In December 2023, the Supreme Court of India delivered a landmark judgment in the dispute involving Cox and Kings, setting a significant precedent on the "Group of Companies" doctrine. This doctrine, pivotal in the context of arbitration agreements and their enforceability within corporate groups, was examined in detail, providing clarity on its application. Cox and Kings was successfully represented by Mr. Divyakant Lahoti, Ms. Madhur Jhavar, and Ms. Vindhya Mehra of Lahoti Advocates, under the leadership of Mr. Hiroo Advani, Senior Partner at Advani & Co.

Background of the Case

The matter centred on the inclusion of SAP India's parent company, i.e. SAP SE which was not a signatory to the arbitration agreement. The Supreme Court's judgment provided a comprehensive analysis of the "Group of Companies" doctrine, which allows for the extension of arbitration agreements to non-signatory entities under certain conditions.

The Supreme Court's Ruling

On 06.05.2022, a three-judge Bench led by Hon’ble J. Ramana (the then Chief Justice); Hon’ble J. Surya Kant and Hon’ble J. A.S Bopanna, while deciding an Application under Section 11 of the Arbitration and Conciliation Act, 1996, wherein a non-signatory was sought to be impleaded, expressed their concerns regarding the applicability of Doctrine of Group of Companies under Indian context, especially keeping in mind, the pendulum of jurisprudence on the subject wherein one jurisdiction has refrained from applying such doctrine and on the other hand a liberal approach is adopted by another jurisdiction.

 

The Five Judge Bench of the Supreme Court has answered the reference made to it by the three-judge bench, holding that the group of companies’ doctrine is an integral part of Indian arbitration law. The Court has also situated the doctrine within arbitration law, without overturning the separate legal personality of individual entities within the corporate group. 

 

Through the judgment, Five Judge Bench has highlighted the importance of delving deep into the molecular details of the complex commercial transactions and focusing on the substance of the relationships within a corporate group to identify the true intent of the parties to the agreement and the non-signatories concerned with the performance of the agreement.  Such exercise is to be undertaken by the Arbitral Tribunal by giving appropriate hearing to the non-signatory for objecting to be impleaded into the Arbitral Proceedings. 

 

Court opined that in case of joinder of non-signatory parties to an arbitration agreement, the two scenarios may prominently emerge: first, where a signatory party to an arbitration agreement seeks joinder of a non-signatory party to the arbitration agreement; and second, where a non-signatory party itself seeks invocation of an arbitration agreement.  In both the scenarios, 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 factual evidence and application of legal doctrine. The tribunal can delve into the factual, circumstantial, and legal aspects of the matter to decide whether its jurisdiction extends to the non-signatory party. In the process, the tribunal ought to comply with the requirements of principles of natural justice such as giving opportunity to the non-signatory to raise objections with regard to the jurisdiction of the arbitral tribunal. This interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of determination of true parties to an arbitration agreement to be decided by arbitral tribunal under Section 16.

 

In essence, the Supreme Court has placed ‘conduct and intention’ of signatories and non-signatories, on a pedestal. This approach aligns with the overarching goal of fostering a pro-arbitration environment, even when multiple parties including non-signatories, are involved.

 

The Hon’ble Five Judge Bench of the Supreme Court has held that Chloro Controls is erroneous to the extent it held that non-signatories can be roped in by invoking the phrase 'parties claiming through or under,' as the said phrase is used to bind successors-in-interest of party in a derivative capacity.  And in conclusion, the Supreme Court held that:

 

i.               The High Court/Supreme Court at the referral stage under Section 11 of the Arbitration Act must leave it to the arbitral tribunal to decide whether non-signatories are bound by the arbitration agreement or not.

ii.             'Parties’ as defined under Section 2(1)(h) read with Section 7 of the Act, includes both signatory and non-signatory parties to the arbitration agreement.

iii.           The role and relationship of a third-party, as may be specified in the agreement, could be a factor of their consent to be bound by the arbitration agreement.

iv.           Section 7 of the Act does not exclude the possibility of binding third-parties.

v.             The principle of alter ego or piercing the corporate veil cannot be made the basis for the application of the group of companies doctrine.

vi.           The principle of group of companies has an independent existence as a principle of law which stems from a balanced reading of Section 2(1)(h) along with Section 7 of the Act.

vii.         To apply the group of companies doctrine, courts or tribunals have to consider all cumulative factors as laid down in ONGC v. Discovery Enterprises, in which the Supreme Court held that that in addition to the cumulative factors laid down in Chloro Controls, the performance of the contract was also an essential factor to be considered by the courts and tribunals to bind a non-signatory to the arbitration agreement. Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine.

viii.        The persons claiming 'through or under' can only assert rights in a derivative capacity.

ix.           An arbitration agreement must be written, but it need not be signed.

Implications for the Corporate Sector

This judgment has far-reaching implications for the corporate sector, especially for conglomerates and multinational corporations with intricate corporate structures. It highlights the importance of considering the ramifications of arbitration agreements and their potential extension to all entities within a corporate group.

The Supreme Court's judgment, in the Cox and Kings case, significantly influenced by the adept representation by Mr. Divyakant Lahoti, Ms. Madhur Jhavar, and Ms. Vindhya Mehra of Lahoti Advocates, led by Mr. Hiroo Advani of Advani & Co., marks a pivotal development in the "Group of Companies" doctrine. It offers a clearer framework for the doctrine's application, reflecting the complexities of modern corporate structures and ensuring that arbitration agreements are interpreted in alignment with the parties' intentions. This ruling is set to have a lasting impact on arbitration practices and contract structuring within corporate groups across India.