Group of Companies Doctrine:
Joinder of Non- Signatory as a Party in Arbitral Proceedings
Arbitration agreement is a ‘founding stone’ of the arbitration mechanism. It is a prerequisite for the parties to enter into an arbitration agreement for submitting the dispute for arbitration. Section 7 of the Arbitration and Conciliation Act defines arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not.” It is very clear from the words of the provision that to submit the dispute to arbitration, the parties must enter into a mutually accepted agreement with their free consent and intentions. However, with the passage of time, the issue of inclusion of non- signatory in the arbitral proceedings, as a party, arose. Therefore, the Doctrine of Group of Companies was evolved as a solution. It was first propounded in the Dow Chemical v. Isover Saint Gobain.
The Doctrine was first recognized in India by the Madras High Court in SEI Adhavan Power Pvt. Ltd. V. Jinneng Clean Energy Technology. The court decided upon the issue that “whether non signatory to the agreement can be added as part to arbitration proceedings?” Consequently, the court putting emphasis on the Chloro Controls case, observed that though the scope of arbitration agreement only binds the parties but under the internationally developed doctrine where the agreement entered into by a company, is one within the group of companies, can bind its affiliates if the circumstances shows that mutual intention of all the parties is to bind non signatory. Hence, the Doctrine of Group of Companies is based on the mutual intention of the parties to bind a non- signatory.
Similarly, in Cheran Properties Ltd v. Kasturi & Sons, the Supreme Court held that the non- signatory can be bound by the arbitral award. To support the view, the court relied on the Group of Companies Doctrine, it was observed that “the group of companies doctrine is akin to principles of agency or implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, notwithstanding their formal status as non signatory”
Recently, in Mahanagar Telephone Nigam Ltd. V. Canara Bank, the apex reconsidered the issue regarding the “joinder of non- signatory to the arbitration proceedings”. The court observed as per the principles of Contract Law an agreement entered into by one company of a group cannot bind the others as they are recognized as a separate legal entities. Similarly, the principle is also applicable in arbitration and the signatories are alone bound by the agreement. However a non- signatory can be bound by the arbitration agreement on the basis of “Group of Companies Doctrine” which indicates the implied consent to an agreement to arbitrate, in the context of modern multi party business transactions. The circumstances in which the group of companies doctrine can be invoked to bind non- signatories:
- If there is a direct relationship between the party which is signatory to the arbitration agreement
- Direct commonality of the subject matter
- The composite nature (transaction which is inter- linked in nature) of the transaction between the parties
- Tight group structures with strong organizational and financial links, so as to constitute single economic unit
Consequently, with all above counts, the recognition of the doctrine has no doubt settled the issue of joinder of non- signatories in the arbitral proceedings.