INDIA’S TAKE ON THE GROUP OF COMPANIES DOCTRINE

Varun Kumar Chopra,

Former Deputy Advocate General & Advocate, Supreme Court of India

The issue of whether Indian courts can utilize their authority to direct parties in legal proceedings with non-signatories to arbitration – and likewise, to appoint arbitrators in cases with non-signatories – has been examined periodically. Being aware of the contractual essence of arbitration, Indian courts were reluctant to impose arbitration on non-signatories. Nonetheless, in numerous instances, it was clear that controversies appropriately meant for arbitration were being pursued in courts (and arbitration evaded) by including non-signatories. This issue often emerged in the setting of joint venture agreements, which included various contracts with distinct dispute resolution clauses, frequently among different affiliates within the same organization. While the exact arrangement of these transactions and the mix of disputing parties differed from case to case, the central question persisted: in transactions involving multiple parties and contracts, what was the court’s responsibility in directing parties (including non-signatories) to arbitration, and what were the boundaries of its authority?

The Supreme Court encountered this scenario in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.[1] (“Chloro Controls”). In a pivotal ruling, a three-judge panel of the Supreme Court directed the parties to arbitration, citing that non-signatory group companies were obligated by the arbitration agreement due to a shared intention of the parties involved. The Supreme Court noted that if a “mother agreement” and various “ancillary agreements” pertain to different aspects of a composite transaction, the arbitration clause in the mother agreement would be binding on all parties engaged in the transaction. The Supreme Court examined sections 8[2] and 45[3], which pertain to the authority of a judicial body to direct parties involved in a legal case to arbitration, stating that an individual bound by an arbitration agreement or a “person claiming through or under him” has the right to request referring the parties to arbitration. The Supreme Court interpreted the statutory language “persons claiming through or under” to broaden the reach of arbitration clauses beyond the direct signatories, encompassing those who played a crucial role in the transaction but may not have explicitly agreed to the arbitration agreement. The Court reasoned that parties engaged in carrying out related contracts, even if they are not signatories to the primary agreement, could be viewed as “claiming through or under” the signatories, particularly when these contracts constituted a unified transaction. The principle established in Chloro Controls[4] was adhered to and its relevance further extended by later rulings. Nevertheless, it was scrutinized by another three-judge panel of the Supreme Court in Cox and Kings Ltd v. SAP India Pvt Ltd[5]. Challenging the validity of the ruling established in Chloro Controls[6], the three-judge panel submitted the issue to a five-judge (constitutional) bench of the Indian Supreme Court. The Supreme Court has definitively ruled on the issue in Cox and Kings. Observing that “consent is fundamental to arbitrations” and that privity rules are relevant, the Supreme Court then examined the Doctrine’s applicability within Indian law.

The Court examined the meaning of an arbitration agreement as outlined in Section 7[7]. It observed that although the Act mandated a written agreement, it did not require signatures from all parties involved. An arbitration agreement might be demonstrated through a series of communications. Therefore, individuals who did not sign the arbitration agreement (the “non-signatories”) could still be considered parties to an arbitration agreement if they had genuinely agreed to it. The Court remarked that this was not about extending an arbitration agreement to outside parties, but instead a method of determining the genuine or ‘true’ parties involved in the dispute. The Court recognized the necessity of embracing a contemporary perspective on consent to more effectively address the commercial realities of composite transactions that involve multiple interconnected agreements and parties. The Court observed that the Doctrine “serves to ascertain the mutual intention of the parties to hold a non-signatory to [an] arbitration agreement by highlighting and examining the corporate relationship of the separate legal entities.” The Court made a distinction between the “alter ego” doctrine and the group of companies doctrine. It highlighted that although the alter ego doctrine entails ignoring a corporation’s distinct legal identity, this Doctrine does not interfere with the legal personality of the entities engaged. Rather, it serves as a method to establish the genuine intent of the parties in order to identify those involved (both signatories and non-signatories) in the arbitration agreement, functioning without the need to pierce the corporate veil. The Court specified that there ought to be limited judicial involvement by courts. In the context of applications to direct parties to arbitration, courts need to assess “prima facie” if a valid arbitration agreement is present. A thorough examination or a judgment on the case’s merits is unnecessary. Likewise, for the selection of arbitrators, courts are consulted only when the designated appointment procedure does not succeed, and the range of review is restricted to an assessment of the arbitration agreement. Any thorough evaluation must be assigned to the arbitral tribunals, which have the authority to define the boundaries of their own jurisdiction.

The issue of the enforceability of arbitration agreements in contracts that are unstamped or insufficiently stamped has recently been a topic of considerable discussion in India. In two earlier instances (SMS Tea Estates[8] and Garware[9]), two-judge panels of the Indian Supreme Court determined that arbitration agreements found in unstamped contracts would be deemed non-existent in legal terms, meaning an Indian court would not acknowledge or enforce the arbitration agreement. This perspective was confirmed by a three-judge panel of the Indian Supreme Court in a later case (while addressing a separate issue), Vidya Drolia v Durga Trading Corpn[10] (“Vidya Drolia”).

In NN Global Mercantile v Indo Unique Flame[11] (“NN Global 1”), a three-judge bench of the Supreme Court of India scrutinized the validity of the legal principles established in previous rulings. The Court determined that an arbitration agreement is viewed as a distinct agreement from the main contract and would not become unenforceable, even if the main contract was deemed unenforceable due to being unstamped or inadequately stamped. Arbitration may begin, and it would be the responsibility of the arbitral tribunal to ascertain if the original contract met the necessary stamping requirements. Due to the discrepancy between the decision made by the three-judge bench in NN Global 1[12] and the stance upheld by an earlier three-judge bench in Vidya Drolia[13], the issue was escalated to a five-judge bench of the Indian Supreme Court.

In NN Global 2, most members of a five-judge bench of the Supreme Court determined that the earlier rulings of SMS Tea Estates[14] and Garware[15] were appropriately adjudicated, and that an Indian court could neither acknowledge nor enforce an arbitration agreement present in an unstamped or inadequately stamped contract. Consequently, courts were unable to appoint arbitrators or direct parties to arbitration if confronted with a contract that was unstamped or insufficiently stamped. It would be essential to initially seize the instrument and ask the parties to rectify the stamping issue before proceeding further. This resulted in considerable delays in starting the arbitration. While NN Global 2 should have been the ultimate authority on the matter, the issue of the enforceability of arbitration agreements in unstamped contracts persisted. It had been examined in previous cases by the Supreme Court until the whole matter was ultimately submitted to the seven-judge in the case of Re. Interplay Between Indian Stamp Act and The Arbitration & Conciliation Act[16] bench due to the “broader implications and outcomes” of NN Global 2.

The Court performed a thorough examination of the Indian Stamp Act, 1899 (the “Stamp Act”) and the Arbitration Act to determine that agreements lacking stamps or inadequately stamped are not void or unenforceable. When confronted with requests to refer parties to arbitration or to appoint arbitrators, courts merely need to confirm the presence of an arbitration agreement and should allow arbitral tribunals to handle any stamping issues.

The Court examined the clauses of the Stamp Act and observed that the legal requirement did not make unstamped agreements null, but stipulated that unstamped agreements could not be used as evidence or processed, recorded, or verified. The Court observed that there exists a distinction between “void” (pertaining to the enforceability of an agreement) and “inadmissible” (related to whether a court could assess or depend on the agreement). The Stamp Act, as a financial law, outlined the method for rectifying a flaw related to stamping. Consequently, it did not anticipate that agreements without stamps would be invalid.

The Court observed that the Arbitration Act allowed for limited judicial intervention, aiming primarily to reduce the oversight role of courts in the arbitration process. It also observed that the Arbitration Act serves as a self-contained framework and allows for the separation of the arbitration agreement from the principal contract. The Court observed that the presumption of separability was relevant not only for establishing the jurisdiction of the arbitral tribunal but also that it “embodies the fundamental principle regarding the substantive autonomy of an arbitration agreement.” Arbitral tribunals possessed the authority to establish the boundaries of their own jurisdiction, and the legislative directive mandated that courts refrain from intervening “at the referral stage by yielding to the jurisdiction of the arbitral tribunal on matters concerning the existence and validity of an arbitration agreement.” The Court states that Indian judges are obligated to interpret the Arbitration Act “in a way that revitalizes the principles of contemporary arbitration in India.”

The Court emphasized the necessity of interpreting the Stamp Act and the Arbitration Act in a way that aligns them, ensuring that both laws are fully realized and that the objectives of neither statute are undermined. The Court observed that the Arbitration Act, a detailed legal framework regulating arbitrations, was a “special” statute in relation to this case and should take precedence for arbitration agreements. The Arbitration Act did not outline stamping as a prerequisite for a valid arbitration agreement and mandated that courts limit themselves to assessing the existence of an arbitration agreement during the referral phase. In other terms, an objection regarding stamping cannot be adjudicated by Indian courts when they assess applications under Section 8[17] (to refer parties to arbitration) or Section 11[18] (to appoint the arbitral tribunal) of the Arbitration Act. While this matter did not emerge in NN Global 2, the Court noted that Indian courts need not address the stamping issue when granting interim measures under Section 9[19].

The Court determined that it was the responsibility of the arbitral tribunal to comply with the law and impound the agreement, if necessary, to guarantee adherence to the procedure under the Stamp Act for correcting defects. The matter of stamping is a jurisdictional concern. The stipulations of the Stamp Act clarify that an individual authorized “by consent of parties” to accept evidence is permitted to seize and inspect an instrument, and that such an individual authorized “by consent of parties” to accept evidence encompasses an arbitral tribunal.

The Group of Companies Doctrine is highly valuable in Indian business as it guarantees that the reality of contemporary corporate frameworks is represented in the arbitration procedure. By permitting non-signatories in a corporate group to be bound by or reap benefits from arbitration agreements, the doctrine enhances substantive justice and stops entities from misusing corporate separateness to avoid responsibilities. This principle promotes efficiency by preventing redundant legal actions and ensuring that conflicts involving interconnected entities are settled in a unified manner. Considering the recent Supreme Court decision regarding unstamped or improperly stamped arbitration agreements, the relationship between these principles bolsters the pro-arbitration perspective of Indian law. By permitting the arbitration process to continue despite formal issues such as inadequate stamping, the Court upholds party autonomy and reduces procedural obstacles. This method, alongside the Group of Companies Doctrine, promotes a favorable business climate, especially for multinational firms with intricate structures. The incorporation of these principles aids Indian companies by improving predictability, efficiency, and the confidence of global investors. By advocating for arbitration as a viable means of resolving disputes, India establishes itself as an attractive location for cross-border investments and international arbitration, in line with its goal to evolve into a worldwide economic center. This progressive legal approach connects legal formalism with practical business requirements.

[1] (2013) 1 SCC 641

[2] The Arbitration and Conciliation Act, 1996

[3] The Arbitration and Conciliation Act, 1996

[4] (2013) 1 SCC 641

[5] (2022) 8 SCC 1

[6] (2013) 1 SCC 641

[7] The Arbitration and Conciliation Act, 1996.

[8] SMS Tea Estates v Chandmari Tea Co (2011) 14 SCC 66

[9] Garware Wall Ropes v Coastal Marine Constructions & Engg (2019) 9 SCC 209

[10] (2021) 2 SCC 1

[11] (2021) 4 SCC 379

[12] (2021) 4 SCC 379