Doctrine of Group of Companies of Arbitration law

How did the Supreme Court of India, in its judgment on Cox & Kings Ltd. v. SAP India (P) Ltd., address the applicability of the ‘group of companies’ doctrine in Indian arbitration law.

In the Supreme Court’s judgment in Cox & Kings Ltd. v. SAP India (P) Ltd.[December 2023], the Court upheld the applicability of the ‘group of companies’ doctrine in arbitration.  This doctrine makes an arbitration agreement binding on a firm which, though not a signatory, is a member of a group of companies which is a party to the agreement.

“The group of companies doctrine must 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,” a Constitution Bench headed by Chief Justice of India D.Y. Chandrachud held in a judgment.

Key Findings:

1. Consent and Party Definition: The Court clarified that determining who is a “party” to an arbitration agreement involves issues of consent. The definition of “parties” under Section 2(1)(h), read with Section 7 of the Arbitration and Conciliation Act, 1996 (“Act”), includes both signatories and non-signatories. Implied consent through conduct can indicate a party's agreement to be bound.

2. Doctrine Application: The Court affirmed that the ‘group of companies’ doctrine is a standalone principle, derived from a harmonious reading of Section 2(1)(h) and Section 7 of the Act. It allows for non-signatories to be bound by arbitration agreements if their involvement in the contract suggests a common intention among the parties.

“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,” Chief Justice Chandrachud observed.

1. Factors for Applicability: To apply the doctrine, courts must consider factors such as:

• Mutual intent of the parties

• Relationship between signatory and non-signatory

• Commonality of subject matter

• Composite nature of the transaction

• Performance of the contract[1]

1. “Claiming Through or Under” Misinterpretation: The Court corrected the previous interpretation in Chloro Controls, stating that “claiming through or under” does not grant independent rights to non-signatories but pertains to derivative capacities like assignment or subrogation.

2. Impact on Arbitration Proceedings: The doctrine concerns only the arbitration agreement, not the underlying commercial contract. Non-signatories can be bound to the arbitration agreement without becoming formal parties to the underlying contract.

Overall, the judgment supports a flexible approach to arbitration, emphasizing the practical realities of group companies and their involvement in contractual disputes.

[1]  ONGC v. Discovery Enterprises Pvt Ltd., (2022) 8 SCC 42 [2022 INSC 483].