[Sidhant Singh is a 2nd-year student at Hidayatullah National Law University, Raipur]
The Groups of Companies (‘Doctrine’) has evolved through judicial interpretation and is being adapted to make arbitration better in the current commercial landscape. However, the Supreme Court of India critically examined this doctrine in the past one year.
Recently the Supreme Court (‘SC’) of India delivered a landmark judgment in “Cox and Kings Ltd. v. SAP India Private Ltd” (‘Cox and Kings Judgment’) which highlights the application of the Group of Companies Doctrine in Indian Law. The Cox and King Judgment not only confirms that the Doctrine is the fundamental doctrine of the Indian legal system but also defines the areas beyond which the Doctrine should not be extended. In this context, the SC has emphasised the important distinction between a non-party and a non-signatory. Additionally, it has been suggested that implied consent could be implied in certain situations to admit a non-signatory to an arbitration agreement.
The gist of the Doctrine is that there are instances where a company not being specifically to an arbitration agreement, still being part of the group of companies, can either take benefit of or be bound by the terms of such an arbitration agreement entered into by its sister, parent or affiliated company when the circumstances clearly show that the collective will of all parties to the contract was to include both parties, those who signed the agreement and those who did not. However, the doctrine can’t automatically apply to a company just because it belongs to the same group. In the case of Oil and Natural Gas Corporation Ltd v. Discovery Enterprises Pvt. Ltd., SC laid down some factors that need to be satisfied to invoke the doctrine to bind a non-signatory entity within a corporate group to an arbitration agreement, which includes:
Mutual intention of the parties
The connection between Non-signatory and signatory to an arbitration agreement
The execution of the contract
Shared nature of the subject matter
The inherent complexity of the transactions
The Doctrine adopts a pragmatic view of consolidating all parties closely associated with a disputed transaction in one forum. This is of particular significance in multifaceted disputes which involve a large number of agreements and parties. The Doctrine is responsible for ensuring the involvement of all the parties in the negotiation process for the transaction. It also helps in reducing the number of cases and reduces the occurrence of contrasting verdicts.
While acknowledging the advantages of the Doctrine, some courts criticized it for extending too far the concept of ‘party consent’, which is a crucial requirement of arbitration. The main criticism of the Doctrine is that it does not determine the consent of a party in a true form but rather constructs it. This criticism shows the retrospective analysis, which means looking at the agreement after it has been executed to add non-signatories to it, is intrusive. It means introducing a party that has not signed the document but holds them responsible for the undertakings stipulated therein. There are criticisms of the Doctrine, which argue that it infringes principles like party autonomy, privity of contract, and separate legal personality.
Recognizing the need for a thorough reassessment of the fundamental elements of the Doctrine, the 3-judge bench of the SC, in Cox and Kings (2022), posed relevant questions about the legality of the Doctrine to a 5-judge Bench of the SC. The Constitution bench settled the issue with the issuance of the Cox and Kings Judgment.
Clarifying Non-Signatory Binding Criteria
The Supreme Court, stressing the importance of party autonomy and the contractual basis of arbitration agreements, indicated that the signature of a party or the agreement in itself represents the deepest manifestation of a person or entity’s consent to the jurisdiction of an arbitral tribunal.
At the same time, the court observed that the requirement of an arbitration agreement in writing doesn’t rule out the potential binding of non-signing parties when there is a legal connection between a signatory and a non-signatory. Therefore, the SC has noted the fact that a valid contract doesn’t necessarily require the physical signatures of the parties on the document stipulating the agreement’s conditions.
The Supreme Court stated that with regard to non-signatory parties, the issue that arises is whether or not such parties had behaved, had rights, or had acted in a way that suggests that they intended to be bound by the arbitration agreement and the underlying contract. The court also addressed a complex situation where a party participates in the negotiation and execution of a composite contract related to the main contract but later declines to be bound by the arbitration clause within the main contract. The court held that in such scenarios, the party may still be bound by the arbitration agreement based on the surrounding facts.
The Constitution Bench confirmed the independent status of the Doctrine concerning the questions raised in Cox and Kings (2022) on its legal basis. This interpretation emanates from interpreting Section 2(1) (h) jointly with Section 7 of the Arbitration and Conciliation Act ('Arbitration Act').
The court made it clear that the Doctrine is not against the idea of “party consent” affirming that it is similar to other consent-based doctrines of agency, assignment, assumption, and guarantee. These doctrines usually help in determining the intentions of parties aiming to bind a party to an arbitration agreement who has not signed the document.
Although the SC upheld the enforceability of the doctrine, it rejected the rationale in the “Chloro Controls India (P) Ltd. vs. Severn Trent Water Purification Inc” that relied on “claiming through or under” in Section 8 of the Arbitration Act to encompass the doctrine. The Court clarified that a non-signatory party is not a ‘claiming through or under’ signatory party. In addition, the Court stressed that the meaning of a ‘party’ in Section 2(1)(h) in conjunction with Section 7 of the Arbitration Act includes both non-signatory and signatory parties. It distinguishes ‘party’ from ‘persons claiming through or under a party’ in the arbitration agreement, and such persons can only assert rights on a derivative basis.
Guiding Principles For Future Application
The Cox and Kings judgment strikes a fine balance between party consent and modern-day commercial considerations. It stresses that a signature is irrelevant but arbitral tribunals or courts must confirm that such consent existed. The judgment holds that the consent can be implicit, which in turn, implies that a party to an agreement should not necessarily be a signatory.
In order to apply the doctrine, the first step is to identify the existence of a group of companies. Once this is done, the focus shifts to evaluating the conduct of both signatory and non-signatory parties. Specifically, their actions should indicate their intention to include the party in the arbitration agreement who has not signed the document. Ultimately, the non-signatory can be held to be bound by an arbitration agreement on the grounds of shared subject matter, related transactions, and contract performance.
In general, if someone signs a document, they are considered a party to that agreement. However, in some situations, someone who did not sign the document may still be bound by the arbitration agreement by referring facts of the case. The party who wants to involve the non-signatory in the arbitration process has the burden to prove that the arbitration clause applies to both parties.
The Cox and King judgment puts an end to the practice of making unsubstantiated requests to add more parties to arbitration. This judgment now stipulates that before a non-party can be dragged into the arbitration, the party applying the Doctrine must prove and specify the factors mentioned by the SC. It is a way of ensuring that non-signatories are taken into the proceedings and that party autonomy is not abused to avoid party chaos.
The Cox and Kings Judgment has brought much-needed clarity to the Doctrine, resolving ambiguities present in various SC rulings. These are only some of the benefits associated with this decision as it not only harmonizes conflicted rulings but also simplifies application and litigation matters under the Doctrine thereby reducing jurisdictional challenges.
Secondly, the Supreme Court decision strengthens the “Kompetenz-Kompetenz” doctrine, in Indian law. This means that the arbitral tribunal will decide whether an arbitration agreement is binding on a non-signatory or not. This reaffirmation of two fundamental principles, namely the ‘Kompetenz-Kompetenz’ and ‘severability’ ones, is generally welcomed, especially because of the setback they had suffered in the N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. However, the real test is how the referral courts will uphold the dictum, “When in doubt, refer to arbitration”.