Arbitration Law: Supreme Court Reserves Order On Critical Question

The apex court's decision will answer a question that most recently arose in the Amazon-Future Retail dispute.

<div class="paragraphs"><p>Supreme Court of India. (Source: Reuters)&nbsp; </p></div>
Supreme Court of India. (Source: Reuters) 

The Supreme Court on Wednesday reserved its judgement in a case that will determine whether non-signatories to an arbitration agreement can be bound by it.

The issue had assumed significance in the litigation between Inc. and Future Coupons Pvt. The question was whether Future Retail could be made a party to the arbitration proceedings between Amazon and Future Coupons. The Supreme Court didn't delve into the question directly and upheld the arbitrator's order in the case.

Arbitration law experts saw this as a missed opportunity in clarifying the law on group of companies doctrine. In May last year, the issue came back to the Supreme Court in the litigation between Cox and Kings Ltd. and SAP India Pvt.

In this case, the apex court will determine the applicability of the group of companies doctrine, which binds third parties to the arbitration proceedings if mutual intention existed when the agreement was signed.

Genesis Of The Doctrine

In 2012, the Supreme Court delivered an important judgement that made way for including those who may not have explicitly signed the arbitration agreement.

In what came to be known as the Chloro Controls case, the apex court held that a non-signatory can be made party to international arbitration proceedings if there was a legal relationship between them. The group of companies' doctrine was accepted as a basis to establish this relationship. 

However, a three-judge bench of the top court decided to refer this matter to a five-judge bench, raising doubts on the correctness of principle laid down in the Chloro Controls case. Several senior advocates argued for and against the applicability of the doctrine to bind third parties to arbitration proceedings.

The Doctrine Is Already Ring-Fenced To Avoid Abuse

Senior advocate Abhishek Manu Singhvi said the doctrine was already ring-fenced by the court to avoid its abuse.

The court has enough tools at its disposal so that an innocent party does not get punished. There is no straight-jacket formula for the doctrine and it is ascertained based only on the facts and circumstance of each case, he argued.

"If a party is fully involved in the negotiation and performance of the contract, but the agreement is so designed that he does not want to be a party to the arbitration proceeding, then it should not matter whether he is a signatory or not. The courts should have the power to rope in the said party." - Singhvi's Submission

In the earlier hearings, senior advocate Hiroo Advani and Solicitor General Tushar Mehta also argued in favour of the doctrine, saying:

  • Many foreign jurisdictions have accepted the doctrine on the concept of "implied consent". If the implied consent of a party is translating into an actual performance of the contract, then such a third party can be roped into the arbitration proceeding.

  • In cases where the signatory is an agent of a non-signatory party and is acting on behalf of the non-signatory, then such a party can be compelled to arbitrate even if it's not a part of the arbitration agreement.

  • A non-signatory must not be completely ousted from the scope of an arbitration proceeding as this doctrine is a part of the statute itself.

Arbitration Based On Consent And Party Autonomy

Arguing against the doctrine, Senior Advocate Darius Khambata said an arbitration agreement is a contract and in order to bind a non-signatory to it, essentials of a contractual agreement must be satisfied.

There should be some cardinal limits in place when deciding whether a non-signatory can be bound by the agreement, he said.

Arbitration is based on consent and party autonomy.
Senior Advocate Darius Khambata

It was highlighted that India used this doctrine in the most liberal manner, and that many times, any creditworthy member of the group of companies has been roped into the agreement. If limits are not placed on this practice, India would not be an attractive place for arbitration, Khambata submitted.

Senior Advocate Ritin Rai contended that merely being part of a group is not enough and that there must be an intent to unconditionally accept the arbitration agreement. "An arbitration agreement is a matter of consent and not coalition and there must be some standard to rope in the non-signatory."

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