15 December 2023

Indian Arbitration Jurisprudence Recognizes Group Of Companies Doctrine: Supreme Court

King, Stubb & Kasiva


King Stubb & Kasiva (KSK) - Advocates & Attorneys is a full-service law firm in India that has been operating since 2005 based in Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Kochi, & Italy with 120+ professionals. We specialise in M&A, litigation, arbitration, employment, labour, banking, finance, e-commerce, and emerging technology practices.
The judgement came through a Five-Judges Bench in Cox and Kings Ltd. v. SAP India Pvt. Ltd.
India Litigation, Mediation & Arbitration
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Amidst the haze of a smog engulfing yet another Delhi winter, the Hon'ble Supreme Court of India on 6th December 2023 cleared the air around the applicability of group of companies doctrine to arbitration proceedings. The judgement came through a Five-Judges Bench in Cox and Kings Ltd. v. SAP India Pvt. Ltd.

Essentially, the Court clarified that a corporate entity which is part of a group of companies despite being a non-signatory to an arbitration agreement could be the true or the veritable party to the transaction and in-turn to the dispute.

The Court emphasized the importance of establishing that for a non-signatory to be made a party to arbitration, it must be proved that in addition to the non-signatory being a group company, it had materially participated in the negotiation or performance of the contract; with performance from non-signatory being of paramount relevance. Additionally, it is a legal relationship that to qualify one as a group company and not merely a commercial relationship. Although, at times even a commercial relationship may suffice, as demonstrated below.

Group of Companies Doctrine is only one of the ways to bind non-signatories

In addition to the group of companies doctrine, the Indian courts have also identified other ways for binding non-signatories to arbitration. One being that of estoppel; a prime example being the 17th April 2023 judgement of Hon'ble High Court of Delhi in Gaurav Dhanuka v. Surya Maintenance Agency Pvt. Ltd. & Ors. Therein the High Court was concerned with establishing an arbitration tribunal or referring the dispute to arbitration. The dispute was between the owner of certain commercial real estate on one side and three companies being the developer, maintenance agency, and property manager, respectively, on the other side. The developer had argued that it neither had any corporate relations with the other two; nor any arbitration agreement with the owner; hence it could not be made party to arbitration.

The High Court, however, ruled that although the developer was not connected to the maintenance agency and property manager through group of companies doctrine, the developer was deriving the direct benefits of having appointed them to manage and service the commercial real estate. The High Court expressed: "The agreements in question have to be read with each other to derive the respective rights and obligations of the parties."

Importantly, estoppel and other such doctrines remain available as the Supreme Court in Cox and Kings specified that the group of companies doctrine is not to the exclusion of other doctrines to bind non-signatories.

The Intent Behind the Five-Judges Bench Judgement

Although the group of companies doctrine circumvents the legal principles of privity to contracts, party autonomy, and separate corporate legal personality, it is aimed at ensuring accountability of all parties who have materially participated in the negotiation and performance of the transaction. This, as per the Court, is to be achieved through striking a balance between the "consensual nature of arbitration" and the "modern commercial realities".

The decision of the Five-Judges Bench will also – in appropriate cases – enable parties to circumvent another restriction against reference to arbitration, which is when the subject-matter of disputes shall affect third-party rights i.e. the arbitration process will end up determining rights of parties that are not party to the arbitration agreement. This restriction was enshrined by the Supreme Court in the 2021 decision of Vidya Drolia v. Durga Trading Corpn. and shall to a certain extent stand allayed.

Why Group of Companies Doctrine may still be seen as a black sheep?

The Five-Judges Bench of the Supreme Court categorically recognized that Courts in England, which houses one of the leading international arbitration centres (London International Arbitration Centre) has expressly rejected group of companies doctrine to bind non-signatories to arbitration. Resultantly, arbitration lawyers shall need to scramble by identifying other modes of binding non-signatories for such arbitrations which may see enforcement in the United Kingdom and such other jurisdictions rejecting the group of companies doctrine. On the contrary, Singapore, which is another leading arbitration jurisdiction, has validated the group of companies doctrine.

Hence, having a foresightedness in terms of what strategy and legal grounds to employ shall remain crucial, especially when reliance is placed on group of companies doctrine to bind non-signatories in international commercial arbitrations.

Different Implications for Different Proceedings

When a Court is asked only to refer a dispute to arbitration it shall only need to prima-facie establish whether there exists a group of companies aspect to the signatories and the non-signatories that are sought to be made party to arbitration. The referral Court shall need to leave the ultimate determination in this regard to the arbitral tribunal, much in keeping with the kompetenz-kompetenz doctrine.

Whereas, when a Court is called upon to grant urgent interim protections/reliefs, especially prior to the constitution of arbitral tribunal, it shall in all possibilities be rather slow in passing directions against non-signatories, unless it can be successfully demonstrated without much complication that the parties against whom the urgent interim reliefs are being sought are indeed forming part of the group of the signatory company. This shall however be rare on account of the prime test for the group of companies having been identified as being performance by the non-signatory. Needless to say, much shall depend upon a case-to-case basis application of the group of companies doctrine.

Group of Companies Doctrine in Other Legal Frameworks

While with the Five-Judges Bench decision, the doctrine has found a firmer and clearer footing in arbitration proceedings, the jurisprudence therein could have little meaning for an area such as insolvency law, especially in the context of corporate insolvency resolution process for group companies; which is still in works on the legislative side. The limited impact shall especially be on account of the specified test of "default" as being a necessity for triggering corporate insolvency proceedings.

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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