SC Ruling Affirms ‘Group of Companies’ Doctrine, Binding Non-Signatories to Arbitration Agreements

On December 6,  Supreme Court of India delivered a verdict in the case of Cox and Kings Ltd v. SAP India Pvt Ltd, affirming that an arbitration agreement can bind non-signatories under the “group of companies” doctrine.

The Court, consisting of Chief Justice of India DY Chandrachud, Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala, and Manoj Misra, emphasized the continued relevance of the “group of companies” doctrine in Indian arbitration jurisprudence. The doctrine proves valuable in discerning the parties’ intentions, particularly in intricate transactions involving multiple parties and agreements.

The ruling clarified that non-signatories can be bound by an arbitration agreement, challenging the notion that only those who formally sign the agreement are obligated by it.

The Court underscored that a written arbitration agreement does not preclude non-signatories from being bound if there exists a defined legal relationship between signatories and non-signatories, coupled with a mutual intent to be bound through their conduct.

Chief Justice DY Chandrachud, while delivering the judgment, emphasized that while a party’s signature expresses consent to jurisdiction, the assumption that non-signatories are not part of the agreement is not always correct.

The Court highlighted that non-signatories, due to their relationship with signatory parties and their commercial involvement in the subject matter, are not complete strangers to the arbitration agreement.

Key Conclusions of the Judgment:

“a. The definition of parties under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act 1996 includes both signatory and non-signatory parties.

b. The conduct of non-signatories can indicate their consent to be bound by the arbitration agreement.

c. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.

d. The concept of parties under the Arbitration Act is distinct from the concept of parties “claiming through or under” a party to an arbitration agreement.

e. The ‘group of companies’ doctrine aims to maintain corporate separateness while determining the common intention of the parties to bind non-signatories.

f. The principle of ‘alter ego’ or ‘piercing the corporate veil’ cannot be the basis for applying the group of companies doctrine.

g. The ‘group of companies’ doctrine has an independent existence as a principle of law.

h. Courts or tribunals must consider cumulative factors in applying the ‘group of companies’ doctrine.

i. Persons claiming “through or under” can assert rights in a derivative capacity.

j. The judgment in Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc is considered erroneous in extending the phrase “parties claiming through or under” to bind non-signatories.

k. The ‘group of companies’ doctrine’s utility in determining parties’ intentions in complex transactions justifies its retention in Indian arbitration jurisprudence.

l. At the referral stage, the referring court should leave it to the Arbitral Tribunal to decide whether non-signatories are bound by the arbitration agreement.”

Justice Narasimha issued a separate but concurring judgment.

In May 2022, a three-judge bench led by the then CJI NV Ramana referred the matter to a larger bench, questioning aspects of the “group of companies” doctrine.

The reference stemmed from an application filed under Section 11 of the Arbitration Act by Cox and Kings Ltd, seeking arbitration in a dispute related to SAP India Private Ltd.

The referring bench urged caution in applying the group of companies doctrine, emphasizing that mere affiliation with a group does not automatically extend the arbitration agreement to a non-signatory.

The Court criticized the Chloro Controls decision, deeming it based on economic convenience rather than a correct application of the law.

It referred the interpretation of ‘claiming through or under’ in amended Section 8 of the Arbitration Act concerning the group of companies doctrine to a larger Bench for reconsideration.