nos. 13573-13576 of 2014)

6 (1995) Supp. 4 SCC 541. As per this decision, a Committee of Disputes was directed to be formed that would hear the disputes between public sector undertakings. The public sector undertakings were not allowed to fight their litigation in courts.

7 (2011) 3 SCC 404. As per this decision, the Committee of Disputes was held to have outlived their utility and given the high stakes involved in disputes between public sector undertakings, the directions to form a Committee of Disputes was withdrawn.

8 A 'composite transaction' refers to a transaction which is interlinked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.

9 (2013) 1 SCC 641, See also (2018) 15 SCC 678; (2018) 16 SCC 413; 2018 (4) CTC 46

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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