SC affirms “Group of Companies’ doctrine in Indian arbitration jurisprudence

A Constitution bench of the Supreme Court ruled on Wednesday, approving the “Group of Companies” doctrine in Indian arbitration jurisprudence and allowing non-signatories to an arbitration agreement to be made parties to a dispute if they are members of the same group of companies and have similar intentions.

The bench, presided over by Chief Justice Dhananjaya Y Chandrachud of India, concluded that the doctrine ought to be preserved in Indian arbitration statutes and rules, taking into account its practicality and ascertaining the parties’ intentions in the context of intricate transactions entailing numerous parties and agreements.

The 1996 Arbitration & Conciliation Act’s relevant provisions can be interpreted to incorporate the doctrine, according to the five-judge bench that also included justices Hrishikesh Roy, PS Narasimha, JB Pardiwala, and Manoj Misra. The bench further argued that the statute’s definition of “parties” can encompass both signatories and non-signatories.

The actions of non-signatory parties may indicate that they agree to be legally bound by the arbitration agreement. The court said that the “Group of Companies” theory is ingrained in the idea of the parties’ “mutual intent,” and that the necessity of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.

The Constitution bench held that the arbitral tribunal ought to determine whether the non-signatory party is obligated by the arbitration agreement, not the reference court. The tribunal may examine the factual, circumstantial, and legal components of the case to determine whether it has jurisdiction over the non-signatory party based on the application of legal theory and factual evidence. It said that the tribunal must adhere to the natural justice concept throughout the proceedings, including providing the non-signatory party with a chance to voice concerns.

According to Desai & Diwanji Senior Partner Sumant Nayak, the ruling provides much-needed clarity on the affiliate businesses’ participation in the arbitration proceedings. “In my opinion, this would further streamline the arbitration hearing procedure, allowing group firms to participate in the proceedings at the arbitrator’s discretion. Nayak said, “This theory may potentially be included in the next Act modification.

Mayank Mishra, a partner at INDUSLAW, praised the Supreme Court for using a sophisticated and impartial analysis while concisely summarizing the essence of the doctrine. “This ruling has provided a welcome protection in circumstances involving complicated transactions, several parties, and agreements, even though it was previously well acknowledged that non-signatories might be bound by an arbitration agreement. The ruling will increase arbitration’s effectiveness as a more morally sound means of settling conflicts in general.

The decision reached in a dispute between software company SAP India and travel company Cox and Kings is significant because it will determine the future direction of commercial arbitration jurisprudence in India, especially when the doctrine is compared to the well-established ideas of privity and consent in arbitration agreements.

The terms and conditions of an arbitration agreement are binding exclusively on the parties to it, in accordance with the general concept of privity of contract. Nonetheless, if there seems to be a “mutual intent” between the parties to bind such non-signatories, even they may be bound under the “Group of Companies” theory.

The Constitution bench on Wednesday established the legal situation by pointing out the differences between responsibilities originating under contract law and those arising under party autonomy under arbitration law. “Arbitration law functions inside a separate legal domain. Determining whether an arbitral tribunal has jurisdiction over a disagreement between parties is the primary goal of arbitration law, according to the statement, “whereas the main goal of corporate law and contract law is the imputation of substantive legal liability.”

“Tribunals and courts cannot take a strict stance in order to exclude any individuals or organizations that, by their actions and interactions with the isolated parties, suggested that they would be bound by the underlying agreement including the arbitration clause…It said that a balance must be struck between the consensual character of arbitration and the realities of contemporary business, where a non-signatory may be involved in a transaction in a variety of ways.

The court stated that this kind of balance can be reached by assuming that the non-signatories are not genuinely strangers to the disagreement between the signatory parties because of their relationship with them and their active participation in carrying out commercial obligations that are closely related to the subject matter.

The “Group of Companies” doctrine is a consent-based theory, therefore in order to demonstrate the parties’ shared purpose, a number of factual criteria must be taken into account. The court clarified that the party wishing to add a non-signing party would carry the burden of showing the “mutual intention,” stating that in order for the principles to be applied, both the signatory and non-signatory parties must have mutually intended to be bound by the arbitration agreement.

The court also made it clear that although the presence of a group of firms is a prerequisite, it is not a sufficient one in order to ascertain the parties’ intentions. It also said that the courts should instead ascertain if a group of firms exists and, if so, how the signing and non-signatory parties have behaved to suggest that they intend to include the non-signatory in the arbitration agreement.

The bench stated that the “Group of Companies” doctrine is predicated on upholding the corporate separateness of the group of companies. Consequently, the concept of alter ego or piercing the corporate veil cannot be used as the foundation for applying the doctrine while assessing the parties’ shared intention to bind the non-signatory to the arbitration agreement.

In order to guarantee that the resulting legal framework is coherent, the court said that it is taking a balanced approach without compromising on the fundamental ideas of contract law, business law, and arbitration law.

For an authoritative ruling on the applicability of the “Group of Companies” doctrine in Indian jurisprudence independent of any statutory provision and whether the doctrine could be read into any existing provision of the 1996 Arbitration and Conciliation Act, a three-judge bench had referred the case to the larger bench in May 2022. Another question that remained unanswered was to the potential for an arbitral tribunal’s jurisdiction to include individuals who have not signed an arbitration agreement.

In 2015, three further agreements were made by the two businesses, committing them to arbitrate future disputes in accordance with the 1996 Act. But when the new software implementation project ran into problems, C&K contacted SAP SE, the German-based company’s main arm, to ask for help.

C&K ended the project in November 2016 and sought a refund of ₹45 crores to recover the money they had paid to SAP as the project was never able to get off the ground despite many extensions. SAP India, in response, claimed that C&K had improperly terminated the agreement and wanted ₹17 crores as payment. SAP India also filed a notice to commence arbitration proceedings.

In 2019, C&K commenced a new arbitration and gave SAP a new notice, although facing impending bankruptcy itself. Even though SAP SE did not sign any of the agreements, C&K submitted a notice to SAP SE this time asking to include it as a party to the arbitration. In response to SAP’s failure to choose an arbitrator, C&K petitioned the Supreme Court to do so in accordance with Section 11 of the Arbitration Act.