A three-judge Bench of the Supreme Court examining the 'group of companies' doctrine has referred the question of its correctness and application to a larger Bench.
The 'group of companies' doctrine enables non-signatories to an arbitration agreement to nevertheless be bound to an arbitration agreement if there is a clear intention of the parties to bind such non-signatories1. Its genesis in Indian law can be traced back to Chloro Controls India Pvt Ltd v Severn Trent Water Purifications Inc & Ors2 and several other judgments since. Based on the ratio of Chloro Controls and the recommendation of the 246th Law Commission Report, §8 of the Arbitration & Conciliation Act 1996 was amended in 2015 to enable "any person claiming through or under" a party to the arbitration agreement to also commence arbitration.
Cox & Kings had entered into a series of agreements with SAP India (Respondent No 1). Disputes arose between the parties and SAP India invoked arbitration against Respondent No 1 and its parent company, Respondent No 2. Neither Respondent replied to the arbitration notice, so SAP India made an application under §11 of the Act for the appointment of an arbitrator. The application was made to the Supreme Court as this was an international commercial arbitration.
The question for the Supreme Court's consideration was whether the parent company, which was not a signatory to the arbitration agreement, could be forced to arbitrate by SAP India. Two separate but concurring opinions were passed:
Justices NV Ramana and AS Bopanna
In the majority opinion, the Bench said:
- The group of companies doctrine postulates the joinder of non-signatories as parties, rather than just as claimants under a signatory.
- The doctrine relies on the subjective intention of the parties to bind non-signatories to an arbitration agreement. Jurisprudence has shown that arbitration, being a creature of contract and therefore agreement, does not sit well in binding such non-signatories.
- The doctrine appears to have been based more on economics and convenience rather than law. It runs counter to the principles of party autonomy and separate corporate personality.
The Bench accordingly referred this matter to a larger Bench to consider whether Chloro Controls and subsequent judgments were good law.
Justice Surya Kant
In a concurring opinion, Justice Surya Kant held:
- While the scope of the group of companies doctrine required a larger Bench's consideration, he proposed an "authoritative determination of the contours of the Doctrine" rather than doing away with it altogether.
- This doctrine serves the function of identifying parties that deliberately use the corporate form as a shield to avoid being subjected to arbitration.
- The doctrine helps navigate complex multi-party business transactions which necessarily involve third parties which are non-signatories to the arbitration agreement. The doctrine acknowledges the commercial reality that parties often transact with subsidiaries based on the goodwill of the parent company.
- It prevents the multiplicity of proceedings by joining non-signatories involved in the negotiation and/or performance of an agreement.
On the basis the above, he framed additional questions for the consideration of the larger Bench, particularly whether the group of companies doctrine should be read into §8 of the Act or exist as an independent principle of law.
The examination of this doctrine by a larger Bench of the Supreme Court will be important since this doctrine has been a mainstay in Indian jurisprudence for the past decade.
* Judgment dated 6 May 2022 passed by Supreme Court in Arbitration Petition (Civil) No. 38/2020
1. Dow Chemical v Isover-Saint-Gobain ICC Case No. 4131
2. (2013) 1 SCC 641
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