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Consent is the fundamental requirement for initiating or concluding an arbitration process. Consent refers to the shared intention of the parties to resolve legal disputes through an arbitral tribunal instead of the court. This intention is established through an agreement of arbitration, which is properly documented. Section 7 of the Arbitration and Conciliation Act, 1996 mandates that parties reduce their intent to submit disputes to arbitration in a written agreement. Thus, parties who have signed the arbitration agreement are typically bound by the law of arbitration, which is considered a cornerstone. However, various legal concepts, including the "group of companies" theory have been used to demonstrate assent and bind non-signatories to an arbitration agreement, although such instances are rare.

The "group of companies" doctrine suggests that a non-signatory can be bound by an arbitration agreement if it belongs to the same group of companies as the signatory and all parties to the agreement mutually intend for the non-signatory to be bound by it. The parties' intentions are usually inferred from their conduct, which involves examining whether the non-signatory participated in negotiating, performing, or terminating the contract. It is not enough to establish consent based solely on the existence of an affiliate relationship between a signatory and a non-signatory.

The "group of companies" doctrine originated from the International Chamber of Commerce (ICC) case of Dow Chemicals Company vs Isover Saint Gobain [ICC Case No. 4131, IX Y.B. COMM. ARB. 131 (1984)].  In this case, Dow Chemicals commenced arbitration against Isover Saint Gobain, who challenged the jurisdiction citing that some of Dow's subsidiaries were not parties to the arbitration agreement. However, the ICC rejected Isover's objection on two grounds: firstly, the subsidiaries played a significant role in executing the contract between Dow and Isover, and secondly, the parent company controlled and directed the subsidiary companies, making them eligible to pursue their claims in arbitration. The ICC held that a non-signatory company could be bound by an arbitration agreement if all parties have a mutual intention to be bound by the proceedings, and if the parties belong to a closely-related group that forms a single economic unit (known as "same economic reality"). While the "group of companies" doctrine aims to enhance procedural efficiency by bringing together companies involved in complex business structures under a single arbitration agreement, it also challenges the concept of corporate personality by lifting the corporate veil.

Applicability of this Doctrine in India:

The "group of companies" doctrine was first recognised by the Hon'ble Supreme Court in the case of Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. & Ors [(2013)1 SCC 641]. The non-signatory to the Arbitration Agreement can become a party to the Arbitration Agreement by applying the principle of “group of companies”. The court ruled that a "non-signatory" who belongs to the same corporate group as a signatory may be included in the arbitration process if it is evident from the circumstances surrounding the transaction that both the signatory and the non-signatory were intended to be bound by the arbitration agreement. The court also highlighted four critical factors that underpin this principle: "direct relationship between the signatories and the non-signatories, direct commonality of the subject matter, the composite nature of the transaction between the parties, and whether the ends of justice would be served by referring the disputes to arbitration." 

Further, In Mahanagar Telephone Nigam Ltd vs Canara Bank (2020) 12 SCC 767, the Hon’ble Supreme Court further observed that the ‘group of companies’ doctrine has been invoked by the Courts and Tribunals in Arbitration, where an Arbitration Agreement has entered into by one of the Companies in the group, and the non-signatory affiliate, or sister, or parent concern is held to be bound by the Arbitration Agreement, if the facts and circumstances of the case envisaged that it was the mutual intention of all the parties to bind both the signatories and the non-signatory affiliates in the group. 

The 'group of companies' doctrine has been upheld by the Supreme Court in the recent judgment of Oil and Natural Gas Corporation Ltd. v. M/s Discovery Enterprises Pvt. Ltd. & Anr, [Civil Appeal No. 2042 of 2022]. According to this doctrine, a non-signatory can be compelled to participate in arbitration proceedings if they are deemed to be an alter ego of the signatory company. In elaborating on the application of this doctrine, the Court identified several factors that must be considered, including:

• Mutual intent of parties;

• Relationship of a non-signatory to a signatory;

• Commonality of the subject matter;

• Composite nature of the transaction; and

• Performance of the contract.

The doctrine provides that a non-signatory may be bound by an Arbitration Agreement where the parent or holding company, or a member of the group of companies is a signatory to the Arbitration Agreement and a non-signatory entity of the group has been engaged in the negotiation or performance of the contract. In the doctrine of ‘group of companies’ the non-signatory, or affiliate non-signatory of the parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement and composite nature of transactions is present between the parties. A composite transaction, refers to a transaction which is interlinked in nature, of where performance of the agreement may not be feasible without the aid, execution and performance of the supplementary or ancillary agreement, for achieving the common object and collectively having a bearing on the dispute.

Earlier in Yogi Agarwal v. Inspiration Clothes the Hon’ble Court observed that “When Sections 7 and 8 of the Arbitration Act refer to the existence of an arbitration agreement between the parties, they necessarily refer to an arbitration agreement in regard to the current dispute between the parties or the subject-matter of the suit. It is fundamental that an arbitration provision, to constitute an arbitration agreement for the purposes of Sections 7 and 8 of the Act, should satisfy two conditions. Firstly, it should be between the parties to the dispute. Secondly, it should relate to or apply to the dispute.”

Now, constructing the above, it was quintessential that the dispute must be between the parties and only applies to them. Although, confirming parties may sign the contract, in the capacity, as to verify the terms of the contract. However, the crux of an arbitration is a dispute and a dispute occurs between the interested parties who have rights and obligations under the arbitration agreement. A mere observer that verifies the terms of the arbitration agreement is not covered under Section 7(1) of the Arbitration and Conciliation Act, 1996, “all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not”. 

Further the Hon’ble Supreme Court has held in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531, “that a person who is not a party to the arbitration agreement, cannot be roped into the arbitration proceedings, roped into an application under Section 9″

After the above references, it may seem conflicting that the distinction made is between parties and non-parties to the contract. However, one may argue that a confirming party may be said to be a party. This is where the crucial concept of “proper party” comes into play. Further as per Order 1 Rule 10(2) CPC, the court can at any point add or remove a plaintiff or defendant. This principle can only be done on two grounds:

(i) if the said party is a necessary party; or

(ii) if the said party is a proper party.

But, as explained above at length the precedents laid down in Chloro Controls it was mentioned that legal basis arising out of a specified contract or an implied condition, then it may bind to a non-signatory party in an Arbitration. Further, the Hon’ble Supreme Court also laid down the principle of group of companies. The said principle was again followed in MTNL (supra), in which the broad conditions where doctrine of the group of companies can be applied to refer to non signatories to  arbitration are given.

Also in the Arbitration Act the term ‘Party’ as defined under section 2 (1) (h) is specifically stating about the party to the arbitration agreement, and not identically states about the signatory of the agreement. This position is further clarified in Section 7 of the Act, where it mentions that the arbitration agreement may also be contemplated by exchange of letters, or telecommunications which provide agreement to which is accepted by one party and not denied by the other. The said fact was further clarified in ascertainment of an arbitration agreement by the Hon’ble Supreme Court in Cheran Properties (2018) 16 SCC 413, that the arbitration agreement shall be in writing but does not exclude the possibility of binding of third parties who may be a non-signatory to the agreement, but is in direct consequential relation. This clarifies that arbitration agreement should be in writing but not necessarily signed by both the parties. In other words the purview of Section 7 does not preclude the tribunal to consider the issue of whether or not non-signatories can be treated as party. Hence, there is no restriction in the Act itself for Indian Courts or Tribunals to bind non-signatories to arbitration. 

It is pertinent to mention that the theories of binding of non-signatory to arbitration are particularly remains in facts to facts of the case. Also, it has been clarified by the Hon’ble Supreme Court in Ameet Lalchand Shah vs Rishabh Enterprises (Civil Appeal no. 4690/2018), that a direct relationship and a direct commonality should exist between the signatory and a non-signatory to be binding to the agreement. But, there might be a situation depending upon case to case, that if a party signs an agreement in the capacity of non-signatory agent and the non-signatory may be bound by the contracts arbitration clause. Despite there was no explicit contract between the two and where the principal refutes the contentions, the court must ascertain the declaration authority involving the concerned parties along with the nature and extent of the situation.  Whether a non-signatory may compel or be compelled would depend on the extent to which an adjudicator would go to find evidence of the requisite consent and intention. Such extent would depend on the factual case. 

The courts have further compelled non-signatories to arbitrate their dispute irrespective of their corporate facade or as and when the courts have found signatory to be an alter ego of the non-signatory or vice-versa.  The Courts have laid down the principle of Corporate veil as and when it would be justified such as where the parent and subsidiary company; 

• Are run by common officer;

• Not having separate profit centres; 

• Have close proximity among themselves

• Financial support or restructure other group members

On applying to the aforementioned principles of Corporate Veil and doctrine of ‘group of companies’ and ‘Composite transactions’ the Courts consider that non-signatory to an arbitration should join to the proceedings

Anomalies Highlighted by Supreme Court

Very recently, in the Cox and Kings Ltd. v SAP India Pvt. Ltd., [Arbitration Petition (Civil) No. 38 of 2020] case, the Supreme Court pointed out various discrepancies in the Chloro Control ruling. One of the main issues was that the Chloro Control decision pertains to the parties' subjective intent to be bound by the arbitration agreement, even though they were not a party to the agreement. The court held that it is challenging to determine the intent of a non-signatory party and that the Supreme Court should clarify this matter.

The Supreme Court also noted that adding non-signatories to the arbitration process undermines the commercial reality and the advantages of having separate corporate entities in the form of subsidiaries. Furthermore, the court acknowledged that enforcing concepts like a single economic entity is challenging in terms of legal principles. The Court deemed that the areas left unresolved by the Chloro Control ruling not only violate the distinct legal identities of companies but also the fundamental principle of party autonomy. In the end, the Hon'ble Court concluded that the Chloro Control decision was driven more by economic and practical considerations rather than legal principles. Therefore, questioning the validity of the legal position in Chloro Control, the Supreme Court has referred the matter to a larger bench to resolve the ambiguity surrounding the 'group of companies' doctrine once and for all.

References:

https://www.mondaq.com/india/arbitration--dispute-resolution/1217422/group-of-companies-doctrine-an-analysis-in-the-context-of-arbitration/

https://www.scconline.com/blog/post/2022/10/19/the-group-of-companies-doctrine-defending-an-endangered-species-of-the-indian-arbitration-law/

https://blog.ipleaders.in/group-of-companies-doctrine-a-defense/

https://www.thehindubusinessline.com/business-laws/gavelgroup-of-companies-doctrine-set-for-an-overhaul/article65488314.ece