LI Network
Published on: December 06, 2023 at 12:30 IST
A Constitution Bench of the Supreme Court, led by Chief Justice DY Chandrachud, established that an arbitration agreement has the authority to bind non-signatories under the “group of companies” doctrine.
The ruling, delivered in the case of Cox and Kings Ltd v. SAP India Pvt Ltd, emphasizes the indispensability of this doctrine in deciphering the intentions of parties involved in intricate transactions with multiple entities and agreements.
The Court asserted that the requirement for a written arbitration agreement does not limit its applicability solely to signatory parties.
It clarified that non-signatories could be bound if a defined legal relationship exists between them and the signatories, and if the parties intended to be bound by their conduct.
Chief Justice DY Chandrachud underscored, “While a party’s signature on an agreement signifies consent to jurisdiction, the presumption that non-signatories are not part of the agreement may not always be accurate.”
The judgment outlines key conclusions:
a. Section 2(1)(h) and Section 7 of the Arbitration and Conciliation Act 1996 encompass both signatory and non-signatory parties.
b. The conduct of non-signatories can indicate their consent to be bound by the arbitration agreement.
c. A written arbitration agreement, as per Section 7, does not exclude the possibility of binding non-signatory parties.
d. The ‘group of companies’ doctrine aims to preserve corporate separateness while establishing the common intention of parties to bind non-signatories.
e. The principle of ‘alter ego’ or ‘piercing the corporate veil’ is not the basis for applying the ‘group of companies’ doctrine.
f. The doctrine’s application should consider cumulative factors, and the single economic unit principle alone is insufficient.
g. The ‘group of companies’ doctrine is an independent legal principle derived from Sections 2(1)(h) and 7 of the Arbitration Act.
h. The referring court, at the referral stage, should leave it to the Arbitral Tribunal to determine whether non-signatories are bound by the arbitration agreement.
In a separate but concurring judgment, Justice Narasimha supported the decision. The reference to the ‘group of companies’ doctrine arose in an application under Section 11 of the Arbitration Act by Cox and Kings Ltd, seeking arbitration in a dispute with SAP India Private Ltd.
The Court cautioned that the doctrine should be applied judiciously, and mere affiliation within a corporate group is insufficient to extend the arbitration agreement to non-signatories.
This ruling follows a referral by a three-judge bench in May 2022, expressing reservations about aspects of the ‘group of companies’ doctrine, particularly in light of the Chloro Controls case.
The decision clarifies and upholds the legal standing of the ‘group of companies’ doctrine in Indian arbitration jurisprudence.