The Group of Companies Doctrine upheld by the Supreme Court: arbitration agreements can bind non-signatory parties                   

Posted On - 22 December, 2023 • By - King Stubb & Kasiva

Cox and Kings Ltd v. SAP India Pvt Ltd, Arbitration Petition No. 38/2020, Decided on 6th December 2023.

Summary

In this judgment, a 5-judge constitution bench of the Supreme Court settled the dust and held that the ‘Group of Companies’ doctrine will be valid in Indian arbitration jurisprudence and non-signatories can be bound by the arbitration agreement. Court observed that the important consideration is whether such a non-signatory intended to effect legal relations with the signatory parties and be bound by the arbitration agreement. The Court acknowledged the fact that arbitration is a process based on ‘consent’ of the parties and the ‘party autonomy’ underpins the arbitration process. The court emphasized adopting a ‘modern approach to consent’, in which commercial reality shall get due importance and circumstances, apparent conduct, and commercial facets of business transactions shall be considered.

Facts of the Case:

The Petitioner sought greenfield solutions for its e-commerce problems, for which respondent 1 provided its hybrid solutions. Over time disputes arose between the parties. During this phase, the petitioner had requested Respondent 2 to mediate between the parties. However, disputes could not be resolved. Consequently, the petitioner initiated the arbitration proceedings and sought to bind Respondent 2 to the proceedings even though the said respondent was not a party to the arbitration agreement.

Issues:

  1. Whether the phrase ‘claiming through or under’ in Sections 8 and 116 could be interpreted to include the ‘Group of Companies’ doctrine.
  2. Whether the ‘Group of Companies’ doctrine as expounded by the Chloro Controls Case[1] and subsequent judgments is valid in law.

Judgement:

  1. On the first issue, the court observed that the ‘group of companies’ doctrine has an independent existence.The Court examined the term ‘claiming through or under’, and analysis of foreign jurisdictions on this subject led to the following propositions:
    • the typical scenarios where a person or entity can claim through or under a party are assignment, subrogation, and novation;
    • 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;
    • 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
    • mere legal or commercial connection is not sufficient for a non-signatory to claim through or under a signatory party.
  2. In the Chloro Controls Case, the court stated that “a non-signatory party may claim through or under a signatory party by virtue of its legal or commercial relationship with the latter”
    • In the instant case, the court stated that the observation in the Chloro Controls case goes against the Common law principle 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 court concluded that “even though a subsidiary derives interests or benefits from a contract entered into by the company within a group, they would not be covered under the expression “claiming through or under” merely on the basis that it shares a legal or commercial relationship with the parties”

Analysis:

This judgement plays a pivotal role in Indian arbitration Jurisprudence as there was ambiguity as to whether the ‘Group of Companies’ doctrine is applicable in India or not. A settled position on this doctrine was required since it decides the fate of non-signatories on the question of whether they are bound to the arbitration agreement or not. The court has taken a balanced approach by giving a high degree of evidence to the ‘signature’ of the parties and at the same time held that it is not the sole basis to assess whether a party is bound to the agreement or not.

[1] https://main.sci.gov.in/judgment/judis/39605.pdf