2023 (12) TMI 427 - SC - Indian Laws

Binding non-signatory group companies to arbitration agreements: 'party' u/ss 2(1)(h)/7 may include them, doctrine upheld

The dominant issue was whether the 'group of companies' doctrine can bind non-signatories to an arbitration agreement consistently with the Arbitration ... Validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration - whether there can be a reconciliation between the group of companies doctrine and well settled legal principles of corporate law and contract law? - Doctrine of competence-competence - Doctrine of privity. As per Dr. Dhananjaya Y Chandrachud, CJI HELD THAT:- The questions of law referred to this Constitution Bench answered as follows: a. The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties; b. Conduct of the non-signatory parties could be an indicator of 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. 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; e. 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 nonsignatory party to the arbitration agreement; f. The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine; g. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act; h. To apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in OIL AND NATURAL GAS CORPORATION LTD. VERSUS M/S DISCOVERY ENTERPRISES PVT. LTD. & ANR. [2022 (4) TMI 1350 - SUPREME COURT]. Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine; i. The persons “claiming through or under” can only assert a right in a derivative capacity; j. The approach of this Court in CHLORO CONTROLS (I) P. LTD. VERSUS SEVERN TRENT WATER PURIFICATION INC. & ORS. [2014 (1) TMI 830 - SUPREME COURT] 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. The group of companies doctrine should 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; l. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and m. In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement. The Registry shall place the matters before the Regular Bench for disposal after obtaining the directions of the Chief Justice of India on the administrative side. As per PAMIDIGHANTAM SRI NARASIMHA, J. While concurring with the judgment of the learned Chief Justice, following conclusions arrived at: I. An agreement to refer disputes to arbitration must be in a written form, as against an oral agreement, but need not be signed by the parties. Under Section 7(4)(b), a court or arbitral tribunal will determine whether a non-signatory is a party to an arbitration agreement by interpreting the express language employed by the parties in the record of agreement, coupled with surrounding circumstances of the formation, performance, and discharge of the contract. While interpreting and constructing the contract, courts or tribunals may adopt well-established principles, which aid and assist proper adjudication and determination. The Group of Companies doctrine is one such principle. II. The Group of Companies doctrine, As delineated in para 40 of Discovery Enterprises is also premised on ascertaining the intention of the non-signatory to be party to an arbitration agreement. The doctrine requires the intention to be gathered from additional factors such as direct relationship with the signatory parties, commonality of subject-matter, composite nature of the transaction, and performance of the contract. III. Since the purpose of inquiry by a court or arbitral tribunal under Section 7(4)(b) and the Group of Companies doctrine is the same, the doctrine can be subsumed within Section 7(4)(b) to enable a court or arbitral tribunal to determine the true intention and consent of the non-signatory parties to refer the matter to arbitration. The doctrine is subsumed within the statutory regime of Section 7(4)(b) for the purpose of certainty and systematic development of law. IV. 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 Control 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. Issues Involved:1. Validity of the Group of Companies Doctrine in Indian Arbitration2. Interpretation of the phrase 'claiming through or under' in Sections 8 and 45 of the Arbitration Act3. Determination of parties to an arbitration agreement4. The power of courts to issue directions under Section 9 of the Arbitration Act5. The standard of determination at the referral stage under Sections 8 and 11 of the Arbitration ActSummary:1. Validity of the Group of Companies Doctrine in Indian Arbitration:The Supreme Court was called upon to determine the validity of the 'Group of Companies' doctrine in Indian arbitration jurisprudence. This doctrine allows an arbitration agreement entered into by a company within a group of companies to bind non-signatory affiliates if the circumstances demonstrate the mutual intention of the parties to bind both signatories and non-signatories. The Court emphasized that the basis for an arbitration agreement is generally traced to the contractual freedom of parties to codify their intention to consensually submit their disputes to an alternative dispute resolution process. The doctrine was affirmed, provided it aligns with the mutual intention of the parties.2. Interpretation of the phrase 'claiming through or under' in Sections 8 and 45 of the Arbitration Act:The Court clarified that the phrase 'claiming through or under' in Sections 8 and 45 of the Arbitration Act does not include the Group of Companies doctrine. The phrase is intended for scenarios involving assignment, subrogation, and novation, where a non-signatory claims a derivative right through a signatory party. The Court held that the approach in Chloro Controls, which traced the Group of Companies doctrine to this phrase, was erroneous.3. Determination of parties to an arbitration agreement:The Court held that the determination of whether a non-signatory is bound by an arbitration agreement should be based on the mutual intention of the parties. This can be inferred from the conduct of the parties, including their involvement in the negotiation, performance, and termination of the underlying contract. The Court emphasized that the requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties if there is a defined legal relationship between the signatory and non-signatory parties.4. The power of courts to issue directions under Section 9 of the Arbitration Act:The Court clarified that once a tribunal determines that a non-signatory is a party to the arbitration agreement, such non-signatory can apply for interim measures under Section 9 of the Arbitration Act. This resolves the anomaly pointed out by Chief Justice Ramana regarding the rights of non-signatories under Section 9.5. The standard of determination at the referral stage under Sections 8 and 11 of the Arbitration Act:The Court held that at the referral stage under Sections 8 and 11, the court only needs to determine the prima facie existence of an arbitration agreement. If the referral court cannot decide the issue, it should leave it to the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement. This approach minimizes judicial intervention and upholds the principle of competence-competence, allowing the arbitral tribunal to rule on its own jurisdiction.Conclusion:The Court affirmed the Group of Companies doctrine within the framework of Indian arbitration law, emphasizing mutual intention as the key determinant. It clarified the interpretation of 'claiming through or under' in Sections 8 and 45, distinguished between parties and persons claiming through or under them, and outlined the standards for determining parties to an arbitration agreement and the scope of judicial intervention at the referral stage.