‘Group of companies’ doctrine upheld in Indian arbitration law

According to the doctrine, an arbitration agreement entered into by a company within a group of companies may bind its non-signatory affiliates, provided the parties’ mutual intention was to bind both signatories and non-signatories. The doctrine was challenged on grounds that it interferes with party autonomy, and the convention that only a party to a contract can sue under it, known as privity of contract, and separate legal personality.

In a recent case between Cox and Kings Limited and SAP India, the court ruled that companies can be bound by arbitration agreements they haven’t signed if they are part of a ‘group of companies’ that has signed the agreement and several factors indicate their ‘implied consent’ to be bound by the agreement. According to the court, the doctrine “is a means of identifying the common intention of the parties to bind a non-signatory to [an] arbitration agreement by emphasising and analysing the corporate affiliation of the distinct legal entities".

An arbitration agreement must be in writing to be valid, but there is no compulsory requirement that it should be signed by the parties.

Non-signatories could be bound where “factual, circumstantial and legal aspects of the matter” point to their inclusion as parties. Those aspects include the surrounding circumstances of the “formation, performance and discharge of the contract”, as well as additional factors such as “direct relationship with the signatory parties, commonality of subject-matter, composite nature of the transaction and performance of the contract”.

The doctrine now forms part of Indian law.

Arbitration expert Scheherazade Dubash of Pinsent Masons said: “Since the court has made clear that being a signatory to an arbitration agreement is not the sole determinant of being a ‘party’ to the arbitration agreement, corporate affiliates must exercise caution before participating in negotiations and performance of contractual obligations of other companies within the same group.”

The Indian Supreme Court first applied the group of companies doctrine in 2013 in a case between Chloro Controls India and Severn Trent Water Purification. At the time, the court found that the scope of arbitration agreements could extend to non-signatory entities within a group of companies, based solely on the common intention of the parties involved in a composite transaction to be bound by an arbitration agreement.

In this more recent case the court acknowledged the foundational role of consent in arbitration but also noted the need to adapt this principle to modern commercial realities. It said that situations often arise where the signatory company is not always the entity that negotiates or performs the contractual obligation, and that an emphasis on formal consent in such situations would lead to the exclusion of non-signatories from the scope of the arbitration agreement, generating lots of different sets of legal proceedings and fragmentation of disputes.

“The court’s decision underscores the importance of a detailed examination of parties' relationships and intentions in determining whether an entity can be considered 'party' to an arbitration agreement despite not being a signatory,” Dubash said. “It is an important development for multi-party and multi-contract arbitrations in India and clarifies the law on the group of companies doctrine in the country, whilst harmonising the standards of judicial intervention at different stages of arbitration.”

She added: “The decision will be of interest to those doing business in India and reduces the scope for conflicting decisions by different courts of the country.”