The principle that allows third parties to be bound by an arbitration agreement, known as the Group of Companies Doctrine (hereinafter referred to as ‘Doctrine’), was initially articulated by the International Chamber of Commerce (ICC) Tribunal in the Dow Chemicals v. Isover Saint Gobain case. The ICC Tribunal highlighted those elements such as the ‘conclusion, performance, and termination of a contract,’ and ‘common intent of the parties,’ are critical in determining the relevance and extent of an arbitration agreement to third parties.
In the context of complex and multi-party transactions, the matter of whether non-signatories can be subject to an arbitration agreement has become increasingly contentious. It is crucial to delineate clear criteria for when and how non-signatories can be bound by arbitration agreements to avoid unfair outcomes. On December 6, 2023, a constitution bench of five judges in the Supreme Court of India, in Cox and Kings Ltd. v. SAP India Pvt. Ltd, evaluated the validity and application of the “Group of Companies Doctrine” in the context of India.
Background
The topic of obliging non-signatories to comply with arbitration agreements has generated debate and varied interpretations in several jurisdictions. The conventional perspective held that solely those who have explicitly agreed to an arbitration clause are subject to its terms, rooted in the concepts of party autonomy and privity of contract. Yet, globally, numerous courts and tribunals have established principles allowing non-signatories to be bound in specific situations.
In recent times, judicial bodies have brought non-signatories under the coverage of an arbitration agreement by employing principles such as the Doctrine or the alter ego concept.
The phrase “claiming through or under” referred to entities who are successors-in-interest and act in a derivative capacity, substituting the signatory party to the arbitration agreement such as on assignment, subrogation, or novation. They did not include companies with independent legal personalities, even where they were members of the same group. This phrase appears in some domestic legislation and serves as another ambiguous point of reference for the basis of the expansion of an arbitration agreement.
Before the Arbitration and Conciliation Act of 1996 (“the Act”) came into effect in India, judicial attitudes were conservative, restricting arbitration engagements to those explicitly party to the agreement. Following the Act’s enactment, however, Indian courts shifted to a more expansive stance, acknowledging circumstances under which non-signatories could be considered bound by arbitration agreements. The landmark ruling by the Supreme Court in Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc(2013) significantly contributed to this change, introducing the Doctrine to India for the first time.
This ruling established that non-signatories could be subject to arbitration provided there was an evident intention to include parties that had not signed the agreement.
The Doctrine was further expanded by the Indian Supreme Court in subsequent cases like Mahanagar Telephone Nigam Ltd v. Canara Bank. The court recognised other relevant aspects, including the non-signatory’s involvement in contract negotiations or performance, the single economic reality concept, and the prima facie determination threshold requirement at the referral stage.
The essence of the Doctrine is to enable the realization of a shared intention between parties, in situations indicating an intent to bind both signatories and non-signatories. This involves deciphering the essence of a business agreement and unraveling from a layer of commercial agreements, an intention to bind an entity that is not formally a signatory but has willingly accepted the responsibility to be bound by the actions of a signatory.
The lack of uniformity within Indian arbitration law on this subject has led to confusion for both parties and arbitrators. Consequently, there was a pressing requirement for a clear and decisive statement from the Supreme Court of India on this topic, which was provided in the recent ruling in Cox and Kings.
The Supreme Court of India took into consideration Professor William Park’s advice to exercise caution while using certain principles to bind third parties to an arbitration agreement when submitting the case to a constitution bench in Cox and Kings:
“For arbitrators, motions to join non-signatories create a tension between two principles: maintaining arbitration’s consensual nature, and maximizing an award’s practical effectiveness by binding related persons. Pushed to the limit of their logic, each goal points in an opposite direction. Resolving the tension usually implicates the two doctrines discussed below: implied consent and disregard of corporate personality….
…the fact that a “non-signatory” might be bound to arbitrate does not dispense with the need for an arbitration agreement. Rather, it means only that the agreement takes its binding force through some circumstance other than the formality of signature.”
The discussion of implied consent and disregard of corporate personality highlights the legal and conceptual frameworks that arbitrators must navigate in such situations. Implied consent suggests that parties may be bound to arbitrate even without a formal arbitration agreement if their conduct or circumstances indicate a clear intention to do so. On the other hand the disregard of corporate personality allows arbitrators to look beyond the formalities of legal entities and hold related persons or entities accountable for the actions or obligations of the primary parties to the arbitration agreement.
The Judgement
Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2023), emerged from a three-judge bench’s referral, questioning the Doctrine’s correctness as previously interpreted in Chloro Controls.
The constitution bench explored several key issues, including the possibility under the Arbitration and Conciliation Act (the Act) for a non-signatory to join an arbitration agreement, the role of parties’ conduct in determining an intent to arbitrate, and the circumstances under which the Doctrine could apply.
Chief Justice DY Chandrachud clarified that the Act permits the inclusion of non-signatories in arbitration agreements if there is a clear legal relationship with the signatory parties and consent to arbitrate, either explicitly or implicitly, is present. He outlined conditions under which the Doctrine could apply, emphasizing the need for a direct relationship, commonality of subject matter, and a composite transaction that necessitates collective performance.
Justice Narsimha, in a concurring judgment, emphasized contractual interpretation and the Arbitral Tribunal’s role in deciding on non-signatory involvement, advocating for a flexible approach to Section 7 of the Act to reflect the parties’ intentions and the realities of modern transactions. The judgement highlighted that the existence of a group of companies is a “factual element” that the Court or tribunal must reconsider while analysing the consent of the parties and distinguished the Doctrine from other principles like alter ego or piercing the corporate veil, establishing it as an independent basis for binding non-signatories to arbitration agreements. This decision provides a clear framework for applying the Doctrine in India, addressing the complexities of modern corporate transactions and arbitration.
Conclusion
The Cox and Kings decision delicately balances the importance of “party consent” against modern commercial practices, highlighting that even without a direct signature, consent for arbitration can be implicitly given, allowing non-signatories to be considered part of an arbitration agreement. It introduces a methodical approach for applying the Doctrine, starting with verifying the existence of a group and then examining the actions and shared intentions of both signatories and non-signatories. The judgment necessitates a thorough evaluation of factors like subject matter commonality and transaction interconnectedness to justify binding a non-signatory to an arbitration agreement, placing the burden of proof on those advocating for the inclusion of non-signatories. It aims to eliminate baseless requests to add parties to arbitration, establishing strict criteria for when non-signatories can be involved, thus preserving party autonomy, and preventing its misuse by discouraging companies from using complex group structures to shield themselves from liabilities and obligations. Striking the right balance between accountability and legal clarity is essential to harness the Doctrine’s benefits effectively.
