Arbitration Law: Supreme Court Upholds 'Group Of Companies' Doctrine

It says conduct of the non-signatory party can be an indicator of their consent to be bound by the arbitration agreement.

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

It is not necessary for a person or an entity to be a signatory to an arbitration agreement in order to be bound by it, the Supreme Court said on Wednesday while upholding the 'group of companies' doctrine.

The doctrine provides that an arbitration agreement, which is entered into by a company within a group of companies, may bind the non-signatory affiliates if the circumstances demonstrate that the mutual intention of the parties is to bind both the signatories and non-signatories to the agreement.

"The requirement of a written arbitration agreement does not exclude the possibility of binding non-signatory parties," it said.

The court explained that in case of non-signatory parties, it is crucial for a court or a tribunal to determine whether such parties intended to be bound by the agreement.

The underlying basis for the application of the group of companies' doctrine rests on maintaining the corporate separateness of the group of companies while simultaneously determining the common intention of the parties to bind the non-signatory to the arbitration agreement, the court observed.

It said the conduct of the non-signatory party could be an indicator of their consent to be bound by the arbitration agreement.

The apex court laid down the application of this doctrine. It said that to apply this doctrine, the courts and tribunals will have to consider various cumulative factors in a case and that the concept of a single-economic unit cannot be the sole basis for invoking the group of companies' doctrine.

In 2012, the top court delivered an important judgement that made way for including non-signatories to an arbitration agreement.

In what came to be known as the Chloro Controls case, the apex court joined non-signatories as parties to an arbitration agreement in their own rights on the basis that they were signatories to ancillary agreements, which were closely interlinked with the performance of the principal arbitration agreement.

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.

After hearing the case at length earlier this year, the five-judge bench reserved its verdict in April.

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