| Headnote |
Issues for consideration: The primary issue for consideration of the present Constitution Bench of Five Judges was determination of the validity of the ‘Group of companies doctrine’ in Indian arbitration jurisprudence and its applicability to proceedings under the Arbitration and Conciliation Act, 1996. Earlier, the Group of Companies doctrine had been adopted and applied in Indian arbitration jurisprudence in Chloro Controls case, where a three Judge Bench of the Supreme Court had read the said doctrine into the phrase “claiming through or under” in Section 45 of the Arbitration and Conciliation Act, 1996. The ‘Group of companies doctrine’ provides that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates, if the circumstances are such as to demonstrate the mutual intention of the parties to bind both signatories and non-signatories. This doctrine was called into question purportedly on the ground that it interfered with the established legal principles such as party autonomy, privity of contract, and separate legal personality. Also, there were ancillary issues such as: (i) whether the Arbitration and Conciliation Act, 1996 allows joinder of a non-signatory as a party to an arbitration agreement; (ii) whether Section 7 of the Arbitration and Conciliation Act, 1996 allows for determination of an intention to arbitrate on the basis of the conduct of the parties; and (iii) interpretation of the phrase “claiming through or under” appearing under Sections 8, 35 and 45 of the Arbitration and Conciliation Act, 1996.Arbitration – Arbitration agreement – Consent as the basis for arbitration:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): Consensus ad idem between the parties forms the essential basis to constitute a valid arbitration agreement – 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. [Paras 60, 63] Arbitration and Conciliation Act, 1996 – s.2(1)(h) r/w s.7 – Definition of “parties”:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as nonsignatory parties. [Para 165] Arbitration – Parties to an arbitration Agreement – Method to figure out:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The signature of a party on the agreement is the most profound expression of the consent of a person or entity to submit to the jurisdiction of an arbitral tribunal – However, the corollary that persons or entities who have not signed the agreement are not bound by it may not always be correct – The issue of who is a “party” to an arbitration agreement is primarily an issue of consent. [Para 66] Words and Phrases – Arbitration agreement – Term “nonsignatories” – Meaning of:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The term “non-signatories”, instead of the traditional “third parties”, seems the most suitable to describe situations where consent to arbitration is expressed through means other than signature – A non-signatory is a person or entity that is implicated in a dispute which is the subject matter of an arbitration, although it has not formally entered into an arbitration agreement – 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. [Paras 66, 127] Arbitration – Group of companies doctrine in Indian arbitration jurisprudence – Relevance –Doctrines / Principles:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The group of companies doctrine is a consent-based doctrine which has been applied, for identifying the real intention of the parties to bind a non-signatory to an arbitration agreement – 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. [Paras 81, 165] Corporate Law – Principle of corporate separateness – Separate legal personality:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The entities within a corporate group have separate legal personality, which cannot be ignored save in exceptional circumstances such as fraud – The distinction between a parent company and its subsidiary is fundamental, and cannot be easily abridged by taking recourse to economic convenience – Legally, the rights and liabilities of a parent company cannot be transferred to the subsidiary company, and vice versa, unless, there is a strong legal basis for doing so – 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. [Paras 89, 165] Arbitration – Group of companies doctrine – Adopting a pragmatic approach to consent:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): Corporate structures may take the form of groups based on equity, joint ventures, and informal alliances – In the context of arbitration law, the challenge arises when only one member of the group signs the arbitration agreement, to the exclusion of other members – Should the non-signatories be excluded from the arbitration proceedings, even though they were implicated in the dispute which forms the subject matter of arbitration? – As a response to this challenge, arbitration law has developed and adopted the group of companies doctrine, to allow or compel a non-signatory party to be bound by an arbitration agreement – The group of companies doctrine is applied to ascertain the intentions of the parties by analysing the factual circumstances surrounding the contractual arrangements. [Paras 96 and 97]Arbitration – Group of companies doctrine – International perspectives – Precedents on applicability of the doctrine in France, England, Switzerland, Singapore and the USA – Discussed:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The international jurisdictions, in some form or the other, have moved beyond the formalistic requirement of consent to bind a nonsignatory to an arbitration agreement – The issue of binding a non-signatory to an arbitration agreement is more of a factspecific aspect – In jurisdictions such as France and Switzerland, there is a broad consensus that consent or subjective intention of a non-signatory to arbitrate may be proved by conduct – Such subjective intention could be derived from the objective evidence in the form of participation of the nonsignatory in the negotiation, performance, or termination of the underlying contract containing the arbitration agreement – However, the group of companies doctrine has not been universally accepted by all jurisdictions – 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 nonsignatory to the arbitration agreement. [Para 58]Arbitration – Group of companies doctrine, a fact based doctrine: Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The existence of a group of companies is a factual element that the court or tribunal has to consider when analysing the consent of the parties – It inevitably adds an extra layer of criteria to an exercise which at its core is preponderant on determining the consent of the parties in case of complex transactions involving multiple parties and agreements. [Para 102] Arbitration – Group of companies doctrine – Mutual intention of all the parties to bind the non-signatory to the arbitration agreement – The determination of mutual intention:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The primary test to apply the group of companies doctrine is by determining the intention of the parties on the basis of the underlying factual circumstances – 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 – Avoiding multiplicity of proceedings and fragmentation of disputes is certainly in the interests of justice –However, it can never be the sole consideration to invoke the group of companies doctrine. [Para 109] Arbitration – Group of companies doctrine – Applicability – Threshold standard of evidence:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): In Discovery Enterprises case, the Supreme Court refined and clarified the cumulative factors that the courts and tribunals should consider in deciding whether a company within a group of companies is bound by the arbitration agreement – All the cumulative factors laid down in Discovery Enterprises case must be considered while determining the applicability of the group of companies doctrine – However, the application of the above factors has to be fact-specific, and onecannot tie the hands of the courts or tribunals by laying down how much weightage they ought to give to the above factors – The principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine. [Paras 110, 128 and 165] Arbitration and Conciliation Act, 1996 – ss.8 and 45 – Phrase “claiming through or under” as appearing under ss.8 and 45 of the Arbitration Act – Party to arbitration agreement and Persons “claiming through or under” a party to the arbitration agreement are different:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): A person “claiming through or under” is asserting their legal demand or cause of action in an intermediate or derivative capacity – A person “claiming through or under” has inferior or subordinate rights in comparison to the party from which it is deriving its claim or right – Therefore, a person “claiming through or under” cannot be a “party” to an arbitration agreement on its own terms because it only stands in the shoes of the original signatory party – 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 – The persons “claiming through or under” can only assert a right in a derivative capacity. [Paras 137, 165] Words and Phrases – “Claiming through or under”; “claim”; “through” and “claiming under”. [Para 137] Arbitration and Conciliation Act, 1996 – s.9 – Power of the Courts to issue directions u/s.9:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The group of companies doctrine is based on determining the mutual intention to join the non-signatory as a “veritable” party to the arbitration agreement – Once a tribunal comes to the determination that a non-signatory is a party to the arbitration agreement, such nonsignatory party can apply for interim measures under s.9 of the Arbitration and Conciliation Act, 1996. [Para 153] Arbitration and Conciliation Act, 1996 – ss.8 and 11 – Standard of determination at the referral stage – Stage of applicability of the group of companies doctrine under the Arbitration Act:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): When a non-signatory person or entity is arrayed as a party at Section 8 or Section 11 stage, the referral court should prima facie determine the validity or existence of the arbitration agreement, as the case may be, and leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement – 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. [Paras 163, 165].Arbitration and Conciliation Act, 1996 – s.7 – Requirement of a written arbitration agreement u/s.7 – Effect:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The requirement of a written arbitration agreement u/s.7 does not exclude the possibility of binding non-signatory parties. [Para 165] Arbitration – Group of companies doctrine – Whether the principle of alter ego or piercing the corporate veil can be the basis for application of the group of companies doctrine:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The principle of alter ego disregards the corporate separateness and the intentions of the parties in view of the overriding considerations of equity and good faith – In contrast, the group of companies doctrine facilitates the identification of the intention of the parties to determine the true parties to the arbitration agreement without disturbing the legal personality of the entity in question – The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine. [Paras 104, 165] Arbitration – Group of companies doctrine – Factors to be considered for application of the doctrine – Conduct of the non-signatory parties – Relevance:Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The participation of the non-signatory in the performance of the underlying contract is the most important factor to be considered by the courts and tribunals – 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 – The non-signatory’s participation in the negotiation, performance, or termination of the contract can give rise to the implied consent of it being bound by the contract – Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. [Paras 118, 125 and 165]Arbitration – Arbitration and Conciliation Act, 1996 – s.2(1)(h) and s.7 – Group of companies doctrine – Has independent existence: Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of s.2(1) (h) along with s.7 of the Arbitration Act. [Para 165] Arbitration and Conciliation Act, 1996 – Group of Companies doctrine – In Chloro Controls case, a three Judge Bench of Supreme Court read the said doctrine into the phrase “claiming through or under” in s.45 of the Arbitration Act – Challenge to.Held (per Dr. Dhananjaya Y Chandrachud, CJI) (for himself, Hrishikesh Roy, J B Pardiwala and Manoj Misra, JJ.): The approach of the Supreme Court in Chloro Controls case to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the wellestablished principles of contract law and corporate law. [Para 165] Arbitration – Group of companies doctrine – Applicability – Non-signatory, if party to arbitration agreement – Determination – Arbitration and Conciliation Act, 1996 – s.7(4)(b).Held (per Pamidighantam Sri Narasimha, J.) (Concurring with Dr. Dhananjaya Y Chandrachud, CJI): 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 s.7(4)(b), a court or arbitral tribunal will determine whether a nonsignatory 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. [Para 56]Arbitration – Group of companies doctrine – Arbitration agreement – Ascertaining the intention of the non-signatoryHeld (per Pamidighantam Sri Narasimha, J.) (Concurring with Dr. Dhananjaya Y Chandrachud, CJI): The Group of Companies doctrine 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. [Para 56] Arbitration and Conciliation Act, 1996 – s.7(4)(b) – Inquiry by a court or arbitral tribunal under s.7(4)(b) and Group of companies doctrine.Held (per Pamidighantam Sri Narasimha, J.) (Concurring with Dr. Dhananjaya Y Chandrachud, CJI): Since the purpose of inquiry by a court or arbitral tribunal u/s.7(4)(b) and the Group of Companies doctrine is the same, the doctrine can be subsumed within s.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 s.7(4)(b) for the purpose of certainty and systematic development of law. [Para 56] Arbitration and Conciliation Act, 1996 – ss.2(1)(h), 7, 8 and 45 – Expression “claiming through or under” in ss.8 and 45 – Difference from expression ‘party’ in s.2(1)(h) and 7.Held (per Pamidighantam Sri Narasimha, J.) (Concurring with Dr. Dhananjaya Y Chandrachud, CJI): The expression “claiming through or under” in ss.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 tracing the Group of Companies doctrine through the phrase “claiming through or under” in ss.8 and 45 is erroneous – The expression ‘party’ in s.2(1)(h) and s.7 is distinct from “persons claiming through or under them”. [Para 56] |
