Group of Companies Doctrine in Arbitration Proceedings | Judgement Pronouncement

Can a non-signatory be a party to an arbitration agreement?

Before answering the larger question on the validity of the Group of Companies Doctrine, the Court clarified whether an arbitration agreement applied only to the parties that had signed the arbitration agreement. Today, the Bench held that mutual consent forms the “cornerstone” of arbitration and a signature was the “most profound” way to express this consent to an arbitration agreement. However, the lack of signature does not always indicate the lack of consent especially when multiple parties are involved. 

For this reason, the Court held that the appropriate terminology was “non-signatory” and not “third-party” to describe companies that had expressed their consent to arbitration through means other than a signature. A “non-signatory,” the Court said, is a “person or entity that is implicated in a dispute which is the subject matter of an arbitration, although it has not formally entered into an arbitration agreement.”

To identify non-signatory companies who are bound by the arbitration agreement, one would have to examine whether the non-signatory intended to “affect legal relations” with a signatory or has given consent to be part of the agreement.

The Bench then set out to clarify the scope of Section 7 of the Arbitration Act, 1996 which deals with an “arbitration agreement”. They pointed out that Arbitration agreements arise out of a legal relationship between or among persons or entities which may be contractual or otherwise. When the legal relation is contractual, the nature of the relationship can be determined based on general contract law principles. 

Further, one does not need to be a signatory to the arbitration agreement to be bound by it. In the case of non-signatories, Courts must identify whether the non-signatory entities consented to be bound by the arbitration agreement or the underlying contracts containing the arbitration agreement through their acts or conduct. 

While the Court emphasised the requirement of a written arbitration agreement, it stated that the circumstances surrounding the agreement must also be taken into consideration. The requirement of a written arbitration agreement does not exclude the possibility of binding non-signatories parties if a defined legal relationship between the signatories and non-signatories parties exists.

Lastly, once the validity of an arbitration agreement is established, the Court or tribunal can determine which parties (both signatory and non-signatory) are bound by such agreement. 

Striking a balance…

The Bench emphasised the importance of an adjudicatory body to find the balance between a rigid interpretation of an arbitration agreement and real-life factors that surround that company. This included the obligations imposed by the company and contract laws.  Arbitration law, they said, was an autonomous legal field. While the main purpose of company law and contract law is to ascertain the substantive contractual liability of a party, the purpose of arbitration law is to decide if the arbitral tribunal has the jurisdiction to hear a matter before it. 

On the one hand, the Court or tribunal cannot ignore the intention of the party to be bound by arbitration. On the other hand, the Court or tribunal cannot adopt a rigid approach to exclude all non-signatories who have shown intention to be bound by the arbitration agreement through their conduct. 

Further, arbitration involves not only domestic but also international law and principles. GOCD was established by international tribunals to apply to arbitration cases and not any other form of adjudication. Therefore, the Bench held that courts and tribunals must balance out domestic as well as international principles.

Applying the GOCD and the burden of proof

In tune with the existing jurisprudence on the GOCD, the Bench held that merely being a part of a group of companies is not sufficient to invoke a non-signatory to be a part of an arbitration agreement. The tribunal must consider “if the conduct of the signatory and non-signatory parties indicates their common intention to make the non-signatory a party to the arbitration.” 

In determining whether this common intent or consent exists, the Courts or tribunals must look at:

1. The relationship between and amongst the legal entities within a corporate group structure.
2. The involvement of the parties in the performance of the underlying legal obligations in the contract. 
3. Commonality of subject-matter
4. Composite nature of the transactions and the 
5. Performance of the contract. 

The burden of proof, the Bench said, lay on the party or entity who wants to bring the non-signatory in as a party to the arbitration. 

Courts or tribunals have to holistically assess if the conduct of the non-signatory was such that they could not be deemed as “total strangers” to the subject matter of the dispute. 

Clarifying the decision in Chloro Controls

The Bench was also tasked with clarifying whether the Group of Companies Doctrine could be invoked under Section 45 of the Arbitration Act. Section 45 grants judicial authorities the power to refer parties to arbitration when one of the parties or any person claiming “through or under” them requests the same. 

Previously, in Chloro Controls v Severn Trent Water Purification Inc. (2012), a three-judge Bench of the Supreme Court had made non-signatory entities a party to the arbitration as they were part of ancillary agreements which were closely interlinked with the principle agreement. The Court had reasoned that the non-signatory parties were part of the same corporate group and therefore were “subsidiaries in interest” who could claim “through or under” the signatories.

However, today, the Bench clarified that the GOCD stood on its “own right” and a non-signatory party who is made part of the arbitration via the GOCD was not joining the agreement “through or under” a signatory party. The non-signatory entity’s involvement was based on mutual consent, so they can be made a party by applying the GOCD directly. To this extent, the Bench held that the reasoning of the Court in Chloro Controls was erroneous. 

Arbitral Tribunals to determine if a non-signatory can be considered as a party in each instance

In the application of the GOCD, the Bench contemplated two scenarios. First, when a signatory wants to add a non-signatory as a party. Second, when a non-signatory by themselves wants to be a party to an arbitration. In both scenarios, the Bench stated that the Court must determine firstly if there is an existence of an arbitration agreement and second if the non-signatory is a “veritable party” to the arbitration agreement. 

However, as such matters are complex and require closer scrutiny, the Court must leave it to the arbitral tribunals to determine whether a non-signatory is a party to the arbitration agreement based on “factual evidence and legal doctrine.” The arbitral tribunal can analyse the facts and circumstances of the case, and determine if it has jurisdiction to hear the matter. They can then draw other incidental conclusions after duly considering all the factors stated above. 

This, the Bench said, would give effect to the principle of Kompetenz-kompetenz enshrined under Section 16 of the Arbitration Act. This principle establishes that the tribunal was empowered to determine its jurisdiction.

In light of these decisions, the Bench concluded that:

1. The definition of “parties” under Section 2 (1)(h) read with Section 7 of the Arbitration Act includes both signatory as well as non-signatory parties. 
2. The conduct of non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. 
3. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.
4. 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. 
5. The underlying basis for the application for the GOCD rests on maintaining the corporate separateness of the group of companies while determining the common intention of the parties to bind the non-signatories to the arbitration agreement.
6. The principle of “Alter Ego” or ‘Piercing the corporate veil’, cannot be made on the basis for the application of the GOCD.
7. The GOCD has an independent existence as a principle of law which stems from a harmonious reading of Section 2 (1) (h) and 7 of the Arbitration Act. 
8. To apply the GOCD, Courts and tribunals have to consider all the cumulative factors laid down in discovery enterprises. The Principle of a “single economic unit” cannot be the sole basis for invoking the GOCD.
9. Persons ‘claiming through or under’ can only assert a right in a derivative capacity 
10. The approach of the court in Chloro Controls, to the extent that it traces the GOCD to the phrase ‘claiming through or under’, is erroneous and against the principle of contract law and corporate law.
11. The GOCD is to 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.
12. At the referral stage, the referral court should leave it for the arbitration tribunal to decide whether the non-signatories are bound by the arbitration agree
13. In the course of the judgement, any authoritative determination given by the court about the GOCD should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to arbitration agreements.

Justice P.S. Narasimha has written a concurring opinion in the case. After reading the answer to the constitutional question in the case, CJI Chandrachud directed that individual cases concerning the same question of law be placed before regular benches for disposal after obtaining permission from the Registry.