10 May 2022

Arbitration – Group of Companies doctrine for inclusion of non-signatories – Supreme Court refers issue to Larger Bench

Dealing with an application filed under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), the 3-Judge Bench of the Supreme Court has doubted the correctness of its earlier decision in the case Chloro Controls India Pvt. Ltd. v. Seven Trent Water Purification and number of subsequent decisions following it on application to the ‘Group of Companies Doctrine’.

In Chloro Controls case, the Apex Court had earlier held that arbitration is possible between a signatory and a third party (non-signatory), however, to proceed with such arbitration, there must be a legal relationship between the non-signatory and the party to the arbitration agreement.

The Court now in the case Cox and Kings Limited v. SAP India Private Limited [Judgement dated 6 May 2022] has held that the areas which were left open by the Court in Chloro Control have created certain broad­based understanding of the doctrine which may not be suitable and  would  clearly  go  against  distinct  legal  identities of  companies and party autonomy itself.

According to the Court, the concepts like single economic entities are economic concepts difficult to be enforced as principles of law. It was also of the view that the line of judgments by the Court, beginning with Chloro Controls, premised more on convenience and economic efficiency in resolution of disputes rather than a consistent and clear legal doctrine which respects party autonomy and intent. It said that hence there was a clear need for having a re­look at the doctrinal ingredients concerning the Doctrine.

The Court also noted that various cases were decided by the Court, without referring to the ambit of the phrase ‘claiming through or under’ as occurring under the amended Section 8 of the Arbitration Act. It was also of the view that the scope of judicial reference at the stage of Sections 8 and 11 of the Arbitration Act, needs to be relooked considering the ambit of unamended Section 2(1)(h) of the Arbitration Act. 

The Apex Court found it appropriate to refer the aspect of interpretation of ‘claiming through or under’ as occurring in amended Section 8 of the Arbitration Act qua the doctrine of a group of companies to a larger Bench to provide clarity on this aspect and mentioned the following issues:

  1. Whether phrase ‘claiming through or under’ in Sections 8 and 11 could be interpreted to include the ‘Group of Companies’ doctrine?
  2. Whether the doctrine as expounded by the Chloro Control Case and subsequent judgments is valid in law?

It may be noted that a separate Order was passed by Hon’ble Mr. Justice Surya Kant, wherein though he broadly agreed that the Doctrine needs to be looked into by a Larger Bench of the Supreme Court, the Hon’ble Justice was of the view that the Doctrine is a means of grappling with complex multi­party business transactions which necessarily involve more than  two  parties, even if these additional parties do not finally and formally sign the contract. According to him, the Doctrine helps to ensure that arbitration as a dispute resolution mechanism is able to adapt to this reality.

Noting that a large chunk of Indian business houses is composed of family run entities or groups and the individuals running these entities often occupy multiple roles in different companies within the group, the Hon’ble Justice opined that it becomes even more relevant to have a doctrine such as the Group of Companies in Indian arbitration law.

Among various other questions proposed to be referred to the Larger Bench, the important ones were 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 and that whether  the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?

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