Arbitration pact: Supreme Court upholds group of companies doctrine

The Supreme Court on Wednesday ruled that non-signatory firms can be bound by arbitration agreement under the ‘group of companies’ doctrine.

This means that companies that belong to the same group of firms, but are not signatories to the arbitration agreement, can still be bound by 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,” the Bench of Chief Justice of India (CJI) DY Chandrachud, Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra said in the Cox and Kings vs SAP India Pvt Ltd verdict.

A party who is not a signatory to the arbitration agreement will still be bound by it provided that there is a clear and defined legal relationship between signatories and non signatories.
 

“The signature of a party in an agreement is the most profound expression of consent of a person to submit to jurisdiction. However, the corollary that persons who have not signed aren't part of the agreement may not always be correct,” the Bench said.
 

The case pertains to the dispute between Cox and Kings and software firm SAP. Cox and Kings had employed SAP to install software in its systems. However, Cox and Kings later said that SAP did not comply with the agreement properly and started an arbitration proceeding against it.
 

In the proceedings, SAP’s German arm SAP SE was made a party. SAP said its German arm was not a party to the arbitration agreement so it could not be dragged into the dispute. Cox and Kings invoked the ‘Group of Companies’ doctrine, saying that the German arm can be made a party even if it is a non-signatory in the arbitration agreement.
 

In 2022, former CJI NV Ramana referred the matter to a five-judge Constitution Bench.
 

The doctrine was contested by some parties, who said that it did not consider individual party autonomy and the separate legal entity concept.
 

Tejas Karia, partner, head of arbitration, Shardul Amarchand Mangaldas & Co, said the judgment will reduce the possibility of abuse of the doctrine.

“The recognition of corporate separateness and taking away the mechanism of piercing corporate veil to join non-signatory will help reduce misuse of this doctrine by joining non-signatory only because of holding-subsidiary relationship. The greater authority given to the arbitral tribunal to decide the status of non-signatory party is a pro-arbitration step. The narrowed contours for invoking the Group of Companies’ will reduce the scope and possibility of abuse of the doctrine,” he said.

Suvigya Awasthy, partner, PSL Advocates & Solicitors, said the decision of binding non-signatories has been left with the arbitral tribunal that is aligned with the doctrine of kompetenz-kompetenz (competence or jurisdiction to rule) as well as the recent trend to reduce judicial interference in arbitration.

“It would be safe to say that the judgment of the Constitutional Bench is commercially sound that appreciates the nuances of business transactions involving multiple entities and concurrently reinforces the factors for determining the impleadment of non-signatories,” Awasthy said.
 

The court said that an agreement to refer disputes to arbitration must be in a written form, as against an oral agreement, but need not be signed by the parties. 

What’s the likely impact

•  Reduce the possibility of abuse of the doctrine
•  Enhance the efficacy of arbitration
•  Give greater authority to the Arbitral Tribunal
•  Reduce judicial interference in arbitration