“Group of Cos. Doctrine” Applies to Arbitration in India and Can Be Invoked to Bind Non-Signatories Parties | SC

Case Details: Cox and Kings Ltd. v. SAP India (P.) Ltd. [2023] 157 taxmann.com 142 (SC)

Judiciary and Counsel Details

• Dr. Dhananjaya Y Chandrachud, CJI
• Hrishikesh Roy, J.B. Pardiwala & Manoj Misra, JJ.

Facts of the Case

In the instant case, the Supreme Court upheld the ‘group of companies’ doctrine in the arbitration law proceedings, the Court held that the Group of Cos. doctrine” applies to arbitration in India & can be invoked to make arbitration agreement binding on non-signatory parties. The Court further clarified that the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine;

The questions before the consideration for Court were as under:

(a) Whether the group of companies doctrine should be read into Section 8 of the Arbitration Act or whether it can exist in Indian jurisprudence independent of any statutory provision?

(b) Whether the group of companies doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?

(c) Whether the group of companies doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?

(d) Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the group of companies doctrine into operation even in the absence of implied consent?

Concerning the question of the independent existence of ‘doctrine of group of companies’, the Court held that 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;

On the question of ‘single economic reality’, the Court held the doctrine to be applicable when there is a tight group structure or single economic reality, without any reference to the intention of the parties. However, the Court ultimately relied on implied or tacit consent by the non-signatory, evidenced by its conduct, to hold that it is a party.

“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; The 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;

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 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”; Court Said

Supreme Court Held

With regard to the question of basis of application of ‘group of companies doctrine’, the Court held that the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine;

“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;

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. Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine;

The persons “claiming through or under” can only assert a right in a derivative capacity;

The approach of the Court in Chloro Controls to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law;

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;” Court Said

The Court gave direction to the referral Court that at the referral stage, the court should leave it for the arbitral tribunal to decide whether the arbitration agreement binds the non-signatory; and In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.