Arbitration pacts can be binding on non-signatory firms under ‘group of companies’ doctrine: SC

In a path-breaking verdict with wide ramifications for arbitration cases, the Supreme Court on Wednesday widened the ambit of the term ‘party’ under the arbitration law to include non-signatory firms within a group in an agreement by using the “group of companies” doctrine.

The group of companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement which has been signed by another member of the group and this usually enhances the scope and effectiveness of such an agreement.

A five-judge Constitution bench headed by Chief Justice D Y Chandrachud, in its two separate concurring judgements, made the doctrine applicable under the Arbitration and Conciliation Act, 1996 with certain caveats.

“We deem it appropriate to retain the doctrine which has held the field in Indian jurisprudence though by firmly establishing it within the realm of the mutual consent or the mutual intent of the parties to a commercial bargain.

“This will ensure on the one hand that Indian arbitration law retains a sense of dynamism so as to respond to contemporary challenges. At the same time, structuring the doctrine in the manner suggested so as to ground it in settled principles governing the elucidation of mutual intent is necessary. This will ensure that the doctrine has a jurisprudential foundation in party autonomy and consent to arbitrate,” the CJI said while writing the 106-page judgement for himself and Justices Hrishikesh Roy, JB Pardiwala and Manoj Misra.

The CJI said, “The definition of “parties” under Section 2(1)(h) (term party) read with Section 7 (arbitration agreement and its ingredients) of the Arbitration Act includes both the signatory as well as non-signatory parties.” Justice P S Narasimha wrote a separate 45-page concurring judgement.

“While concurring with the judgment of the learned Chief Justice, my conclusions are as follows...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. While interpreting and constructing the contract, courts or tribunals may adopt well-established principles, which aid and assist proper adjudication and determination. The Group of Companies doctrine is one such principle,” Justice Narasimha said.

The CJI extensively dealt with the 'group of companies' doctrine, its applicability in foreign countries and importance in Indian context.

The verdict said, “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.” “The Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement and the requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties,” the court held.

It also held under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement.

“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,” it said.

“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,” the court said.

The judgement said to apply the group of companies doctrine, the courts or tribunals have to consider all the “cumulative factors” laid down in its one of the earlier judgements.

It 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.

The larger bench was determining the validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration.

The doctrine was called into question on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality.

The challenge before the apex 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.

The matter came up before the larger bench on a reference from a three-judge bench which had doubted the correctness of the application of the doctrine by Indian courts.

One of the referred questions was whether the ‘Group of Companies Doctrine’ should be read into the provisions of the Indian arbitration law or if it can exist in Indian jurisprudence independent of any statutory provision.

The case was referred to a larger bench in May 2022 by a three-judge bench headed by the then CJI, N V Ramana, saying that certain aspects of the ‘group of companies’ doctrine needed reconsideration.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)