The Constitution Bench of the Supreme Court of India has delivered its judgment on the reference made regarding the applicability of the “Group Companies Doctrine” under Indian arbitration law.
JSA appeared for the Respondents SAP India Private Limited and SAP SE GmbHbefore the Constitution bench of the Supreme Court. Though the full text of the judgement is not available yet, the Court has held that the group of companies doctrine cannot have a blanket application and has clarified the parameters regarding its application. To ascertain whether a non-signatory party is bound by the arbitration agreement, the conduct and intention of the parties needs to be considered.
Key aspects pronounced in court are as follows:
- The definition of parties under Section 2(1)(h) read with Section 7 of the Arbitration Act, 1996 (“Act”) includes both signatory as well as non – signatory parties.
- Conduct of the non-signatory parties could be an indicator of consent to be bound by the arbitration agreement.
- The requirement of a written arbitration agreement under Section 7 of the Act does not exclude the possibility of binding non – signatory parties.
- Under the Act, the concept of parties 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 of companies while determining the common intention of the parties to bind the non-signatory to the arbitration agreement.
- The principle of alter ego or piercing the corporate veil cannot be made 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 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 Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. and Anr. 2022 SCC OnLine SC 522. Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine.
- Persons claiming “through or under” can only assert rights in a derivative capacity
- The approach of the Supreme Court in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. (2013) 1 SCC 641to the extent that it raised the group of companies doctrine through the phrase “claiming through or under” is against the well-established principles of contract law and corporate law.
- The group of companies doctrine should be retained in Indian arbitration law and jurisprudence, considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements.
- At the referral stage, the referral court should leave for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement.
- Any authoritative interpretation in this judgment to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to an arbitration agreement.
The reference made to the Constitution Bench was answered in the above terms. The Registry of the Supreme Court has been directed to place the individual matters to the respective benches for directions on the administrative side. This judgement clarifies the place of the group of companies doctrine in Indian law.
The Team: Partner – Farhad Sorabjee, Dheeraj Nair, Pratik Pawar, Shanaya Cyrus Irani, Kumar Kislay, Senior Associate – Siddhesh Pradhan and Associate – Aishna Jain
The matter was led by Ritin Rai, Senior Advocate.
Practicing as a lawyer since 2000 in Indian courts and tribunals. Appeared in twenty High Courts of India and conducted several arbitrations.