In its modernist narrative technique, Ulysses is feted by literary critics and novelists as a literary masterpiece. Despite the varied criticism, the legacy of Ulysses endures particularly because its experimental narrative technique challenged the conventional literary style. The challenge before this Court is to figure out whether there can be a reconciliation between the group of companies doctrine and well settled legal principles of corporate law and contract law. Ramana (as he was then), and the concurring opinion by Justice Surya Kant) doubted the correctness of the application of the doctrine by the Indian courts. Chief Justice Ramana criticised the approach of a three-Judge Bench of this Court in Chloro Controls India (P) Ltd v. Whether the phrase ‘claiming through or under’ in Sections 8 and 11 could be interpreted to include the ‘Group of Companies’ doctrine; and b. Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies Doctrine into operation even in the absence of implied consent. Moreover, Section 7(4)(b) indicates that a non-signatory could be bound by an arbitration agreement if in the course of a written communication, it has demonstrated an intention to be bound by the agreement; and d. The applicability of the group of companies doctrine must be examined from the touchstone of whether a non-signatory could be made a party to the arbitration agreement. It would be against the concept of party autonomy to bind a non-signatory to an arbitration agreement without ascertaining their consent; e. The group of companies doctrine constitutes a true and genuine effectuation of the real intent of the parties to subject both the signatory and non-signatory parties to the arbitration agreement; b. Moreover, the legislature specifically amended Section 8 of the Arbitration Act by inserting the words “any person claiming through or under” to recognize and codify the reality of non-signatories acting through or under the signatory parties. A non-signatory can be impleaded in an arbitration proceeding provided: (i) there is a defined legal relationship between the non-signatory and the parties to the arbitration agreement; and (ii) the non-signatory consented to be bound by the arbitration agreement in terms of Section 7 of the Arbitration Act.
Therefore, they cannot be applied to determine the intention of non-signatories to be bound by an arbitration agreement; b. Section 7 of the Arbitration Act requires the arbitration agreement to be in writing. Moreover, Chloro Controls (supra) wrongly held that the courts have the discretion to refer non- signatory parties to arbitration under Sections 8 or 45 of the Arbitration Act in exceptional cases. If the referral court under Sections 8 and 11 cannot prima facie determine the issue of joinder of a non-signatory to the arbitration agreement on the basis of the group of companies doctrine, it can refer the issue to be decided by the arbitral tribunal. Mr Pallav Mongia, learned advocate on behalf of the interveners in IA No 58168 of 2023, submitted that Section 2(1)(h) of the Arbitration Act does not restrict the definition of parties to “signatories”.
Further, the learned senior counsel submitted that the courts can take aid of the group of companies doctrine to issue interim directions against non-signatories to the arbitration agreement. Before the enactment of the Arbitration Act, the law on arbitration was substantially contained in the Arbitration Act of 1940, the Arbitration (Protocol and Convention) Act of 1937, and the Foreign Awards (Recognition and Enforcement) Act of 1961. Section 2(1)(h) of the Arbitration Act defines a “party” to mean “a party to an arbitration agreement.” An “arbitration agreement” is defined under Section 2(1)(b) to mean “an agreement referred to in Section 7.” Section 7 lays down the essential elements of a valid and binding arbitration agreement.
Section 7(5) further stipulates that the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if two conditions are satisfied. Generally, a party to an arbitration agreement is determined on the basis of persons or entities who are signatories to the arbitration agreement or the underlying contract containing the arbitration agreement. In Sukanya Holdings (supra) the applicant filed an application under Section 8 of the Arbitration Act before the High Court and sought to enforce the arbitration agreement against both the signatories and non-signatories to the agreement. This Court refused to join Indowind to the arbitration agreement on the ground that (i) Indowind was not a signatory to the sale agreement; (ii) Indowind and the promoter company were two independent companies with a separate and distinct legal existence; and (iii) the fact that Indowind did not sign the sale agreement indicated that it was the mutual intention of all the parties to not make it a party to the arbitration agreement.
The pre Chloro Controls (supra) position was characterized by three underlying precepts: (i) arbitration could be invoked at the instance of a signatory to the arbitration agreement only in respect to disputes with another signatory party; (ii) the court would adopt a strict interpretation of the provisions of the Arbitration Act, particularly the unamended Section 8 which only allowed reference of “parties” to an arbitration agreement; and (iii) there was an emphasis on formal consent of the parties, thereby excluding any scope for implied consent of the non-signatories to be bound by an arbitration agreement. In that case, a foreign entity and an Indian entity incorporated a joint venture company to market and distribute chlorination equipment. However, the court noted that such non-signatory parties are required to claim “through or under the signatory party.” Thus, this Court accepted that arbitration is possible between a signatory to an arbitration agreement and a third party or non-signatory claiming through a party.
The court noted that the group of companies doctrine has been developed by courts and tribunals in the international context to bind a non-signatory affiliate or sister concern within the same corporate group as the signatory party, to an arbitration agreement provided there was a mutual intention of all the parties. In Chloro Controls (supra), this Court acknowledged that cases of composite transactions involving multi-party agreement give rise to peculiar challenges where non-signatories may be implicated in the dispute because of their legal relationship and involvement in the performance of contractual obligations. It observed that all the agreements were signed by “some parties or their holding companies or the companies into which the signatory company had merged.” Although these companies did not put pen to paper for all the agreements, they were descendants in interest or subsidiaries of the signatory parties and therefore would be covered under the expression “claiming through or under” the parties to the agreement. To cure this anomaly, it was suggested that the definition of “party” under Section 2(1)(h) be amended to also include the expression “a person claiming through or under such party.”
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In 2016, the legislature amended Section 8 to bring it in line with Section 45 of the Arbitration Act. In Cheran Properties (supra), the issue before this Court was whether the arbitral award could be enforced under Section 35 of the Arbitration Act against a non-signatory, who was a nominee of one of the signatories to the arbitration agreement and a direct beneficiary of the underlying contract between the signatories.
This Court in Cheran Properties (supra) interpreted the group of companies doctrine to hold that its true purport is to enforce the common intention of the parties where the circumstances indicate that both the signatories and non- signatories were intended to be bound. This Court relied on Chloro Controls (supra) to hold that a non-signatory, which is a party to an PART C interconnected agreement, would be bound by the arbitration clause in the principal agreement. Reynders Label Printing India Private Limited, a two-Judge Bench of this Court was dealing with an application under Section 11(6) of the Arbitration Act seeking the appointment of an arbitrator. The High Court referred the parties to arbitration, but Canara Bank challenged the impleadment of CANFINA. After a dispute arose between the parties, ONGC invoked the arbitration clause in the contract against Discovery Enterprises and Jindal Drilling and Industries Ltd., a sister company of Discovery Enterprises.
This Court cited Chloro Controls (supra) and the subsequent decisions with approval to emphasize that the group of companies doctrine can be applied to bind a company within a group which is not a signatory to the arbitration agreement. In that PART C case, Dow Chemical (Venezuela) entered into a contract with a French company, which later assigned the rights to Isover Saint Gobain, for distribution of thermal isolation products in France. In response, the four companies of the Dow Chemical group (the two formal parties to the contract – Dow Chemical AG and Dow Chemical Europe, and the two non-signatories – Dow Chemical Company and Dow Chemical France) instituted arbitral proceedings against Isover Saint Gobain before the ICC tribunal. As for Dow Chemical Company, the tribunal held that the holding company had ownership of the trademarks under which the products were marketed in France and had absolute control over its subsidiaries who were involved in the negotiation, performance, and termination of the two contracts. However, the tribunal emphasized that a non- signatory may be bound by the arbitration agreement entered into by another entity of the same group if the non-signatory appears to be a veritable party to the contracts on the basis of their involvement in the negotiation, performance, and termination of the contracts. According to the Court of Appeal, the common intention may be ascertained from the active role played by the non- signatories in the performance of the contract containing the arbitration agreement, which gives rise to the presumption that the non-signatory had knowledge of the arbitration agreement. In a decision rendered in 1996, the Swiss Federal Supreme Court held that the fact that a non-signatory party belonged to the same group of companies as the signatory party to the arbitration agreement was not a sufficient justification for binding the non-signatory to the arbitration agreement. To determine the implied consent, it was held that the courts or tribunals may take into consideration the fact whether the non-signatory party was involved in the negotiation and performance of the contract, and thereby expressed its willingness to be bound by the arbitration agreement. Under English law, an arbitration PART C agreement is extended to non-signatory parties on the basis of traditional contractual principles and doctrines such as agency, novation, assignment, operation of law, and merger and succession.
Thus, the English law does not favor the application of the group of companies doctrine for extending an arbitration agreement to non-signatory parties. The Court was called upon to interpret Section 1 of the Arbitration Act of 1975 which allowed any party to an arbitration agreement “or any person claiming through or under him” to apply to court to stay proceedings where an arbitration agreement existed. The Ministry of Religious Affairs, Government of Pakistan, the Government of Pakistan entered into a Memorandum of Understanding with Dallah Real Estate and Tourism Holding Company for construction of housing facilities in Mecca, Saudi Arabia. Star Pacific Line Pte Ltd, the Singapore High Court expressly rejected the group of companies doctrine to PART C bind non-signatories to arbitration agreement. Outokumpu Stainless, the issue before the United States Supreme Court was whether the New York Convention precludes a non-signatory to an international arbitration agreement from compelling arbitration by invoking domestic doctrines such as equitable estoppel. Moreover, it was observed that “the provisions of Article II contemplate the use of domestic doctrines to fill gaps in the Convention.” Thus, it was held that the New York Convention does not set out a comprehensive regime to preclude the use of domestic law to enforce arbitration agreements. Similarly, the doctrine of arbitral estoppel has been developed by the US Courts to bind non-signatory parties to an arbitration agreement. In jurisdictions such as France where the doctrine has gained acceptance, group of companies is one of the several factors that a court or tribunal considers to determine the mutual intention of all the parties to join the non- signatory to the arbitration agreement. The principle of party autonomy underpins the arbitration process as it allows the parties to dispense with technical formalities and agree upon substantive and procedural laws and rules applicable to the merits of the dispute. laid down four essential elements of an arbitration agreement: PART D (i) There must be a present or a future difference in connection with some contemplated affair (ii) The parties must intend to settle such difference by a private tribunal (iii) The parties must agree in writing to be bound by the decision of such tribunal. An arbitration agreement is a conclusive proof that the parties have consented to submit their dispute to an arbitral tribunal to the exclusion of domestic courts. An arbitration agreement must satisfy the principles of contract law laid down under the Contract Act, in addition to satisfying other requirements stipulated under Section 7 of the Arbitration Act, to qualify as a valid agreement.
This doctrine has two aspects: first, only the parties to the contract are entitled under it or bound by it; and second, the parties to the contract cannot impose a liability on a third party. For instance, Section 7 of the UNCITRAL Model Law defines an arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” (emphasis supplied) PART D 65. Since consent forms the cornerstone of arbitration, a non-signatory cannot be forcibly made a “party” to an arbitration agreement as doing so would violate the sacrosanct principles of privity of contract and party autonomy. There may arise situations where persons or entities who have not formally signed the arbitration agreement or the underlying contract containing the arbitration agreement may intend to be bound by the terms of the agreement.
Importantly, Section 9 provides that a promise is said to be express if the proposal or acceptance of any promise is made in words, while a promise is said to be implied if such proposal or acceptance is “made otherwise than in words.” Thus, a contract may either be express or implied. Section 2(h) of the Arbitration Act defines a “party” to mean a party to an arbitration agreement. Section 7 defines an arbitration agreement to mean an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a “defined legal relationship.” Section 7 requires that an arbitration agreement has to be in writing. According to the first circumstance laid down under Section 7(4)(a), an arbitration agreement is in writing if it is signed by the parties. Section 7(4)(b) provides the second circumstance, according to which an arbitration agreement is in writing if it is contained in an exchange of letters, telex, telegrams or other means of telecommunication including communication through electronic means which provide a record of the agreement. Iranian Offshore Engineering and Construction Company, this Court observed that Section 7(4)(b) requires the court to ask whether a record of agreement is found in the exchange of letters, telex, telegrams, or other means of telecommunication.
All the three circumstances PART D contained in Section 7(4) are geared towards determining the mutual intention of the parties to be bound by the arbitration agreement. The mandatory requirement of a written arbitration agreement is merely to ensure that there is a clearly established record of the consent of the parties to refer their disputes to arbitration to the exclusion of the domestic courts. Article II paragraph 2 of the New York Convention defines “agreement in writing” to include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. In 2006, UNCITRAL recommended that the circumstances described in Article II paragraph 2 of the New York Convention “be applied recognizing that the circumstances described therein are not exhaustive.” Additionally, it also recommended that Article 7 paragraph 1 of the UNCITRAL Model Law should be applied “to PART D allow any interested party to avail itself of rights it may have, under the law or treaties of the country where an arbitration agreement is sought to be relied upon, to seek recognition of the validity of such an arbitration agreement.” The Arbitration Act is largely based on the UNCITRAL Model Law. Reading Section 7 of the Arbitration Act in view of the above discussion gives rise to the following conclusions: first, arbitration agreements arise out of a legal relationship between or among persons or entities which may be contractual or otherwise; second, in situations where the legal relationship is contractual in nature, the nature of relationship can be determined on the basis of general contract law principles; third, it is not necessary for the persons or entities to be signatories to the arbitration agreement to be bound by it; fourth, in case of non-signatory parties, the important determination for the courts is whether the persons or entities intended or consented to be bound by the arbitration agreement or the underlying contract containing the arbitration agreement through their acts or conduct; fifth, the requirement of a written arbitration agreement has to be adhered to strictly, but the form in which such agreement is recorded is irrelevant; sixth, the requirement of a PART D written arbitration agreement does not exclude the possibility of binding non- signatory parties if there is a defined legal relationship between the signatory and non-signatory parties; and seventh, once the validity of an arbitration agreement is established, the court or tribunal can determine the issue of which parties are bound by such agreement.
To determine whether a non-signatory is bound by an arbitration agreement, the courts and tribunals apply typical principles of contract law and corporate law. Courts and tribunals across the world have been applying traditional contractual and commercial doctrines to determine the consent of the non- signatory parties to be bound by the arbitration agreement. The group companies can be defined in the Indian context as “an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community.” Section 2(46) of the 2013 Act defines a holding company as a company of which one or more other companies are subsidiary companies.
Although a holding company owns a controlling interest in the subsidiary company, they are considered as separate legal entities. The company urged that the corporate veil should be lifted to treat the petition as one filed by the shareholders. Air India, this Court cautioned that the principle of piercing the corporate veil should be applied in a restrictive manner and only in scenarios where it is evident that the subsidiary company was a mere camouflage deliberately created by the holding company for the purpose of avoiding liability.
Moreover, since the companies in a group have separate legal personality, the presence of common shareholders or directors cannot lead to the conclusion that the subsidiary company will be bound by the acts of the holding company. Tower Hamlets London Borough Council, Lord Denning held that a group of three companies should be treated as a single economic entity on the basis of two factors: first, the parent company owned all the shares of the subsidiary companies to the extent that it controlled every movement of the given subsidiary companies; and second, all the three companies in the group virtually acted as partners and could not be treated separately. In the context of arbitration law, the intention of the parties has to be derived from the words used in the arbitration agreement. However, there may arise situations where a person or entity may not sign an arbitration agreement, yet give the appearance of being a veritable party to such arbitration agreement due to their legal relationship with the signatory parties and involvement in the performance of the underlying contract. The meaning of the contract must be gathered by adopting a common sense approach, which should “not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation.” Therefore, there is a need to adopt a modern approach to consent, which takes into consideration the circumstances, apparent conduct, and commercial facets of business transactions. Mohan Thedani, where this Court observed that “wherever written instruments are appointed, either by the requirement of law, or by the contract of the parties, to be the repositories and memorials of truth, any other evidence is excluded from being used either as a substitute for such instruments, or to contradict or alter them.” Consequently, it was urged that the courts or tribunals cannot interpret the arbitration agreement in a manner so as to expand its reach to parties not named in the agreement. On the other hand, courts and tribunals cannot adopt a rigid approach to exclude all persons or entities who, through their conduct and relationship with the signatory parties, intended to be bound by the underlying contract containing the arbitration agreement. The level of the non-signatory party’s involvement was to the extent of making the other party believe that it was a veritable party to the contract, and the arbitration agreement contained PART E under it. Increasingly, multinational groups often adopt new and sophisticated corporate structures for execution and delivery of complex commercial transactions such as construction contracts, concession contracts, license agreements, long term supply contracts, banking and financial transactions, and maritime contracts.
The group of companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement which has been signed by other member of the group. However, Professor Hanotiau does concede that the existence of a group of companies may be a relevant factual element to determine whether the conduct of a non-signatory party amounts to consent. According to Born, the doctrine also promotes efficacy of arbitration agreements by prohibiting circumvention of arbitration through satellite litigation by non-signatory parties within a group. Rather, the courts need to determine: first, the existence of a group of companies; and second, the conduct of the signatory and non-signatory parties which indicate their common intention to make the non-signatory a party to the arbitration agreement.
In Chloro Control (supra), this Court rightly observed that a non-signatory could be subjected to arbitration provided the underlying transactions were with a group of companies and there was a clear intention of the parties to bind both the signatory as well as non-signatory parties to the arbitration agreement. This Court in Cheran Properties (supra) clarified that there is an important distinction between the group of companies doctrine and the principle of veil piercing or alter ego. Once the existence of the corporate group is established, the next step is the determination of whether there was a mutual intention of all the parties to bind the non-signatory to the arbitration agreement.
It is important to note that the group of companies doctrine concerns only the parties to the arbitration PART E agreement and not the underlying commercial contract. According to Justice Surya Kant, on the one hand, Chloro Controls (supra) emphasizes on the “intention of the parties”, while on the other hand it allows joinder of non-signatory parties to arbitration proceedings “without their prior consent”. We would like to clarify that the phrase “without their prior consent” has to be construed as “without prior formal consent to the arbitration agreement or the underlying contract containing the arbitration agreement.” Reading the above two paragraphs harmoniously, it is evident that paragraph 72 emphasizes on determining the “intention of the parties” to bind a non-signatory party to an arbitration agreement.
The application of the group of companies doctrine will serve to stymie satellite litigation by non-signatory members of the corporate group, thereby ensuring the efficacy of the agreement between the parties. In other words, the group of companies doctrine is a means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement. The nature of the contractual relationship can either be formally encrusted in the underlying contract, or it can also be inferred from the conduct of the signatory and non-signatory parties with respect to such contract. In Canara Bank (supra), this Court observed that the group of companies doctrine can also be invoked in cases where a “tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality.” In Cox and Kings (supra), Justice Surya Kant observed that applying this approach has the tendency to overlook the principle of corporate separateness and dispense with the consent of the parties. Moreover, the imposition of liability on a non-signatory company within a group for the acts of other members of the group merely on the basis of the fact that they belong to a “single economic unit” will ride roughshod over the principle of distinct corporate personality.
The presence of strong organizational links and financial links between the signatory and non- signatory parties is only one of the factual elements that the court or tribunal may consider to determine the legal relationship between the signatory and non-signatory parties. Commonality of the subject matter indicates that the conduct of the non-signatory party must be related to the subject matter of the arbitration agreement. In Chloro PART E Controls (supra), this Court clarified that the principle of “composite performance” would have to be gathered from the conjoint reading of the principal and supplementary agreements on the one hand, and the explicit intention of the parties and attendant circumstances on the other. The intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances that surround the participation of the non- signatory party in the negotiation, performance, and termination of the underlying contract containing such agreement. Similarly, this Court in Canara Bank (supra) observed that a non-signatory entity may be bound by an arbitration agreement where a parent or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity of the group has been engaged in the negotiation or performance of the commercial contract.
Reynders was not the promoter of the Belgian company, and was therefore not acting in that capacity on or behalf of the company and the applicant failed to discharge its burden to prove that the Belgian company consented to the arbitration agreement. First, by being actively involved in the performance of a contract, a non-signatory may create an appearance that it is a veritable party to the contract containing the arbitration agreement; second, the conduct of the non- signatory may be in harmony with the conduct of the other members of the group, leading the other party to legitimately believe that the non-signatory was a veritable party to the contract; and third, the other party has legitimate reasons to rely on the appearance created by the non-signatory party so as to bind it to the arbitration agreement. The nature or standard of involvement of the non-signatory in the performance of the contract should be such that the non-signatory has actively assumed obligations or performance upon itself under the contract. Mere incidental involvement in the negotiation or performance of the contract is not sufficient to infer the consent of the non- signatory to be bound by the underlying contract or its arbitration agreement. Brekoulakis further notes that the assumption that implied consent of a non-signatory to the underlying contract is sufficient to constitute consent to the arbitration agreement contained in such contract militates against the principle of separability of contracts. The involvement of a non-signatory in the negotiation, performance, or termination of the underlying contract could be an important indicator of the PART E fact that such non-signatory accepted to be bound by the contract. It also adequately accounts for the lack of formal consent on behalf of the non- signatory to the arbitration agreement (and the ensuing procedural aspects such as the constitution of arbitral tribunal) by considering facts and circumstances, such as close relationship and composite transactions, which indicates that there was a mutual understanding or convergence among all the parties to treat non-signatory as parties to the arbitration agreement. Looking at the factors holistically, it could be inferred that the non-signatories, by virtue of their relationship with the signatory parties and active involvement in the performance of commercial obligations which are intricately linked to the subject matter, are not actually strangers to the dispute between the signatory parties. We hold that all the cumulative factors laid down in Discovery Enterprises (supra) must be considered while determining the applicability of the group of companies doctrine. Russel on Arbitration states that an assignee can invoke the arbitration agreement as a person “claiming through or under” a party to the arbitration agreement. However, Roussel-Uclaf (supra) was expressly overruled by the Court of Appeal in Sancheti (supra) on the ground that a mere legal or commercial connection is not sufficient for a person to claim through or under a party to an arbitration agreement. The relevant observation is extracted below: PART F The test of derivative action conveys that a third party’s cause of action is derived from the original party to the arbitration agreement. In Rinehart (supra), the Australian High Court’s approach is similar to the doctrine of equitable estoppel developed by the US Courts, to the effect that a non-signatory party who elects to take the benefit of some aspects of the contract, must also accept the burden of it. An analysis of the cases cited above establishes the following propositions of law: first, the typical scenarios where a person or entity can claim through or under a party are assignment, subrogation, and novation; second, a person “claiming through or under” can assert a right in a derivative capacity, that is through the party to the arbitration agreement, to participate in the agreement; third, the persons claiming through or under do not possess an independent right to stand as parties to an arbitration agreement, but as successors to the signatory parties’ interest; and fourth, mere legal or commercial connection is not sufficient for a non-signatory to claim through or under a party.
The 246 Law Commission suggested that the definition of “party” under section 2(1)(h) of the Arbitration Act be amended to include the words “or any persons claiming through or under such party”. On the contrary, a person claiming through or under a party to an arbitration agreement is merely standing in the shoes of the original party to the extent that it is merely agitating the right of the original party to the arbitration agreement. In A Ayyasamy (supra), it was held that Section 8 imposes an affirmative obligation on every judicial authority to “hold down parties to the terms of the agreement entered into between them to refer disputes to arbitration.” Thus, the legislative intent behind Sections 8 and 45 is to ensure that parties fulfil their mutual intention of settling disputes arising between or among them by way of arbitration. In Cheran Properties (supra), this Court rightly observed that the expression “persons claiming under them” is “a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings.” It was further observed that “[h]aving derived its capacity from a party and being in the same position as a party to the proceedings binds a person who claims under it.” Similarly, Section 73 also provides that a settlement agreement signed by the parties shall be final and binding “on the parties and persons claiming under them respectively.” 141. The use of the word “and” in Sections 35 and 73 conveys the idea that “parties” is to be added or taken together with the subsequent phrase “any person claiming through or under.” The above PART F provisions provide that an arbitration award binds not only the parties but also all such persons who derive their capacity from the party to the arbitration agreement.
This Court in Chloro Controls (supra) observed: first, that the use of the expression “any person” reflects the legislative intent of enlarging the scope of the words beyond the “parties” who are signatory to the arbitration agreement; second, a signatory party to an arbitration agreement may have a legal relationship with the party claiming through or under the party on the basis of the group of companies doctrine; and third, in case of a multi-party contract, a subsidiary company which “derives” its basic interest from the parent contract would be covered under the expression “claiming though or under.”
However, this proposition is contrary to the common law position as evidenced in Sancheti (supra) and Tanning Research Laboratories (supra) according to which a mere legal or commercial connection is not sufficient to allow a non-signatory to claim through or under a party to the arbitration agreement. The group of companies doctrine is founded on the mutual intention of the parties to determine if the non-signatory entity within a group could be made a party to the arbitration agreement in its own right. The doctrine can be used to bind a non-signatory party to the arbitration agreement regardless of the phrase “claiming through or under” as appearing in Sections 8 and 45 of the Arbitration Act.
Therefore, we hold that the approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract and commercial law. However, we deem it appropriate to retain the doctrine which has held the field in Indian jurisprudence though by firmly establishing it within the realm of the mutual consent or the mutual intent of the parties to a commercial bargain. Since the scope of this judgment was limited to the group of companies doctrine, any authoritative determination given by this Court in the course of this judgment should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to arbitration agreements.
In Canara Bank (supra) this Court indirectly adopted the principle of estoppel to bind the non-signatory on the basis that it had already participated in the judicial proceedings before the High Court, and cannot subsequently deny being a party to the proceedings before the arbitral tribunal.
The novelists are expected to “take their responsibilities of continuity more seriously” to create “a single unified novel that is the best it can be.” Chloro Controls (supra) was the first chapter in the group of companies doctrine in Indian arbitration jurisprudence. In Cox and Kings (supra), Chief Justice Ramana observed that establishing the group of companies doctrine in the phrase “claiming through or under” creates an anomalous situation where a party “claiming through or under” could be referred to an arbitration agreement, but would not have a right to PART G seek relief under Section 9 of the Arbitration Act. In Cox and Kings (supra), Chief Justice Ramana observed that there is a need to have a relook at the scope of judicial reference at the stage of Sections 8 and 11 of the Arbitration Act considering the ambit of the unamended Section 2(1)(h).
It was held that the Chief Justice or the designated judge will have the powers to determine the jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence of a live claim, the existence of the condition for the exercise of their powers, and the qualifications of the arbitrators.
Where Section 8 requires the referral court to look into the prima facie existence of a valid arbitration agreement, Section 11 confines the court’s jurisdiction to the existence of the examination of an arbitration agreement. The provision empowers the arbitral tribunal to rule on its own jurisdiction, including any ruling on any objections with respect to the existence or validity of arbitration agreement. Therefore, the issue of existence of a valid arbitration agreement was referred to be decided by the arbitral tribunal after conducting a detailed examination of documentary evidence and cross-examination of witnesses. In Chloro Controls (supra), this Court held that it is the legislative intent of Section 45 of the Arbitration Act to give a finding on whether an arbitration agreement is “null and void, inoperative and incapable of being performed” before referring the parties to arbitration.
In case of joinder of non-signatory parties to an arbitration agreement, the following two scenarios will prominently emerge: first, where a signatory party to an arbitration agreement seeks joinder of a non-signatory party to the arbitration agreement; and second, where a non-signatory party itself seeks invocation of an arbitration agreement. In view of the complexity of such a determination, the referral court should leave it for the arbitral tribunal to decide whether the non- signatory party is indeed a party to the arbitration agreement on the basis of the factual evidence and application of legal doctrine. The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non- signatory party to the arbitration agreement; f. The approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law; k.
In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be PART H interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement. Indian Precedents on the Group of Companies Doctrine… 27 D. Group of Companies Doctrine in the Context of Section 7… 39 E. Ramana, are as follows: “(a) Whether phrase “claiming through or under” in Sections 8 and 11 could be interpreted to include “Group of Companies” doctrine?
At the outset, he emphasised the need to retain the doctrine in India to keep pace with the complexity of multi-party business transactions, where certain persons do not formally sign the contract but are involved in its negotiation and performance. (c) Whether the Group of Companies doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties? Arbitration agreement.—(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such to make that arbitration clause part of the contract.” It is evident from the above-referred statutory prescription that an ‘arbitration agreement’ is described in sub-section (1) of Section 7 as, “ an agreement by the parties ”. An arbitration agreement is more specifically defined in Section 7(1) of the 1996 Act as an “ an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
Sub-Section (2) of Section 7 incorporates this principle and recognises an agreement, either in the form of an arbitration clause in the contract or in the form of a separate agreement. Apart from the standard methods of drawing inferences by interpreting the express language employed in the agreement, what are the other external aids to assist the court or the arbitral tribunal in constructing the existence of the arbitration agreement with the non-signatory, is the question that we are called upon to answer. An arbitration agreement with non-signatories is to be inferred from the record of the agreement consisting the exchange of correspondence such as letters, telex, telegrams, and other telecommunication and electronic communication, wherein it “ unequivocally and clearly emerge(s) that the parties were ad idem ”. The intention of the parties is to be gathered only from the expressions used in the correspondence and the meaning it conveys and in 10 case it shows that there had been meeting of mind between the parties and they had actually reached an agreement upon all material terms, then and then alone can it be said that a binding contract was capable of being spelt out from the correspondence. Apart from the correspondence relied upon by the learned Single Judge of the High Court, the fax messages exchanged between the parties, referred to above, go to show that the parties were only negotiating and had not arrived at any agreement.
The settled jurisprudence under Section 7(4)(b) is that the non-signatory’s consent to an arbitration agreement can be made out from its conduct by way of exchange of letters, telegrams and other forms of written communication. Therefore, even in the absence of a signature, the non-signatory’s consent to arbitration can be gathered from its written correspondence (even with third parties) that shows its conduct pursuant to the contract containing the arbitration agreement.
Section 7(2) of the Arbitration and Conciliation Act, 1996 recognises the existence of an arbitration agreement in substance, rather than in form.
If the arbitration agreement is evidenced in the written form as contained in a document signed by the parties (Section 7(4)(a)), the parties to the agreement are evidently those who have signed the agreement. The referral court or the arbitral tribunal, while considering the claim of a non-signatory for reference, or the objection of a non-signatory to the inclusion in an arbitration, will primarily examine the record of agreement under Section 7(4)(b) and consider the express language employed by the parties. As the arbitration agreement is confined to a written document contained in the material specified in Section 7(4)(b) and the interpretation and construction is based on its text, Sections 91 and 92 of the Indian Evidence Act, 1872 disable adducing of oral evidence. It is in the context of the above referred legal regime, statutory as well as precedential, that we need to consider the questions 17 referred to this Constitution Bench – whether the Group of Companies Doctrine is part of Indian arbitration jurisprudence and whether it has any statutory basis. The Group of Companies doctrine was formulated and theorised exclusively in international arbitration jurisprudence to specifically determine whether a company which is a non-signatory is party to the arbitration agreement.
Isover objected to the arbitral tribunal’s jurisdiction to render an award with respect to Dow Chemical France and Dow Chemical Company (USA), as they were non-signatories. Further, they were also involved in the performance of the contracts and their subsequent termination since Dow Chemical France effected the deliveries and Dow Chemical Company (USA) owned the trademarks for the goods and also exercised absolute control over its subsidiaries. From the above extracts, it is clear that membership in the same group of companies or “ same economic reality ” were neither the sole nor the guiding factors to hold that the non-signatory companies were parties. Ministry of Religious Affairs, Government of Pakistan, the Paris Court of Appeal enforced the arbitral award against the Pakistan government (non-signatory) as its conduct through involvement in the negotiation and performance of the contract reflected common will to be a party to the arbitration. The focus on mutual intention reflects a fundamental difference between the Group of Companies doctrine and ‘piercing the veil’ or alter ego. Even after applying French law to determine when a non-signatory is a party, based on the material before it, the Court held there was no mutual intention in this case to make the Government of Pakistan a party.
American courts have also relied on implied consent, third party beneficiary, and general contractual and agency law principles to hold that a non-signatory is a party. In this light, he argues that any reference to a group of companies is unnecessary as membership within the same group is not a determinative factor in the inquiry of who is a party to the arbitration agreement. The doctrine was developed in France and is applied there by emphasising mutual consent of the signatory and non-signatory companies.
I have also referred to the reasoning in those decisions where the Court has examined the record of the agreement and constructed the existence of an arbitration agreement based on the express language, coupled with the consent of the parties. Interpreting the words and phrases “any person”, “claiming through or under”, and “shall” in Section 45 of the Court, this Court enlarged the scope of reference for the first time, to bind non-signatories. This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties.
Further, for the derivative action to pass muster, “ a clear intention ” of the signatories and non-signatories had to be ascertained, through the circumstances delineated by the Court, i.e., i) direct relationship with the party to the agreement, ii) commonality of subject matter, iii) composite nature of transaction, and iv) interlinked performance of the contract. The Court allowed the enforcement of an arbitral award against a subsequent purchaser of shares under Section 35 of the Act, interpreting the phrase “persons claiming under them”. In holding a non-signatory bound by an arbitration agreement, the court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. The group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.
This approach was noted in the subsequent decision of Discovery Enterprises, where learned Chief Justice has noted: “ In Ameet Lalchand, the Court did not explicitly invoke the group of companies doctrine to bind a non-signatory, rather it relied on Chloro Controls to hold that a non-signatory would be bound by the arbitration clause in the mother agreement, since it is a party to an inter-connected agreement, executed to achieve a common commercial goal.” (emphasis supplied)
The expression “claiming through or under” in Sections 8 and 45 is intended to provide a derivative right; and it does not enable a non-signatory to become a party to the arbitration agreement. The decision in Chloro Controls (supra) tracing the Group of Companies doctrine through the phrase “claiming through or under” in Sections 8 and 45 is erroneous. The expression ‘party’ in Section 2(1)(h) and Section 7 is distinct from “persons claiming through or under them”. This answers the remaining questions referred to the Constitution Bench.
Case Title: COX AND KINGS LTD. Vs. SAP INDIA PVT. LTD.
Case Number: ARBIT.PETITON No.-000038 / 2020 (2023 INSC 1051 )
