Commercial Realities Take Precedence Over Technicalities Under Group Of Companies Doctrine

The group of companies doctrine should 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 agreements, the Supreme Court has held.

The doctrine provides that non-signatory affiliates can be roped into an arbitration agreement if the mutual intention of the parties under an agreement is to bind non-signatories to the agreement.

Providing much-needed clarity to the doctrine, the court has said that 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.

This is practically very welcome as business transactions grow increasingly complex and involve multiple entities — all of which may not strictly be signatories to an arbitration agreement, said Kartikey Mahajan, partner, Khaitan and Co.

The court has held 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 judgement recognises the importance of using commercial reality as a basis to examine who the party is and sets up indicators based on which a non-signatory may be added to an arbitration. The judgement squarely puts commercial reality and equity ahead of technicalities, Vijayendra Pratap Singh, partner at AZB and Partners, told NDTV Profit.

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 the landmark decision, which 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.

Under Chloro Controls, a non-signatory party could be added to the proceedings if (a) there was a commonality of the subject matter; (b) the non-signatory party was related to the signatories; or (c) the sub-contracts were interdependent on each other, so as to carry out the main contract.

However, the top court has now set a higher threshold for binding a non-signatory to an arbitration agreement.

The court has said that a mere incidental involvement in the negotiation or performance of the contract by the non-signatory party is not sufficient.

In other words, the test is to determine whether the non-signatory has a positive, direct, and substantial involvement in the negotiation, performance, or termination of the contract.

This will limit the liability exposure of a corporate group towards entities that may not have been substantially involved in a particular transaction, which gives rise to an arbitration, Mahajan said.

The court has also said that the concept of a single economic unit cannot be the sole basis for invoking the group of companies doctrine.

Singh said that this guardrails the doctrine by ensuring that frivolous attempts to rope-in a party to an agreement are not tolerated.

For example, now it will not be possible to hold Tata Motors Ltd. responsible for the contracts of Tata Steel Ltd. only because they belong to the same group of companies, Singh said.