Applicability of group entity doctrine to non-signatories of arbitration agreement

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

i. 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.

ii. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;

iii. 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;

iv. 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;

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

vi. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement;

vii. The Group of Companies doctrine is also premised on ascertaining the intention of the non-signatory to be party to an arbitration agreement. The doctrine requires the intention to be gathered from additional factors such as direct relationship with the signatory parties, commonality of subject-matter, composite nature of the transaction, and performance of the contract.

viii.Since the purpose of inquiry by a court or arbitral tribunal under Section 7(4)(b) and the Group of Companies doctrine is the same, the doctrine can be subsumed within Section 7(4)(b) to enable a court or arbitral tribunal to determine the true intention and consent of the non-signatory parties to refer the matter to arbitration. The doctrine is subsumed within the statutory regime of Section 7(4)(b) for the purpose of certainty and systematic development of law.

ix. The expression “claiming through or under” in Sections 8 and 45 is intended to provide a derivative right; and it does not enable a non-signatory to become a party to the arbitration agreement. The decision in Chloro Controls (supra) tracing the Group of Companies doctrine through the phrase “claiming through or under” in Sections 8 and 45 is erroneous. The expression ‘party’ in Section 2(1)(h) and Section 7 is distinct from “persons claiming through or under them”.

i. While the SCI ruled that phrase – claiming through or under in S. 8 ,11 and 45 cannot mean to include Group Company Doctrine, the SCI subsumed the principles of Group Company Doctrine under S. 7 of the Arbitration Act.

ii. The SCI subsumed the Group Company Doctrine under S .7 of the Arbitration Act with respect to formation of arbitration agreement as opposed to recognizing the Group Company Doctrine under S. 8 ,11 and 45 of the Arbitration Act in the context of a particular phrase – claiming through or under.

iii. The approach of the SCI is sensible and practical, as the Group Company Doctrine needs to first pass muster of S. 7 of the Arbitration Act. Once the referral court prima facie determines the existence of arbitration agreement and whether the non-signatory is a veritable party to the arbitration agreement, the tribunal will decide whether the non-signatory is bound by the arbitration agreement. The same prime facie principle will apply should a non-signatory invoke the arbitration agreement.

iv. The case highlights the importance of avoiding boilerplate arbitration clauses where group entities related to the contracting parties are involved in some capacity in performance of a contract or discharge of an obligation or otherwise.