Non-signatories to an arbitration agreement can be made parties to a dispute if they are part of the same group of companies and have a common intention, a Constitution Bench of the Supreme Court ruled on Wednesday, giving its stamp of approval to the so-called “group of companies” doctrine in Indian arbitration jurisprudence.
The bench, headed by Chief Justice of India Dhananjaya Y Chandrachud, held that the doctrine should be retained in Indian arbitration rules and statutes in view of its usefulness in determining the intention of the parties in the context of complex transactions involving multiple parties and agreements.
The five-judge bench, also comprising Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra, held that the doctrine could be read into the relevant provisions of the Arbitration & Conciliation Act, 1996, and that the definition of “parties” under the Act could include both signatories and non-signatories.
“The conduct of 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,” the bench said, adding that the existence of the “group of companies” doctrine is inherent in the principle of “mutual intention” of the parties.
According to the Constitution Bench, the referring court should leave it to the arbitral tribunal to decide whether the non-signatory party is bound by the arbitration agreement. “Based on the factual evidence and the application of legal doctrine, the tribunal may delve into the factual, circumstantial and legal aspects of the matter to decide whether its jurisdiction extends to the non-signatory party. In doing so, the tribunal should comply with the requirements of the principle of natural justice, such as giving the non-signatory party an opportunity to raise objections,” it said.
Sumant Nayak, senior partner, Desai & Diwanji, said the judgment provides much-needed clarification on the participation of group companies in arbitration. “This, in my view, will further facilitate the process of arbitration where the group companies could be included in the arbitration proceedings at the discretion of the arbitrator. This doctrine could also be incorporated in the forthcoming amendment to the Act,” Nayak added.
Mayank Mishra, partner at INDUSLAW, praised the apex court for taking a nuanced and balanced approach to the invocation of the doctrine by succinctly outlining its premise. “While it was previously generally accepted that non-signatories could be bound by an arbitration agreement, this judgment has provided a salutary safeguard in cases involving complex transactions, multiple parties and agreements. The decision will promote the effectiveness of arbitration generally as a healthier way of resolving disputes”.
The ruling, which came in a dispute between travel company Cox and Kings and software company SAP India, is significant in determining the future course of commercial arbitration jurisprudence in India, particularly where the doctrine is pitted against the well-established concepts of consent and privity in arbitration agreements.
Under the general principle of privity, only parties to an arbitration agreement are bound by its terms. However, the “group of companies” doctrine holds that non-signatories to an arbitration agreement may also be bound if there appears to be a “mutual intention” of the parties to bind such non-signatories.
In clarifying the law, the constitutional bench on Wednesday cited the distinction between arbitration law and obligations arising under contract law or party autonomy. “Arbitration law operates in an autonomous field of law. While the main purpose of company law and contract law is to impute substantive legal liability, the main purpose of arbitration law is to determine whether an arbitral tribunal has jurisdiction over the dispute arising between the parties,” it said.
“Courts and tribunals cannot adopt a rigid approach to exclude all persons or entities who, by their conduct and relationship with the individual parties, intended to be bound by the underlying contract containing the arbitration agreement… It is necessary to seek a balance between the consensual nature of arbitration and the modern commercial reality where a non-signatory becomes involved in a commercial transaction in a number of different ways,” it said.
Such a balance, the court said, can be achieved by inferring that the non-signatories, by virtue of their relationship with the signatory parties and their active involvement in the performance of commercial obligations closely related to the subject matter, are not in fact strangers to the dispute between the signatory parties.
“Since the “group of companies” doctrine is a consent-based theory, its application depends on the consideration of a variety of factual elements in order to establish the mutual intention of all the parties involved. In other words, the doctrines must infer the mutual intent of both the signatory and non-signatory parties to be bound by the arbitration agreement,” the court said, clarifying that the party seeking to join a non-signatory party bears the burden of proving “mutual intent”.
At the same time, the court clarified that the existence of a group of companies is a necessary but not a sufficient condition for determining the parties’ intention. “Rather, the courts must determine, first, the existence of a group of companies and, second, the conduct of the signatory and non-signatory parties indicating their common intention to make the non-signatory a party to the arbitration agreement,” it added.
According to the bench, the “group of companies” doctrine is based on maintaining the corporate separateness of the group of companies and therefore, while determining the common intention of the parties to bind the non-signatory to the arbitration agreement, the alter ego or piercing the corporate veil principle cannot be made the basis for the application of the doctrine.
The court stated that it was adopting a balanced approach without compromising the fundamental principles of arbitration law, contract law and company law to ensure that the resulting legal framework is consistent.
In May 2022, a three-judge bench had referred the matter to the larger bench for an authoritative decision on the applicability of the “group of companies” doctrine in Indian jurisprudence independently of any statutory provision and further whether the doctrine could be read into any existing provision of the Arbitration and Conciliation Act, 1996. Another question that was referred was whether the jurisdiction of an arbitral tribunal could extend to non-signatories to an arbitration agreement.
The court ruling concerned a dispute between a travel company called Cox and Kings Ltd (C&K) and SAP India Pvt Ltd over a software licensing agreement they entered into in 2010.
In 2015, the two companies signed three new agreements and agreed to resolve future disputes through arbitration under the 1996 Act. However, the project to implement the new software ran into difficulties, prompting C&K to approach SAP SE – the main branch of SAP based in Germany – for assistance.
As the project failed to take off despite repeated extensions, C&K terminated the contract in November 2016 and demanded a refund of ₹45 crore to recover the payments made to SAP. In response, SAP India issued a notice to commence arbitration proceedings, claiming that C&K had wrongfully terminated the agreement and demanded ₹17 crore as payment.
Despite its own impending bankruptcy, C&K sent a new notice to SAP in 2019, initiating a new arbitration. This time, C&K also sent a notice to SAP SE, seeking to make it a party to the arbitration, even though SAP SE was not a signatory to any of the agreements. When SAP failed to appoint an arbitrator, C&K applied to the Supreme Court under Section 11 of the Arbitration Act and requested the court to appoint an arbitrator.