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Synopsis

The Supreme Court on Wednesday has held that the 'group of companies doctrine' should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements.

A five-judge Constitution bench led by Chief Justice of India DY Chandrachud noted the group of companies doctrine is based on determining the mutual intention to join the non-signatory as a “veritable” party to the arbitration agreement. 

"Once a tribunal comes to the determination that a non-signatory is a party to the arbitration agreement, such non-signatory party can apply for interim measures under Section 9 of the Arbitration Act. Establishing the legal basis for the application of the group of companies doctrine in the definition of “party” under Section 2(1)(h) read with Section 7 of the Arbitration Act resolves the anomality," the bench said.

The Constitution bench was called upon to determine the validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration upon a reference made in May, 2022 by a three-judge bench led by then Chief Justice of India NV Ramana.

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

"This doctrine was called into question purportedly on the ground that it interfered with the established legal principles such as party autonomy, privity of contract, and separate legal personality," the bench, also comprising Justices Hrishikesh Roy, J B Pardiwala and Manoj Misra noted.

The challenge before the court was to figure out whether there can be a reconciliation between the group of companies doctrine and well settled legal principles of corporate law and contract law. 

In its conclusion, the bench said, "The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties; Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement; the requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties."

Court added that the underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non signatory party to the arbitration agreement.

"The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine; The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act," it said.

Court has also said at the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement.

In his separate and concurring judgment, Justice PS Narasimha has held that an agreement to refer disputes to arbitration must be in a written form, as against an oral agreement, but need not be signed by the parties. 

"Under Section 7(4)(b), a court or arbitral tribunal will determine whether a non-signatory is a party to an arbitration agreement by interpreting the express language employed by the parties in the record of agreement, coupled with surrounding circumstances of the formation, performance, and discharge of the contract," he said.

The bench also declared the approach adopted in the decision by the three judge bench in 'Chloro Controls India (P) Ltd v Severn Trent Water Purification Inc' (2013), to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law.