A bench comprising of former CJI N.V.Ramanna, Justice Surya Kant and Justice A.S. Bopanna in May 2022 referred the question of the application of the “group of companies” doctrine (“Doctrine”) to include non-signatories in an arbitration agreement to arbitration proceedings, to a larger bench. The bench was hearing an application (Cox and Kings Limited v. SAP India Private Limited and Anr) filed under section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) wherein the applicant, Cox and Kings inter alia, sought to implead the holding company of the Respondent- which was not a signatory to the arbitration agreement in the arbitration proceedings at the very threshold. After extensively considering the relevant statutory provisions and precedents on this subject, the bench formulated the following questions of law, which in their opinion required an authoritative ruling by a larger bench to end the confusion surrounding the group of companies doctrine qua involving non signatories to arbitration proceedings –

1. Whether the Group of Companies Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?
2. Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?
3. Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
4. Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies Doctrine into operation even in the absence of implied consent?

Genesis if the Doctrine

One of the earliest instances of application of the Doctrine can be traced to an award rendered by International Chamber of Commerce (“ICC”) Tribunal in an arbitration between a French company and a Spanish company[1] almost 50 years back.  The succinct observation worth noting in this case with respect to the Doctrine was that – “the concept of a group is defined beyond formal independence born of the creation of distinct legal persons, by the unity of economic orientation dependent on a common power.”

In the same year, a different ICC Tribunal ruled on similar lines and held that instead of a formalistic interpretation of the contract, the real intentions of the parties, in good faith and in the spirit of the operation must be taken into account while deciding the question of involving a group company of a signatory as a party to the proceedings[2]. In Dow Chemical and Ors v. Isover Saint Gobain[3] the ICC Tribunal, while acknowledging the development of the doctrine through the aforementioned to cases (ICC Award No. 2375 and ICC Award No.1434) held that:

“Considering, in particular, that the arbitration clause expressly accepted by certain of the companies of the group should bind the other companies which, by virtue of their role in the conclusion, performance, or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appear to have been veritable parties to these contracts or to have been principally concerned by them and the disputes to which they may give rise.”

Application or lack thereof in India

Courts in India have shown reluctance in involving non signatories to arbitration proceedings which is seen from a line of judgments starting with Sukanya Holdings[4]. The decision in Sukanya Holdings was based primarily on the interpretation of Section 8 of the Arbitration Act. The view expressed by the court was that if a suit is initiated where non signatories are a party and the subject matter falls partly within the arbitration agreement and partly outside, an application under Section 8 would not be maintainable since bifurcation of the cause of action is not possible. Hence, not only did the court deny making non-signatories party to arbitration proceedings, it went a step further by declining to refer the signatories to arbitration proceedings.

The precise question of whether a non-signatory can be made a party to arbitration proceedings was answered in Indowind Energy[5]. The decision of the Court in this case based primarily on the conjoint interpretation of two provisions of the Arbitration Act, Section 2 (h) – which defines “party”, Section 2 (b) – which defines “arbitration agreement” and Section 7 – which lays down the conditions for qualification of an arbitration agreement to be in writing. The Court drew a distinction between an ordinary contract and an arbitration agreement, and expressed the view that while a contract maybe entered into orally or its existence be inferred by conduct of parties, in case of an arbitration agreement, it must strictly satisfy the requirements under Section 7 of the Arbitration Act which says an arbitration agreement has to be in writing. Thus, owing to the absence of a written agreement to arbitrate, the non-signatory was not referred to arbitration. The Court’s second reason to exclude the non-signatory from arbitration was that the common director of the signatory and non-signatory chose carefully to not sign on behalf of the non-signatory, which clearly demonstrates that there was an intent to exclude the non-signatory from the agreement to arbitrate. Judgments of US Court of Appeal where non signatories were held to be bound by the arbitration agreement, were also placed before the Court but it did not consider for the reason that these American judgements did not deal with a provision akin to Section 7 of the Arbitration Act.

Justice Surya Kant was clearly not impressed with the reasoning in Indowind as can be seen from his comments in Cox and Kings.

Non- Signatory – No Problem, Chloro Controls to the Rescue

The judgment in Chloro Controls[6] made a move towards breaking shackles and rigidity imposed by prior jurisprudence on the subject. Its popularity is evidenced by the fact that it finds reference in a whopping 247 cases (both SC and HC’s) since it was delivered.  There were 6 agreements relevant to the transaction out which 3 contained the arbitration clause. The use of the words – “any dispute arising under or in connection with the agreement” led the Court to opine that the word “connection” showed the intention of the parties to expand the scope of disputes under the agreements. An analysis of the nature of the transaction, the manner in which the agreements were structured and conduct of the parties pointed to the fact that it all was intended to give effect to and implement the composite transaction contained in the main agreement and accordingly, it was held that there was a collective intention on behalf of the parties to resolve their disputes collectively through arbitration warranting expansion of the scope of an arbitration to include non-signatories as well.

While Chloro Controls was in the context of an arbitration under Part II of the Arbitration Act and advanced an interpretation of Section 45, the subsequent case of Ameet Lalchand Shah and Ors v Rishab Enterprises and Anr.[7] applied the principle of binding non signatories in the context of a domestic arbitration. The amended Section 8 of the Arbitration Act was examined in this case and it was observed that the phrase “person claiming through or under a party” made it similar to Section 45 of the Arbitration Act. With this analogy and linking the two provisions (8 and 45), the Court followed the principle laid down in Chloro Controls to hold that a non-signatory would be bound by the arbitration clause since it is a party to an inter connected agreement, executed to achieve a common commercial goal.

Recently in ONGC v M/s Discovery Enterprises Pvt. Ltd.[8] the conditions where a non-signatory can be said to be bound by an arbitration agreement has been spelled out quite clearly as – (i) where there exists a group of companies; (ii) the parties have engaged in conduct or made statements indicating an intention to bind a non-signatory. Thus, expanding the law and making it applicable to group of companies as well as to situations where parties by conduct intended to be bound.

Conclusion

At the end of the day, the object of arbitration is to provide a cost effective and speedy resolution of disputes between parties. This purpose is often defeated because of technicalities which result in multiplicity of proceedings and possibility of having conflicting decisions on the same issue. Having a strict and rigid view to exclude non-signatories from arbitration proceedings time and again robs the mechanism of arbitration of its benefits and reduces an arbitral award to a mere paper decree. The advantages of including non-signatories to arbitration (in exceptional circumstances) has been also been spelt out by Alan Redfern and Martin Hunter in their book – Law and Practice of International Commercial Arbitration (4^th Edition). In their view, it is preferable to have a dispute between several parties adjudicated in a single proceeding rather than several proceedings before various fora. This way time and money is saved and as stated above, the possibility of having conflicting decisions on the same issue is avoided. This has been the legislative intent as well, which is evident from the amendments made in Section 8, 9 and 17. At present the court as well as the tribunal has the power to pass directions to a third party/non-signatory while dealing with Section 9 and Section 17 respectively. Moreover, Section 8 has been brought in line with Section 45 to include non-signatories. The legislature seems to be following the international jurisprudence – which realises that in certain cases impleadment of non-signatories would be required for proper adjudication of disputes and also for strengthening arbitration as a dispute resolution mechanism. In national courts, joinder of parties and consolidation of proceedings is allowed, then why not in arbitration ? Moreover, there seems to be a large number of cases which rely on Chloro Control to hold that the arbitral tribunal does not have the power to implead a non-signatory, since the tribunal is a creation of the arbitration agreement between the signatories to the agreement. Thus, a question arises that if an arbitral tribunal has the power under section 17 to direct non-signatories similar to a courts power under section 9 then why not have the power to implead? The reference in Cox and Kings should answer these questions.

[1] ICC Award No. 2375, Clunet 1976, at 973 et seq

[2] ICC Award No.1434, Clunet 1976, at 978 et seq

[3] ICC Award No. 4131, YCA 1984, at 131 et seq. (also published in: Clunet 1983, at 899 et seq.)

[4] Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya & Anr, (2003) 5 SCC 531

[5] Indowind Energy Limited v Wescare India Limited and Another (2010) 5 SCC 306

[6] Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

[7] (2018) 15 SCC 678

[8] Civil Appeal No. 2042 of 2022