Arbitration agreements can be binding on non-signatory firms under ‘group of companies’ doctrine: SC

According to the doctrine, a firm which is not a signatory to an arbitration agreement between two parties can be held bound if such a company is part of the same group of companies which agreed to such a clause or agreement.

New Delhi: The Supreme Court on Wednesday held that an arbitration agreement can be binding on non-signatory firms under the 'group of companies' doctrine.

"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," a five-judge Constitution bench presided over by Chief Justice of India D Y Chandrachud said.

The bench, also comprising Justices Hrishikesh Roy, P S Narasimha, J B Pardiwala and Manoj Misra, delivered its judgment on a plea filed by Cox and Kings Ltd in a dispute arising out of an arbitration agreement. A reference was made to the Constitution bench in May 2022 by a three-judge bench to determine the validity of the ‘group of companies’ doctrine in the jurisprudence of Indian arbitration.

In its 152-page judgment, the bench explained the definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties.

“Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties,” it said.

The bench said to apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises case.

“The group of companies doctrine 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 Act," the bench said.

The bench also declared that 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. However, in the case of multiparty contracts, the courts and tribunals are often called upon to determine the parties to an arbitration agreement, it added.

The bench said, “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”.

The bench said 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.

Justice Narasimha wrote a separate and concurring judgment in the matter.

He said 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. He said under Section 7(4)(b), a court or arbitral tribunal will determine whether a non-signatory 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.