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India: Supreme Court Settles The Dusts On Binding Nature Of An

Arbitration Agreement On Consenting Non-signatories While
Affirming The 'Group Of Companies' Doctrine.
28 December 2023
by Gautam Bhatikar , Neha Naik and Sanaea Laskari
Phoenix Legal

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Introduction
Prior to the judgment passed by the Supreme Court of India (Supreme Court) in Chloro Controls India (P) Ltd.
vs. Severn Trent Water Purification Inc1 (Chloro Controls), the jurisprudence indicated that arbitration could
be invoked only at the instance of a signatory against another signatory.

In Chloro Controls, when the Supreme Court was tasked to determine the scope of arbitral reference under
Section 45 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), in the case of multi-party
agreements signed by different parties and where some contained an arbitration clause and others did not,
the Supreme Court held that the phrase 'any person claiming through or under him' occurring in Section 45
reflects the legislative intent of enlarging the scope of the applicability of the Arbitration Act, beyond parties
who are formal signatories to the arbitration agreement. This would essentially include non-signatories who
are required to claim 'through or under the signatory party' and held that arbitration is possible between a
signatory to an arbitration agreement and a third party or non-signatory claiming through a party. The
Supreme Court in Chloro Controls observed that the non-signatory entities being part of the same corporate
group as the signatory parties were 'claiming through or under' the signatory parties. The Chloro Control case
thus linked the group of companies' doctrine to the wordings 'claiming through or under' appearing in Section
45 of the Arbitration Act.

Subsequently, a three Judge Bench of the Supreme Court2 doubted the correctness of the application of the
group of companies' doctrine and referred the matter to the larger Bench of the Court to consider inter alia
whether the group of companies' doctrine as expounded by Chloro Controls is valid in law and whether the
phrase 'claiming through or under' in Sections 8 and 11 of the Arbitration Act could be interpretated to
include the group of companies' doctrine.

Recently, the five Judge Bench of the Supreme Court in Cox and Kings Limited vs. SAP India Pvt Ltd. and Anr.3
examined the issues on the touchstone of whether the Arbitration Act allows joinder of a non-signatory as a
party to an arbitration agreement and whether Section 7 of the Arbitration Act allows for determination of an
intention to arbitrate on the basis of the conduct of the parties.

Analysis of the Judgment

I. Consent is a pre-requisite to determine if parties can be subjected to arbitration

The Court held that arbitration being a matter of contract, a party cannot be required to submit to arbitration
any dispute which they have not agreed to submit. This led the Court to examine as to whether a non-
signatory can be a party to an arbitration agreement.

A person who has signed the arbitration agreement has obviously consented to submit to the jurisdiction of
an arbitral tribunal.

The Supreme Court observed that Section 2(h) of the Arbitration Act defines "party" to mean party to an
arbitration agreement. Section 7 defines an "arbitration agreement" to mean an agreement by the parties to
submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of
a "defined legal relationship", whether expressed or implied.

The Court further observed that while the arbitration agreement is required to be in writing, Section 7 does
not expressly require the "party" to be a signatory to an arbitration agreement or the underlying contract
containing the arbitration agreement, to be bound by it. However, for a non-signatory person or entity to be
bound by an arbitration agreement, it is necessary that a defined legal relationship exists between the
signatory and non-signatory parties. The Court held that in case of non-signatory parties, it would be
important to determine whether the such persons or entities intended or consented to be bound by the
arbitration agreement or the underlying contract containing the arbitration agreement through their acts or
conduct.

Since consent is a pre-requisite for reference to arbitration, insofar as non-signatories are concerned, the
courts are required to determine whether a non-signatory has consented to be bound by the arbitration
agreement. This is where the group of companies' doctrine has come into the fora for identifying the real
intention of parties to bind a non-signatory to an arbitration agreement.

II. The doctrine of Group of Companies

The application of the group of companies' doctrine pertains to companies that are interrelated due to their
belonging to the same corporate group. The Supreme Court has observed that the doctrine points that a
company not directly party to an arbitration agreement but part of a corporate group should be obligated by
the arbitration agreement made by its related entities, only if the circumstances unequivocally indicate the
collective intent of all involved parties to bind both the signatories and non-signatories.

The group of companies' doctrine cannot extend to a company merely on the basis that the company was
part of the same group of companies. The Supreme Court referred to the judgment of Oil and Natural Gas
Corporation Ltd v. Discovery Enterprises Pvt. Ltd.4 for the factors to be considered while determining the
applicability of group of companies' doctrine which are:-

The mutual intent of the parties;

The relationship of a non-signatory to a party which is a signatory to the agreement;
The commonality of the subject-matter;
The composite nature of the transactions; and
The performance of the contract.

The group of companies' doctrine finds relevance in the case of composite transactions involving multi-party
agreements and ensures accountability of all parties which have materially participated in the negotiations of
the transactions and by doing so have evinced a mutual intent to be bound by the arbitration agreement.

III. Whether 'any person claiming through or under him' in Section 8 and 45 of the Arbitration Act could
be interpretated to include the group of companies' doctrine

While clarifying that the group of companies' doctrine is applicable, Supreme Court determined that the
reliance on the concept of 'claiming through or under' in Section 8 and 45 of the Arbitration Act, as articulated
in the Chloro Controls case to encompass the group of companies' doctrine, was deemed incorrect since the
phrase 'claiming through or under' is used in the context of 'successors in interest' that act in a derivative
capacity and substitute the signatory party to the arbitration agreement.

IV. Arbitral Tribunal to determine whether the non-signatory is bound by an under Section 8 and 11 of
the Arbitration Act

The Supreme Court held that the referral court will be required to prima facie rule on the existence of the
arbitration agreement and whether the non-signatory is a veritable party to the arbitration agreement. In view
of the complexity of such a determination, the referral court should leave it for the arbitral tribunal to decide
whether the non-signatory party is indeed a party to the arbitration agreement on the basis of the facts of
each case and application of legal doctrine.

Conclusion
The Supreme Court while holding that party consent is a pre-requisite for arbitration, it has concluded that it
is not necessary that only a signatory party is to be bound by the arbitration agreement. The existence of
implied consent of a non-signatory party to be bound by an arbitration agreement is required to be
determined by the court or the arbitral tribunal. This judgement has certainly brought clarity to the ambiguity
surrounding the group of companies' doctrine and the requirement of consent of non-signatories to be
bound by arbitration. However, given that the courts or the arbitral tribunal will be required to apply the facts
of each case to determine such applicability, we can certainly expect non-signatories to resist being subjected
to arbitration by attempting to establish that consent was never intended.

Footnotes

1 (2013) 1 SCC 641

2 Cox and Kings Limited vs. SAP India Private Limited and Others, (2022) 8 SCC 1
3 Arbitration Petition (Civil) No.38 of 2020

4 (2022) 8 SCC 42

The content of this article is intended to provide a general guide to the subject matter. Specialist advice
should be sought about your specific circumstances.

AUTHOR(S)

Gautam Bhatikar Neha Naik Sanaea Laskari

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