The decision of the Supreme Court in Cox & Kings Ltd.<\/i> v. SAP India (P) Ltd.<\/i>1<\/sup><\/a> has reignited a debate about the application of the Group of Companies Doctrine (GOCD\/doctrine) to arbitrations in India. But more significantly, it has evoked a discussion on the relevance of \u201cconsent\u201d in arbitration.<\/p>\n Shortly after the Supreme Court, in ONGC Ltd.<\/i> v. Discovery Enterprises (P) Ltd.<\/i>2<\/sup><\/a>, upheld the GOCD and summarised, very succinctly, its elements3<\/sup><\/a>; in Cox & Kings<\/i>4<\/sup><\/a>, a concurrent Bench of the Supreme Court questioned, and even criticised, the way the doctrine has been expounded and applied in India. Notably, in a separate judgment written by Justice Surya Kant, while accepting that the contours of the group of companies doctrine need to be settled by a larger Bench<\/i>5<\/sup><\/a>, it is stated that the GOCD is an integral part of India\u2019s arbitral jurisprudence. Collectively, the Judges posed six questions6<\/sup><\/a> to a larger Bench7<\/sup><\/a> for an authoritative decision on the matter. The Constitution Bench of the Supreme Court has begun hearing the matter.<\/p>\n Those familiar with the doctrine will agree that the conflicting viewpoints and the referral of the matter to a larger Bench is not surprising. While many would argue that absent its application, arbitration, as a means to resolve commercial disputes, would be less effective, others perceive the doctrine as being hostile to the concept of \u201ca separate legal entity\u201d. But to the traditional lawyer in India, the main concern is the doctrine\u2019s propensity to uproot the rule of free consent that is so essential to arbitration and Indian contract law in general. The Supreme Court in Cox & Kings<\/i>8<\/sup><\/a> called out this concern.<\/p>\n Some modern academics and lawyers question this \u201cover reliance\u201d on consent. They make arguments on why it is time to rethink the need for consent in arbitration.9<\/sup><\/a> It is suggested that we should move away from \u201cconsent\u201d and make \u201cthe dispute\u201d the central and determining theme of arbitration.10<\/sup><\/a> Others suggest that arbitration should be a \u201cdefault\u201d choice.11<\/sup><\/a> Interestingly, \u201cnon-consensual arbitration\u201d (an oxymoron to the traditional lawyer) is no longer a theory. It is being practised in some jurisdictions and our Supreme Court has affirmed the concept.12<\/sup><\/a> In fact, some suggest that \u201creal consent\u201d arguably ceased to be the touchstone of arbitration law some time ago.13<\/sup><\/a><\/p>\n The question though is whether such non-consensual form of arbitration, be it in the form of the GOCD or otherwise, is at all legally sustainable in India. Is it not opposed to the underlying legislative policy on which our general arbitration and contract laws are founded?14<\/sup><\/a> The Supreme Court, we hope, will answer this.<\/p>\n This paper broadly summarises the legal position surrounding the GOCD in India with reference to relevant judicial decisions. It also discusses the concerns raised and questions posed by the Supreme Court in Cox & Kings<\/i>15<\/sup><\/a> for determination by a larger Bench.<\/p>\n The principle that rights and obligations of an arbitration agreement apply only to the agreement\u2019s parties is a straightforward application of the doctrine of privity of contract, recognised in both common and civil law jurisdictions.16<\/sup><\/a><\/p>\n Even leading international arbitration conventions adopt the principle that an agreement to arbitrate binds only the parties to such agreement. Article 2(1) of the New York Convention impliedly recognises the subjective limits on the binding nature of arbitration agreements, providing that contracting States \u201cshall recognise an agreement in writing under which the parties undertake to submit their disputes to arbitration\u201d.17<\/sup><\/a><\/p>\n The GOCD envisages, under certain circumstances, the extension of an arbitration agreement signed only by one or some of the companies of a group to other non-signatory companies of the same group.18<\/sup><\/a> The question of extending an arbitration agreement to non-signatory parties consequently involves extending the jurisdiction of the Arbitral Tribunal to or over such parties.<\/p>\n While the doctrine was initially developed by a number of ICC Tribunals and French Courts,19<\/sup><\/a> the findings in Dow Chemical<\/i>20<\/sup><\/a> case are considered to be the cornerstone of this doctrine.<\/p>\n The GOCD drew international recognition in the ICC award in Dow Chemical<\/i> v. Isover Saint Gobain<\/i>.21<\/sup><\/a><\/p>\n In Dow Chemical<\/i>22<\/sup><\/a> , a French subsidiary (Dow Chemical France) and its American parent (Dow Chemical USA) commenced arbitration against the counterparty, Isover Saint Gobain, based on an arbitration clause contained in a contract to which neither Dow Chemical France, nor Dow Chemical USA were parties. The arbitration clause was contained in a contract executed between Isover Saint Gobain and certain affiliates of the Dow Chemical entities. Expectedly, Saint Gobain questioned the jurisdiction of the Arbitral Tribunal on the ground that Dow Chemical France and Dow Chemical USA were not parties to the underlying arbitration agreement.<\/p>\n The Tribunal rejected the jurisdictional challenge. In its analysis, the Tribunal assessed the circumstances under which the (a<\/i>) negotiation;23<\/sup><\/a> (b<\/i>) performance; and (c<\/i>) termination of the underlying contracts took place.<\/p>\n It noted the following:<\/p>\n Lastly, both Dow Chemical France and Dow Chemical USA played an essential role in the termination of one of the contracts.<\/p>\n<\/li>\n<\/ul>\n In light of the above findings, the Tribunal observed that Dow Chemical USA exercised absolute control over its subsidiaries having either signed the relevant contracts or like in Dow Chemical France, effectively participated in the conclusion, performance and termination of the contracts which reflected the mutual intention of the parties to be bound by the contracts in question. It further stated that irrespective of the distinct juridical identity of its members, a group of companies constitutes a single economic reality, which should be taken into consideration by a tribunal ruling on its jurisdiction.<\/p>\n The award in Dow Chemical<\/i>24<\/sup><\/a> was challenged by Isover Saint Gobain before the Court of Appeal in Paris. While rejecting the appeal, the court upheld the finding of the Arbitral Tribunal, holding that:<\/p>\n The arbitrators for good reasons have observed that the law applicable to determine the scope and effects of an arbitral clause providing for international arbitration does not necessarily coincide with the law applicable to the merits of the dispute. Following an autonomous interpretation of the agreement and the documents exchanged at the time of their negotiation and termination, the arbitrators have, for pertinent and non-contradicted reasons, decided, in accordance with the intention common to all companies involved, that Dow Chemical France and Dow Chemical Company have been parties to these agreements although they did not actually sign them and that therefore the arbitration clause was applicable to them as well.25<\/sup><\/a><\/i><\/p>\n The Dow Chemical<\/i>26<\/sup><\/a> case thus crystallised the concept of group of companies in international jurisprudence. What is notable though is that in this case, the non-signatories over whom arbitral jurisdiction was extended were the claimants and not parties resisting arbitration. The third parties, in this case, freely consented to arbitrate.<\/p>\n In India, the basis for extension of an arbitration agreement to non-signatories was crystallised in the Supreme Court\u2019s landmark decision in Chloro Controls<\/i>28<\/sup><\/a>. The Supreme Court did so primarily based on the language of Section 45<\/a> of the Arbitration and Conciliation Act, 1996<\/a> (the Arbitration Act) which is applicable to foreign seated arbitrations to which the New York Convention applies.29<\/sup><\/a> Section 45 provides for reference of disputes to arbitration at the instance of a party to an arbitration agreement or any person claiming through or under<\/i> such party. Importantly, at the relevant time, the corresponding provision applicable to India seated arbitrations (i.e. Section 8 of the Arbitration Act) did not contain the words \u201cany person claiming through or under<\/i>\u201d. These words have since been included in Section 8 also.<\/p>\n The underlying transaction in Chloro Controls<\/i>30<\/sup><\/a> , involved multiple Indian and foreign parties as well as multiple contracts amongst such parties.<\/p>\n As noted by the Supreme Court in Cox & Kings<\/i>31<\/sup><\/a> , there are some material contradictions in the observations of the Supreme Court in Chloro Controls<\/i>32<\/sup><\/a>. Firstly, while expounding on the doctrine, the court expressly noted that the intention of parties was a very significant element that needs to be factored in while extending an arbitration agreement to non-signatories.33<\/sup><\/a> At the same time, the court propounded the \u201ccomposite transaction\u201d theory to cover situations in which an arbitration agreement could be extended to a non-consenting signatory, albeit in exceptional cases.<\/p>\n In deciding the ambit of the doctrine, the court set out four factors that need to be taken into consideration, namely: (i<\/i>) the \u201cdirect relationship\u201d of the non-signatory to the signatory to the arbitration agreement; (ii<\/i>) the \u201cdirect commonality\u201d of the subject-matter; (iii<\/i>) the transaction should be of a \u201ccomposite nature where performance of (the principal) agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreement\u201d; and (iv<\/i>) whether referring disputes under all agreements would \u201cserve the ends of justice\u201d.34<\/sup><\/a><\/p>\n It however stressed that courts will have to examine such pleas with greater caution and by definite reference to the language of the contract and intention of the parties. The principle of \u201ccomposite performance\u201d would have to be gathered from the conjoint reading of the principal and supplementary agreements on the one hand and the explicit intention of the parties and the attendant circumstances on the other.35<\/sup><\/a><\/p>\n Subsequently, in Cheran Properties Ltd.<\/i> v. Kasturi and Sons Ltd.<\/i>,36<\/sup><\/a> the Supreme Court carried forward the above approach, albeit this time in the context of an arbitral award.<\/p>\n Recognising the changing role of modern business transactions, the Court noted that these are often effectuated through multiple layers and agreements.37<\/sup><\/a> The circumstances in which companies have entered into such agreements may reflect an intention to bind both signatories and non-signatories within the same group. Referring to the GOCD doctrine, it stated that it is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.38<\/sup><\/a> It further added that while holding a non-signatory to be bound, courts approach the matter by attributing a business sense to the transactions in question, to attempt to locate the true essence of the business arrangement as well as the intent to bind someone not formally a signatory but who had assumed the obligation to be bound by the actions of a signatory.39<\/sup><\/a><\/p>\n The court also discussed Section 35 of the Arbitration Act which postulates that an arbitral award \u201cshall be final and binding on the parties and persons claiming under them<\/u> respectively\u201d. Interpreting Section 35 of the Act, the Court held that the phrase \u201cpersons claiming under them\u201d widens the net in terms of the persons who the arbitral award seeks to bind.40<\/sup><\/a> It does so by reaching out not only to the parties but to those who claim under them, as well.41<\/sup><\/a> It concluded that the expression \u201cpersons claiming under them\u201d is thus, a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings.42<\/sup><\/a><\/p>\n In MTNL<\/i> v. Canara Bank<\/i>43<\/sup><\/a> , the facts involved a lengthy dispute resolution path that culminated in another dispute, regarding whether the parties had agreed to arbitrate the original dispute. The petitioner, Mahanagar Telephone Nigam Ltd. (MTNL), had placed bonds with the second respondent, Can Bank Financial Services Ltd. (CANFINA), which were bought up by CANFINA\u2019s parent company, Canara Bank during a market shock.44<\/sup><\/a> However, due to a pre-existing contractual dispute with CANFINA about the bonds, MTNL refused to register the bonds in Canara Bank\u2019s name.45<\/sup><\/a> Subsequently however, when the parties commenced arbitration, CANFINA was not a party to the proceedings.46<\/sup><\/a><\/p>\n The Supreme Court, relying on the Group of Companies Doctrine, held that CANFINA could be joined in the arbitration. Following the ratio in Chloro Controls<\/i>47<\/sup><\/a> , it held that the circumstances in which the doctrine could be invoked were if (a<\/i>) there is a direct relationship between the party which is a signatory to the arbitration agreement; (b<\/i>) direct commonality of subject-matter; and (c<\/i>) composite nature of the transaction between parties.48<\/sup><\/a> However, it also introduced the concept of a \u201ctight group structure\u201d with strong organisational and financial links which constituted a single economic unit or a single economic reality,49<\/sup><\/a> as a second possible parameter to invoke the doctrine.<\/p>\n In the facts of the present case, it noted that CANFINA was set up as a wholly-owned subsidiary of Canara Bank.50<\/sup><\/a> The disputes between the parties emanated out of the initial transaction between CANFINA and MTNL.51<\/sup><\/a> There was thus, a clear and direct nexus between the initial issuance of bonds, subsequent transfer by CANFINA to Canara Bank and the cancellation by MTNL and hence, it would be a futile effort to decide the disputes between MTNL and Canara Bank in the absence of CANFINA.52<\/sup><\/a><\/p>\n Lastly, the Court stated that this was a case of implied or tacit consent on part of CANFINA to be impleaded in the arbitral process since it had participated in various earlier proceedings before different fora and hence, there was a clear intention of the parties to bind both Canara Bank and CANFINA to the proceedings.53<\/sup><\/a><\/p>\n In April 2022, the Supreme Court, while deciding on a challenge to an interim arbitral award, held that a non-signatory company within a group of companies can be held to be bound to an arbitration agreement.<\/p>\n The facts involved a contract that Oil and Natural Gas Corporation Limited (ONGC) had awarded to Discovery Enterprises Private Limited (DEPL).54<\/sup><\/a> Subsequently, due to certain defaults by DEPL under the contract, ONGC initiated arbitration against DEPL and Jindal Drilling and Industries Limited (JDIL), a group entity, to recover its outstanding dues of INR 63.88 crores. JDIL, however, was not a signatory to the contract.55<\/sup><\/a><\/p>\n On 27-10-2010, the Arbitral Tribunal passed its interim order holding that JDIL could not be enjoined in the proceedings since it was a non-signatory.56<\/sup><\/a> This interim award was also upheld by the Bombay High Court on the ground of lack of privity of contract.<\/p>\n Before the Supreme Court, the parties challenged the above findings. The Bench, after outlining the development of the Group of Companies Doctrine in India, noted that a non-signatory may be bound by an arbitration agreement, where (a<\/i>) there exists a group of companies; and (b<\/i>) the parties have made statements or engaged in conduct indicating an intention to bind a non-signatory.57<\/sup><\/a>It thus, established a dual requirement for the application of the doctrine.<\/p>\n Further, it reiterated that the present law on the subject considers the following factors:58<\/sup><\/a><\/p>\n (a<\/i>) mutual intent of parties;<\/p>\n (b<\/i>) relationship of a non-signatory to a signatory;<\/p>\n (c<\/i>) commonality of the subject-matter;<\/p>\n (d<\/i>) composite nature of the transaction; and<\/p>\n (e<\/i>) performance of the contract.<\/p>\n Considering the facts of the case, the Court held that the interim award stood vitiated since it had failed to evaluate the legal foundation of the doctrine, either on law or facts, by rejecting ONGC\u2019s application for discovery and inspection of documents.59<\/sup><\/a><\/p>\n On 6-5-2022, a three-Judge Bench of the Supreme Court delivered its judgment in Cox and Kings Ltd.<\/i> v. SAP India (P) Ltd<\/i>.60<\/sup><\/a><\/p>\n The facts of the case, briefly stated, are as follows.<\/p>\n In 2015, Cox and Kings entered into a series of agreements with SAP India Private Limited (Respondent 1) for availing of software services. There were predominantly three transactions: first<\/i>, a software licence and support agreement, second<\/i>, an agreement containing the terms and conditions governing the implementation of the SAP software (GTC) and third<\/i>, an agreement for the customisation of the software. Clause 15.7 of the GTC contained the arbitration clause in question.61<\/sup><\/a> Disputes arose in the course of the next few years and in 2019, Cox and Kings commenced arbitration against SAP India Private Limited and its parent company (Respondent 2). Notably, Respondent 2 was not a party to the GTC. Since there was no response from either respondent, Cox and Kings filed a Section 11 application before the Supreme Court.62<\/sup><\/a><\/p>\n Relying on the position of law laid down in Chloro Controls<\/i>63<\/sup><\/a> , counsel for the applicant argued that arbitration in India can be invoked even against non-signatories, if the circumstances demonstrate that such was the mutual intention of the parties.64<\/sup><\/a> On the other hand, counsel for the respondents argued that Respondent 2 was neither a signatory nor had it ever agreed to be bound by the agreements between the applicant and Respondent 1. Respondent 2, being a foreign entity did not have any business dealings in India and was a separate and independent legal entity from Respondent 1.65<\/sup><\/a> Further, the Group of Companies Doctrine did not apply in the present case since Respondent 2 was not only a non-signatory but had also never participated in the negotiation process during the drafting of the contract. Moreover, there was no consensus among the parties to be bound by the contract.66<\/sup><\/a><\/p>\n Upon hearing the parties, the Court observed that the Group of Companies Doctrine had been applied in a varied manner post the Chloro Controls<\/i>67<\/sup><\/a> decision and more specifically, without referring to the ambit of the phrase \u201cclaiming through or under\u201d as occurring in Section 8 of the Arbitration Act.68<\/sup><\/a> While the policy consideration of efficiency was often used to allow such joinders, in the absence of a legal basis, efficiency cannot be the sole ground to bind a party to arbitration.69<\/sup><\/a> Thus, in this context, the court felt the need to examine the rationality behind the approach taken by the court in the Chloro Controls<\/i>70<\/sup><\/a> case.<\/p>\n It proceeded to trace the jurisprudential history of the Doctrine in the Indian context. Specifically referring to the Chloro Controls<\/i>71<\/sup><\/a> decision, it stated that this decision introduced the mutual intention of the parties to treat a non-signatory as a party to the arbitration agreement. However, this postulation conflated a contractual understanding of the Group of Companies Doctrine, without alluding to contractual principles. While on the one hand, the court reduced the threshold of arbitration being a consensual affair, on the other hand, the Doctrine is transposed on requirements of contract law.72<\/sup><\/a> Further, the amendment to Section 8 of the Arbitration Act post Chloro Controls<\/i>73<\/sup><\/a> was not accompanied by a corresponding amendment to Section 2(1)(h<\/i>) which defines \u201cparty\u201d. This has created an anomalous situation where a party \u201cclaiming through or under\u201d could be referred to an arbitration but may not have the right to seek interim relief under Section 9 of the Arbitration Act.74<\/sup><\/a> Thus, the impact of the absence of such an amendment, needed to be clearly examined.<\/p>\n Moreover, the court also highlighted the fact that only a small number of nations (such as France and India) have applied the Group of Companies Doctrine in the international arbitration context.75<\/sup><\/a> In light of the above, and more importantly, the fact that the Doctrine, as expounded by Indian courts seeks to join non-signatories as \u201cparties in their own right\u201d as opposed to them \u201cclaiming through or under a signatory\u201d, the court was of the opinion that this resulted in obliterating the commercial reality and the benefits of keeping subsidiary companies distinct.76<\/sup><\/a><\/p>\n It thus held that the law laid down in Chloro Controls<\/i>77<\/sup><\/a> and the decisions following it seemed to be based more on economics and convenience rather than on law.78<\/sup><\/a> It was thus, imperative for the matter to be referred to a larger Bench since it involved questions fundamental to the practice of arbitration in India.79<\/sup><\/a><\/p>\n In a concurring but separate opinion, Justice Surya Kant, agreed with the fact that the contours of the Group of Companies Doctrine needed to be settled by a larger bench. While laying down a position in favour of the Doctrine, he held the following:<\/p>\n The Arbitral Tribunal\u2019s decision in B. The Group of Companies Doctrine<\/h4>\n
Award in the Dow Chemical Case<\/i><\/h4>\n
\n
C. Evolution of the Group of Companies Doctrine in India27<\/sup><\/a><\/h4>\n
(a<\/i>) Chloro Controls<\/i> v. Severn Trent Water Purification Inc.<\/i><\/h4>\n
(b<\/i>) Cheran Properties Ltd.<\/i> v. Kasturi and Sons Ltd.<\/i><\/h4>\n
(c<\/i>) Mahanagar Telephone Nigam Ltd.<\/i> v. Canara Bank<\/i><\/h4>\n
(d<\/i>) ONGC Ltd.<\/i> v. Discovery Enterprises (P) Ltd.<\/i><\/h4>\n
D. The Supreme Court decision in Cox and Kings<\/i> and its referral to a larger Bench<\/h4>\n
\n