The Group of Companies doctrine (“Doctrine”) has been judicially formulated to make arbitration better suited to the commercial realities of the modern-day world. However, the Doctrine was subject to closer examination by the Supreme Court of India in the last one year.

The Supreme Court, today, has passed a judgment in Cox and Kings Ltd. v. SAP India Private Ltd.. (“Cox and Kings Judgment”)^[1], which deals with the extent of the application of the Doctrine under Indian law. The Cox and Kings Judgment not only declares the Doctrine to be an intrinsic part of the Indian legal system, but also defines the contours of the Doctrine by guard-railing it from misuse. In doing so, the Supreme Court has reiterated the essential difference between a non-party and non-signatory and has held that consent may be implied in some situations to include a non-signatory to an agreement as party to an arbitration.

The Doctrine entails that a non-signatory company, being one within a group of companies, can take advantage of or be bound by an arbitration agreement entered into by its affiliates or sister or parent concerns, if circumstances demonstrate that the mutual intention of all the parties was to bind both, signatories as well as non-signatories.

The Doctrine seeks to adopt a pragmatic approach by bringing together all parties that are closely connected with a disputed transaction before a single forum. This is particularly relevant in disputes involving multiple agreement and parties. The Doctrine seeks to ensure accountability of all parties who have been materially involved in the negotiation and performance of the concerned transaction. Additionally, the Doctrine also aids in reducing multiplicity of proceedings and the risk of contradictory or conflicting decisions.

While the Doctrine has certain benefits, some courts have found that it overstretches the concept of ‘party consent’, which is the bedrock of arbitration. The strongest criticism of the Doctrine is that in its application, it does not discern consent of a party, but manufactures consent. The criticism implies that after the event analysis i.e., an analysis after the execution of the agreement to bring in non-signatories is intrusive, in as much as it brings in a party, which has not signed a document, to be held accountable for obligations under it. The Doctrine has been called into question on the ground that it interferes with established legal principles such a ‘party autonomy’, ‘privity of contract’ and, ‘separate legal personality’.

While observing that there was a clear need for having a re-look at the doctrinal ingredients of the Doctrine, a three-judge bench of the Supreme Court in Cox and Kings (2022)^[2] referred questions relating to the legal basis of the Doctrine to a five-judge Constitution Bench of the Supreme Court, which has now passed the Cox and Kings Judgment to settle the position.

Observations in the Cox and Kings Judgment

The Supreme Court has pivoted on party autonomy and the contractual basis of an arbitration agreement by noting that the the signature of a party or the agreement is the most profound expression of the consent of a person or entity to submit to the jurisdiction of an arbitral tribunal.

At the same time, it has been observed that the requirement of a written arbitration agreement does not exclude the possibility of binding non signatory parties if there is a defined legal relationship between the signatory and non-signatory parties. Accordingly, the Supreme Court has held that a written contract does not necessarily require that parties put their signatures to the document embodying the terms of the agreement.

The Supreme Court opined that in case of non-signatory parties, the important determination for the courts to make is, whether the persons or entities intended to or consented to be bound by the arbitration agreement or the underlying contract containing the arbitration agreement, though their acts, rights or conduct. The Supreme Court also gave much needed clarity to the piquant situation which arises when a party signs a composite contract, which is closely interlinked to the agreement between the primary parties and such a party was actively involved in the negotiation and performance of the contract, but resists being bound by the arbitration agreement contained in the principal contract. The Supreme Court held that based on an analysis of the surrounding circumstances, such a party may be held to be bound by the arbitration agreement.

The Constitution Bench answered the question posed in Cox and Kings (2022) about the questionable legal basis of the Doctrine by holding that it has an independent existence as a principle of law, which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration and Conciliation Act (“Arbitration Act”).

The Court also conclusively established that the Doctrine is not an anathema to the construct of ‘party consent’ by holding that the Doctrine is similar to other consent-based doctrines such as agency, assignment, assumption and guarantee, to the extent that they are ordinarily applied as a means of identifying the common intention of the parties to bind a non-signatory to an arbitration agreement.

While the Supreme Court affirmed the line of judgments which held that the Doctrine can be enforced and is founded from settled legal principles, it held that the reasoning in Chloro Controls to the extent that it relied on “claiming through or under” in Section 8 of the Arbitration Act to include the Doctrine, was erroneous. The Court held that a non-signatory entity is not ‘claiming through or under’ a signatory party. It has also been opined that the definition of a ‘party’ under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both signatory as well as non-signatory parties and that the concept of a ‘party’ is distinct and different from the concept of ‘persons claiming through or under a party’ to the arbitration agreement. It has thus been observed that the persons claiming through or under can only assert a right in a derivative capacity.

What is the way forward?

The Cox and Kings Judgment ensures that a fine balance is maintained between ‘party consent’ and the commercial realities of today. While it holds that a signature is irrelevant, it emphasises that a court or arbitral tribunal needs to analyse the presence of consent. It holds that this consent may be impliedly given, which may make a party a party to an agreement, though it may not be a signatory to the same.

For invocation of Doctrine, the primary determination would be the existence of a group of companies, followed by the secondary determination about the conduct of the signatory and non-signatory parties which would indicate their common intention to make the non-signatory a party to the arbitration agreement. Parties should consider cumulative factors such as the commonality of the subject matter, composite nature of the transactions, and the performance of the contract to bind a non-signatory party to the arbitration agreement.

The rule is that a signatory alone is a party, unless it is shown from the facts that a non-signatory can be bound to the arbitration agreement. The burden of proof rests on the party seeking to implead a non-signatory to the arbitration proceedings.

The Cox and Kings Judgment curtails frivolous applications seeking to add parties without giving a discernible basis to add such parties, which had become common piece. The Cox and Kings Judgment makes it incumbent upon the party invoking the Doctrine to identify, plead, and establish the factors laid down by the Supreme Court before a non-party is joined to the concerned arbitration proceedings. This ensures accountability in the addition of non-signatories and ensures that party autonomy does not degenerate into party anarchy, at the instance of parties.

The Cox and Kings Judgment has cleared the dust surrounding the Doctrine. It provides much needed clarity which will also cut down the contradictions between various judgments of the Supreme Court, as well as streamline applications and litigations arising from an invocation of the Doctrine, which usually gives rise to jurisdictional challenges.

The judgment of the Supreme Court also provides impetus to the doctrine of ‘kompetenz-kompetenz’ in Indian law. The Supreme Court has done so by giving primacy to the arbitral tribunal in deciding whether a non-signatory is bound by the arbitration agreement. It is a much-appreciated affirmation of the principles of ‘kompetenz-kompetenz’ and ‘severability’, which had seen a setback in the NN Global Judgment^[3], where the principles were an unfortunate casualty. However, it will need to be seen how the referral courts adhere to the discipline of judicial restraint and follow the mantra of “when is doubt, refer to arbitration”.

Footnotes:

[1] Cox and Kings v SAP India Private Limited & Anr., Arbitration Petition (Civil) No. 38 of 2020, Judgment dated 6 December 2023

[2] Cox and Kings Limited v. SAP India Private Limited & Anr, (2022) 8 SCC 1

[3] N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2023) 7 SCC 1