BINDING THIRD PARTIES TO ARBITRATION – THE NEW NORM?

Shweta Surana, Assessment Intern

INTRODUCTION

One of the most fundamental cornerstones of arbitration is consent.  It is by virtue of this unique characteristic of arbitration, that only those parties which consented to the arbitration agreement can be bound by the agreement and the resulting arbitral award.  However, like all things go, there exists an exception for this principle as well.  

Sometimes, there are certain disputes that cannot be resolved without involving a third party to the arbitration.  At times like this, it is crucial to decipher whether there exists implied consent of the third party to be bound by the arbitration agreement.  For this very purpose, numerous legal doctrines are used.  One of the most contentious legal doctrines in this regard, in India, is the group of companies’ doctrine.  To put it simply, this doctrine purports that a non-signatory to the arbitration agreement can be bound by it, if the non-signatory and the party to the arbitration agreement belong to the same group or company.  For example, if the non-signatory is a parent company, then it can be bound by the arbitration agreements entered by the subsidiary company, if the facts of the particular case portray that it was the mutual intention of all the parties to bind the non-signatories to the agreement.[1] These are scenarios wherein numerous entities form part of a single corporate group and hence may be referred to as a single legal entity.

However, it is important to keep in mind that mere affiliation to an entity cannot obligate a non-signatory to be bound by the arbitration agreements of the entity.  There has to be some act by the non-signatory that can be read and interpreted as its express or implied consent to be bound by the arbitration agreement of the signatories.

LEGAL POSITION IN INDIA

One of the earliest pronouncements on this aspect was in the case of Sukanya Holdings vs. Jayesh Pandya^[2] wherein the Apex court held that only signatories to an arbitration agreement can be bound by the agreement even when the dispute arose in regards to the same transaction between various parties.  The same cause of action cannot be bifurcated into matters before the tribunal and other matters before the courts.  Therefore, any person who was not a party to the arbitration agreement could not be brought into the arbitration.

However, taking a pro-arbitration approach, in Chloro Controls,^[3] the Apex court bound non-signatories by the arbitration agreement.  The case was in relation to a section 45 application, under Part II of the Arbitration and Conciliation Act, 1996.  In this landmark case, the court applied the group of companies’ doctrine to understand the relation between the signatory and the non-signatory party and upheld the application of the doctrine as the arbitration clause was present in the mother agreement.  Section 45 of the Arbitration Act also upholds the right of 3^rd parties to claim under the Act and this can be interpreted by the inclusion of the words ‘any person claiming through or under him’.  Even the definition of ‘party’ in the 246^th law commission report[4] comes to mind which discusses on consent to be bound by arbitration.  The report clearly lays down that the meaning of the word ‘party’ is not to be read restrictively.

It is a known fact that the scope of Section 8 of the Arbitration Act has been extended and increased to bring it at par with Section 45 of the Act, post the 2015 Amendment.[5]  Previously, under section 8 of the Act, only a party to the arbitration agreement could claim for reference to arbitration.  However, in the 2015 amendment, the following change was included to make non signatories bound by the arbitration agreement in a domestic arbitration as well. The terms included were ‘a party to the arbitration agreement or any person claiming through or under him’.

It is to be noted that even before the 2015 amendment, the courts applied the Chloro controls reasoning even in domestic arbitrations and referred non-signatories to arbitration, like in the Rakesh v. Milton Global^[6] case of 2014.  In a plethora of judgments such as Mahanagar Telephone Nigam Ltd. v. Canara Bank^[7] and Ameet Lalchand v. Rishabh Enterprises,^[8] the Apex court of India had referred third parties or non-signatories to arbitration, by applying the group of companies’ principle.

TESTS FOR APPLICATION OF THE DOCTRINE

Even though there is no standard, with the increasing usage of the group of companies’ doctrine in India, a few basic tests or parameters for its application have been developed by numerous case laws.  One of the foremost tests for the application of this doctrine is the intention of the parties.  A non-signatory may be bound by the arbitration agreement if the non-signatory was actively involved in the enforcement or performance of the contract or stands to benefit from the performance of the contract.  Another common test before invocation of this doctrine is the test of common control or transaction.  The doctrine can be applied if the series of transactions or multiple contracts all form part of the same composite transaction.

Different courts have applied different tests and considerations before gauging mutual intention or applying the doctrine.  Recently in ONGC v. Discovery Enterprises Pvt Ltd.[9], the full bench of the Supreme Court set aside an arbitral award that failed to consider and correctly apply this doctrine.  The judgement draws on the following five considerations that apply justifying the invocation of the group of companies’ doctrine:[10]

1. The mutual intent of the parties;
2. The relationship of a non-signatory to a party which is a signatory to the agreement;
3. The commonality of the subject matter;
4. The composite nature of the transaction;
5. The party that has actually performed the contract. 

At this juncture, it is important to discuss the judgement in Cox & Kings Limited v. SAP India[11] wherein another full bench of the Supreme Court questioned the basis and applicability of the group of companies’ doctrine.  The court reasoned that the doctrine goes against the basic tenants of party autonomy and distinct corporate personality, and has accordingly referred the matter to a larger bench for clarity on basis, scope and applicability of the doctrine.

AUTHOR’S OPINION

While encouraging at the beginning, the application of the doctrine has to be the exception and not the norm.  Commercial contracts and arrangements are consciously made so as to leave out certain parties from the ambit of the contract.  Application of the doctrine or enforcement of the arbitration agreement should not be encouraged to an extent where the court or arbitral tribunal reads in-between lines for a mutual intention to bind the non-signatory, while ignoring the actual intention of the parties that has been expressed in the agreement.  Exercise of this doctrine requires caution.  It is to be kept in mind that even after the 246^th Law Commission Report, the Parliament chose not to amend the definition of the word ‘party’ so as to not freely include non-signatories.

With that being said, one cannot possibly ignore the benefits of the application of this doctrine.  One of the most successful scenarios of invocation of this doctrine is when the claimant wishes to bind the financially healthier non signatory to the arbitration agreement because the party to the agreement may not be in a financial position to satisfy the award. 

However, it goes without saying that the judgement in Cox & Kings has cast doubts upon the application of this doctrine and the larger bench’s judgement is worth looking out for. Presently, it is at the behest of the arbitral tribunal to adopt any rationale as they please. Even if such an award passed is challenged, the courts can follow the same pattern. Hence, before the larger bench can provide clarity on inclusion of non-signatories to an arbitration agreement via the group of companies’ doctrine, the topic remains a grey area with valid arguments from both sides.

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[1] Mahanagar Telephone Nigam Ltd. v. Canara Bank And Ors., 2019 SCC Online SC 995, para 10.5.

[2]  Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya And Ors (2003) 5 SCC 351.

[3]  Chloro Controls (I) Pvt. Ltd. v. Severn Trent Water Purification Inc. And Ors (2013) 1 SCC 641

[4] Law Commission Of India, Report No. 246, Amendments to the Arbitration and Conciliation Act 1996, August 2014, page 42. 

[5] The Arbitration and Conciliation (Amendment) Act, 2015.

[6] Rakesh S. Kathotia & Anr v. Milton Global Ltd. & Ors, 2014 SCC Online Bom 1119.

[7] Supra note 1.

[8] Ameet Lalchand Shah And Ors. v. Rishabh Enterprises And Ors, (2018) 15 SCC 678.

[9] ONGC v. Discovery Enterprises Pvt Ltd., Civil Appeal 2042 of 2022

[10] ibid para 26.

[11] Cox & Kings Limited v. SAP India Private Limited & Anr Arbitration Petition (Civil) 38 of 2020, SC.