A Constitution Bench of Supreme Court on Wednesday ruled that the group of companies doctrine will be applicable to arbitration proceedings in India [Cox and Kings vs SAP Pvt Ltd].
The “group of companies” doctrine states that a company that is a non-signatory to an arbitration agreement would be bound by the agreement if such a company is a member of the same group of companies that signed the agreement. The doctrine deems that the parties to the arbitration agreement mutually intended for such a non-signatory to be bound by it.
A Constitution bench of Chief Justice of India (CJI) DY Chandrachud with Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala, and Manoj Misra concluded that non-signatory parties, by virtue of their relationship with the signatory and engagement in commercial activities, cannot be deemed strangers to the dispute under arbitration.
“The non signatory by their relation to the signatory and performing commercial duties are not strangers to the dispute in comparison to signatory parties. The GoC (Group of Companies doctrine) is founded on mutual intent of parties … The doctrine is used to bind the non signatory to the arbitration agreement so that it shares the profits and burden it entails,” the Court said.
The verdict came in a case arising out of arbitration proceedings.
The following issues were considered by the bench.
– Whether the group of companies doctrine should be read into Section 8 of the Arbitration Act or whether it can exist in Indian jurisprudence independent of any statutory provision?
– Whether the group of companies doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?
– Whether the group of companies doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
– 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?
The Court emphasized that arbitration is a matter of contract and consent is paramount. No one can be compelled to submit to arbitration without their consent.
It said that courts have to determine whether a non-signatory to an arbitration agreement intended to create a legal relationship with the signatory and agreed to be bound by the arbitration agreement.
Referring to Section 7A of the Arbitration and Conciliation Act, the Court emphasized that while arbitration is contractual, it is not necessary for parties to be signatories to be bound by it.
The Court called for a balanced approach, emphasizing that the decision of parties not to include someone in the arbitration agreement should not be brushed aside. Simultaneously, the Court highlighted the importance of not excluding individuals who, through their conduct, have demonstrated an intention to be bound by the arbitration agreement.
However, the Court also said that the doctrine, which was developed by international arbitration tribunals, is not sufficient to determine whether a party is bound by an agreement. As such, it called on courts to first establish the existence of a group of companies.
“Since GoC is consent based theory it is meant to ascertain the intention of both signatory and non signatory to be bound by the arbitration agreement,” it said.
The Court concluded by upholding the doctrine’s application to arbitration proceedings, stating that the definition of parties includes both signatory and non-signatory parties that are part of the same group of companies.
Hence, the Court held that the act of a non-signatory could make non-signatory companies that are part of the same group, a party to the contract.