Non-Signatories in Arbitration Agreements | Supreme Court’s recent take on Group of Companies Doctrine
Introduction
On December 6, 2023, a five-judge bench (Constitution Bench) of the Supreme Court, in the case Cox & Kings Ltd. v. SAP India Pvt. Ltd., (ARBIT. PETITION № 38/2020) (Cox & Kings Case) held that an arbitration agreement can bind non-signatories and acknowledged the incorporation of the Group of Companies Doctrine (the Doctrine) into Indian arbitration law.
Usually, only those who have signed the arbitration agreement should be obligated and connected to the arbitration proceedings ensuing from a dispute. However, the Doctrine posits that if a corporation has entered into an arbitration agreement, it can extend its binding effect to its non-signatory affiliates if there exists a mutual intention of the parties to bind both the signatories and those who haven’t signed the agreement. Therefore, by virtue of the Doctrine, the non-signatories (depending upon their relationship with the signatory parties and their commercial involvement in the subject matter) may not be treated as total strangers to the arbitration agreement.
Chief Justice Dr. DY Chandrachud, in his opinion (representing himself and three other judges, with a separate concurring opinion from Justice P.S. Narasimha), addressed the challenge of how the Supreme Court should reconcile the Doctrine with established principles of corporate and contract law. This raised certain intriguing questions:
- Does the Group of Companies Doctrine disregard the distinct legal identity of Companies within a corporate group and blindly involves the non-signatory companies in an arbitration agreement merely because arbitration proceedings have been initiated by one of the group’s companies?
- Is it necessary to “penetrate the corporate veil” to expand the scope of arbitration to non-signatory members of a corporate group? Alternatively, could this expansion be achieved by treating the entire corporate group as a “single economic unit” or by regarding the signatory entity as an “alter ego” of the non-signatory affiliate?
- Lastly, should the Group of Companies Doctrine be interpreted within the framework of Section 8 of the Indian Arbitration and Conciliation Act, 1996 (the Act) or can it exist as a standalone principle in Indian Law, irrespective of any statutory provision?
Background
The Supreme Court addressed a similar scenario in the case of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 (Chloro Controls Case). In this landmark decision, a three-judge bench of the Supreme Court directed parties to arbitration, asserting that non-signatory group companies were bound by the arbitration agreement due to a common intention of the involved parties. The Supreme Court stated that in situations involving a “mother/parent agreement” and additional “ancillary agreements” covering various aspects of a composite transaction, the arbitration clause in the mother/parent agreement would encompass all parties participating in the transaction. The Court considered Section 8 and Section 45 of the Act, addressing the authority of a judicial body to refer parties in a legal proceeding to arbitration. These sections specify that a party to an arbitration agreement or a “person claiming through or under him” can apply for referral to arbitration. The Supreme Court interpreted the phrase “persons claiming through or under” in a way that extends the reach of arbitration clauses beyond immediate signatories to include entities integral to the transaction, even if they hadn’t explicitly consented to the arbitration agreement. The Supreme Court reasoned that entities involved in executing interconnected agreements, even if not signatories to the “mother/parent agreement,” could be considered to be “claiming through or under” the signatories, particularly when these agreements constituted part of a composite transaction.
The precedent set by Chloro Controls Case was followed and expanded upon by various subsequent decisions. However, this established principle was challenged by another three-judge bench of the Supreme Court in Cox and Kings Ltd v. SAP India Pvt Ltd. (2022) 8 SCC 1. Expressing doubts about the correctness of the law established in Chloro Controls Case, the three-judge bench referred the matter to a five-judge constitutional bench of the Supreme Court. The Supreme Court has now definitively addressed this question in Cox and Kings Case, providing authoritative guidance on the matter.
The Supreme Court view
The Supreme Court addressed the questions highlighted above:
Firstly, the Court held that the Doctrine is very well ingrained in the Indian Arbitration Law. However, the mere inclusion of a non-signatory entity within a corporate group does not automatically entail its inclusion in an arbitration agreement entered into by another entity in the group. The application of the doctrine is contingent on the specific facts and circumstances surrounding the relationship among the various entities in the group. In this context, the intention of the non-signatory holds paramount importance. The Court emphasized that while the initial step involves establishing the presence of a group of companies, the subsequent and more crucial step is determining whether the non-signatory demonstrated an intention to be a party to the arbitration agreement, despite not formally signing it. The Court articulates:
“In multi-party agreements, the courts or tribunals must scrutinize the corporate structure to ascertain whether both signatory and non-signatory parties belong to the same group. This assessment is context-specific and must adhere to the relevant principles of company law. Once the existence of the corporate group is confirmed, the subsequent inquiry involves determining whether there was a mutual intention among all parties to bind the non-signatory to the arbitration agreement.
The group of companies doctrine mandates that courts and tribunals examine the commercial circumstances and the conduct of the parties to reveal the shared intention to arbitrate. Consequently, a non-signatory may be considered a party to the arbitration agreement without being formally included in the underlying contract. The presence of a group of companies is a crucial factor in determining whether the conduct amounts to consent, but mere membership in a group is insufficient on its own.”
Acknowledging that “the consent forms the cornerstone of arbitrations” and that principles of privity are in play, the Supreme Court proceeded to assess the applicability of the Doctrine in Indian law.
In addition, the Court examined the definition of an arbitration agreement under Section 7 of the Act. It observed that while the Act mandated a written agreement, there was no stipulation requiring signatures from all parties. An arbitration agreement could be demonstrated through an exchange of communications. Consequently, even those who hadn’t signed the arbitration agreement (non-signatories) could be considered parties to the agreement if they had indeed consented (express or implied) to it. The Court emphasized that this was not an extension of the arbitration agreement to third parties but a process of identifying the genuine or ‘veritable’ parties involved in the dispute. The Court recognized the need for a modern approach to consent to effectively address the commercial reality of complex transactions involving multiple agreements and parties.
Secondly, the initial step in the analysis of the question of whether the principle of alter ego or piercing the corporate veil can be the basis for the application of the Doctrine is determining whether the Doctrine exists independently within arbitration law or if it relies on such principles of corporate law. The Supreme Court divided the origin of the doctrine into “consent-based theories,” including agency, novation, assignment, and operation of law, and “non-consensual theories,” such as piercing the corporate veil and alter ego. The essence of the Cox & Kings Case suggests that the Doctrine is based on a consent-oriented approach, wherein non-signatories are considered to have consented to be parties to the arbitration agreement due to special circumstances, even if they haven’t formally accepted or adopted the contractual terms. This initial determination leads to the conclusion that non-consensual theories derived from corporate law do not play a role. In this sense, the Doctrine is firmly grounded in arbitration law and does not significantly disrupt established principles of corporate law.
Thirdly, the Supreme Court, while addressing the interpretation of the Doctrine within the framework of Section 8, explicitly declared that the rationale in Chloro Controls Case, relying on “claiming through or under” in Section 8 of the Act to encompass the Doctrine, was flawed. The Court clarified that a non-signatory entity does not fall within the category of “claiming through or under” a signatory party. Furthermore, it has been asserted that the definition of a “party” under Section 2(1)(h) along with Section 7 of the Act encompasses both signatory and non-signatory parties, emphasizing that the concept of a “party” is distinct from the concept of “persons claiming through or under a party” to the arbitration agreement.
The Supreme Court further asserted that certain factors must be considered when assessing the applicability of the Doctrine. However, it cautioned that the application of these factors must be tailored to the specific facts, taking into account the intricacy of contemporary commercial projects. These factors include:
- The mutual intent of the parties;
- The relationship of a non-signatory to a party that is a signatory to the agreement;
- The commonality of the subject-matter;
- The composite nature of the transactions; and
- The performance of the contract.
Comments
The Cox and Kings Case maintains a delicate equilibrium between “party consent” and “contemporary commercial realities”. It underscores that while a signature holds little relevance, the presence of consent must be scrutinized by a court or arbitral tribunal. The Court asserts that consent can be implied, potentially making a party bound to an agreement despite not being a signatory.
For the application of the Doctrine, the initial assessment revolves around establishing the existence of a group of companies. Subsequently, a secondary evaluation considers the conduct of both signatory and non-signatory parties, indicating a shared intention to involve the non-signatory in the arbitration agreement. Relevant factors, including the commonality of the subject matter, the composite nature of transactions, and contract performance, should be collectively weighed to bind a non-signatory to the arbitration agreement.
The fundamental principle is that a signatory alone constitutes a party unless factual evidence demonstrates that a non-signatory can be obligated to the arbitration agreement. The onus of proof lies with the party seeking to involve a non-signatory in the arbitration proceedings.
The Cox and Kings Case also serves to curb baseless applications that aim to add parties without a discernible basis, a practice that had become increasingly common. It places the responsibility on the party invoking the Doctrine to identify, plead, and establish the factors outlined by the Supreme Court before incorporating a non-party into the relevant arbitration proceedings. The Cox and Kings Case offers much-needed clarity. It not only resolves inconsistencies between various Supreme Court judgments but also streamlines applications and litigation arising from the invocation of the Doctrine, often leading to jurisdictional challenges.