India: Group Of Companies Doctrine In Indian Arbitration Landscape: The Dust Settles

One of the reasons why arbitration is a highly preferred mechanism for adjudicating commercial disputes is that it provides clarity to the parties with respect to the forum that will adjudicate over the disputes arising out of the agreement. However, in certain cases, a party to the arbitration may want to involve a non-signatory to the arbitration proceedings. Albeit limited, there are exceptional circumstances where the arbitration law allows impleadment of a non-signatory to arbitration proceedings. The Group of Companies doctrine (Doctrine) is one such exception wherein a non-signatory can be bound to the arbitration. The Doctrine enables binding of non-signatory affiliates to an arbitration agreement initially made by a specific entity within a corporate group. The application of the Doctrine to arbitration proceedings in India has witnessed an evolution in the last decade starting from its 2012 judgment of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. (Chloro Controls). In 2022, a three-judge Bench of the Supreme Court in the matter of Cox and Kings Limited v. SAP India Private Limited (Cox & Kings I), had referred certain question with regards to the applicability of the Doctrine to a larger bench of the Supreme Court.

In December 2023, a Five-Judge Bench of the Supreme Court (Cox & Kings II) upheld the Doctrine and its application to binding non-signatories to an arbitration agreement with certain observations, which we shall discuss in the present article.

Background of the Doctrine

The general principle, as established in Salomon v. Salomon, is that a company is a distinct legal entity with an independent existence. However, it is customary for a company to hold shares in another company due to the numerous advantages of conducting business through a corporate structure. In furtherance of the same, companies often form a group structure where a number of subsidiaries or affiliates are controlled and / or financed by a parent or a holding company. In such a group structure, although the control rests with the holding company, the day-to-day business is conducted by each entity with the assumption that the rights and liabilities arising out of such business operations will bind only the participating entities. In the same vein, arbitration proceedings generally considered that only the signatories have provided their consent to arbitrate the disputes arising thereof and therefore, only the signatories to the arbitration agreement shall be bound by it.

However, modern-day commercial transactions interlink several corporate entities, some of which may be part of the same group of companies but not a signatory to the arbitration agreement. This has led to non-signatories, i.e., entities which are not signatories to an agreement, being bound by the arbitration agreement in certain circumstances. These circumstances include: (i) consensual basis such as agency, representation, assignment, etc., and (ii) non-consensual basis such as estoppel, alter-ego, piercing of corporate veil. Similarly, the Doctrine provides that a non-signatory may be bound by an arbitration agreement in certain circumstances as provided below.

The Doctrine and its development in Indian Jurisprudence

The jurisprudence concerning the application of the Doctrine can be categorized into (i) the pre-Chloro Controls period, (ii) the post - Chloro Controls period and (iii) post – Cox & Kings II period.

The Indian Courts in the pre - Chloro Control period applied a strict interpretation of the term "parties" to the arbitration under Section 2 (h) of the Arbitration & Conciliation Act, 1996 ("Act"). The Supreme Court observed in Sukanya Holdings v. Jayesh H. Pandya in 2003 that non-signatories to an arbitration agreement cannot be referred to arbitration. Later, in Indowind Energy Ltd. v. Wescare (I) Ltd., the Supreme Court ruled that merely because two companies have common shareholders and directors, they do not become a single entity and thus, are not bound by the acts of each other.

Thereafter, the Supreme Court in Chloro Controls applied the Doctrine to refer foreign parties to arbitration. The Supreme Court had ruled that a non-signatory can be bound by the arbitration agreement in exceptional circumstances where it is clear that the parties to the agreement intended to bind the non-signatory party. Such joinder of non-signatories must be based on: (i) direct relationship between signatory and non-signatory; (ii) direct commonality of the subject-matter; (iii) composite nature of the transaction; and (iv) whether ends of justice are being served by referring the parties to arbitration.

Subsequently, the factors laid down in Chloro Controls judgement have not only been reiterated and relied on in various judgements, but the scope of the Doctrine itself has also been enlarged. Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr., the court, while relying on Chloro Controls (but not the Doctrine itself), referred a non-signatory to arbitration regarding a composite transaction involving a single commercial project. The Doctrine was further expounded in Mahanagar Telephone Nigam Ltd v. Canara Bank where the court observed that the Doctrine can be invoked in cases where there is a tight corporate group structure with strong organizational and financial links constituting a single economic reality. The court referred the non-signatory to arbitration since the dispute could not have been decided without the non-signatory being impleaded as a party to the arbitration proceedings.

In Cox and Kings I, the Supreme Court while examining the Doctrine on the touchstone of principles such as consent, party autonomy and separate legal personality, referred various questions to a larger bench for an authoritative determination.

Ruling in Cox & Kings II

The Five-Judge Bench of the Supreme Court in Cox & Kings II affirmed that the Doctrine is line with the principles of Indian arbitration law. This enables a party to call upon a non-signatory to participate in an arbitration along with other signatories. However, this was held to be contingent upon the parties consenting to bind the non-signatory to the arbitration agreement (by conduct or agreement). The Supreme Court also highlighted that the Arbitral Tribunal will be the appropriate authority to decide whether to include a non-signatory in an arbitration agreement and the intervention by courts must be limited to instances where there is a clear absence of consent or intention to arbitrate from the non-signatory.

Regarding the arbitration agreement's form, as per Section 7 of the Arbitration and Conciliation Act, 1996 (Act), the court emphasized that a flexible and purposive interpretation must be adopted. It should reflect the true intent of the parties and align with the realities of modern transactions and the parties' conduct must be objectively and contextually assessed to determine their arbitration intent.

The Apex Court held that a person 'claiming through or under' (Section 8 or Section 45 of the Act) and a party/signatory to the arbitration agreement cannot be placed on the same footing through the Doctrine and such a stance would be erroneous and misaligned with the Act's framework. A person claiming through a party or a signatory acts in a derivative capacity (such as a person acting under principles like agency or assignment) but such a person cannot be held to be a party to the arbitration agreement. Therefore, the application of the Doctrine in Chloro Control was held to be erroneous.

Furthermore, the judgment clarified the distinction and connection between the Doctrine and other principles like alter ego, piercing the corporate veil, and the single economic unit, which also bind non-signatories to arbitration agreements. The Supreme Court held that the Doctrine stands independently and is not contingent upon these principles.

Our Thoughts

Post Cox & Kings II, the application of the Doctrine by Indian Courts would perhaps be in a stricter sense wherein there will be onus on the parties to establish that there was common intention to bind the non-signatory to the arbitration agreement. The doctrine seems to have broadened the scope of the definition of 'parties' under the Act by holding that a written agreement is not necessary in order to bind some entity (as if a party) to an arbitration. Whether the requirement of consent from the non-signatory will be a sufficient check and balance to the expanded scope, would be perhaps tested in the coming years wherein the Tribunals apply the Doctrine.

In view of the above, it may be logical for companies to avoid such conflicts by specifically providing in their contracts (including arbitration agreements):

However, it must be kept in mind that in light of the Cox & Kings II, a non-signatory entity can be brought under the definition of a "party to the arbitration" if it is established that the conduct of the party indicates that they have consented to be bound by the arbitration agreement. Therefore, third parties who are not signatories to an arbitration agreement but are involved in complex commercial transactions might have to be cautious about the terms of the agreement as well as the actions of the parties during performance of the contract. Apart from the application of the Doctrine, Cox & Kings II ruling is also essential with respect to the application of the principle of lifting of corporate veil. The Supreme Court by this judgement has restored the position of law which stood prior to Chloro Controls, i.e. the doctrine of lifting of corporate veil can be invoked only in extraordinary circumstances where stringent conditions (such as fraud or evasion of legal obligations) are fulfilled, and not in ordinary business transactions or application of the Doctrine in absence of the said stringent conditions.

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.