Group Of Companies Doctrine Can Be Applied To Bind Non Signatory To An Arbitration Agreement: Supreme Court

The Supreme Court, in a judgment delivered on Wednesday (27 April 2022), explained the 'Group of companies' doctrine which postulates that an arbitration agreement entered into by a company within a group of companies, can bind its non-signatory affiliates or sister concerns if the circumstances demonstrate a mutual intention of the parties to bind both the signatory and affiliated, non-signatory parties.The court observed that a non-signatory may be bound by the arbitration agreement where: (i) There exists a group of companies; and (ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.The bench comprising Justices DY Chandrachud, Surya Kant and Vikram Nath held that the following factors have to be considered to apply the doctrine:(i) The mutual intent of the parties(ii) The relationship of a non-signatory to a party which is a signatory to the agreement(iii) The commonality of the subject matter (iv) The composite nature of the transaction (v) The performance of the contractBackgroundIn this case, the Arbitral Tribunal in a matter between Oil & Natural Gas Corporation Limited (ONGC) and Discovery Enterprises Private Limited (DEPL) and others, in its interim award, held that, Jindal Drilling and Industries Limited (JDIL) was not a party to the arbitration agreement and must be deleted from the array of parties. The interim award was challenged in an appeal which was dismissed by the impugned judgment. Appeal filed under Section 37 of the Arbitration and Conciliation Act was dismissed by the Bombay High Court. Aggrieved, ONGC approached the Apex Court.ContentionsBefore the Apex Court, the appellant ONGC contended inter alia that DEPL and JDIL constitute one single commercial entity and that ONGC is hence entitled by law to compel JDIL to participate in the arbitration proceedings so as to enforce the award against it. That, the interim award has been rendered purely on the premise that a non-signatory to the arbitration agreement cannot be impleaded as a party. That, the group of companies doctrine is applicable in this case. On the other hand, the respondents contended that the group of companies doctrine cannot be invoked to indict JDIL for the alleged acts and omissions of DEPL.Group of Companies DoctrineThe bench noted that the principle for binding non-signatories by application of the group of companies doctrine has been invoked in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors (2013) 1 SCC 641 b. Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors; (2018) 16 SCC 413 and c. MTNL v. Canara Bank & Ors. (2020) 12 SCC 767. The court observed:Commentators have noted that a signed written agreement to submit a present or future dispute to arbitration does not exclude the possibility of an arbitration agreement binding a third party. A non-signatory may be bound by the operation of the group of companies doctrine as well as by the operation of the principles of assignment, agency and succession. A party, which is not a signatory to a contract containing an arbitration clause, may be bound by the agreement to arbitrate if it is an alter ego of a party which executed the agreement. This constitutes a departure from the ordinary principle of contract law that every company in a group of companies is a distinct legal entity. A non-signatory may be bound by the arbitration agreement where: (i) There exists a group of companies; and (ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors: (i) The mutual intent of the parties; (ii) The relationship of a non-signatory to a party which is a signatory to the agreement; (iii) The commonality of the subject matter; (iv) The composite nature of the transaction; and (v) The performance of the contract. Consent and party autonomy are undergirded in Section 7 of the Act of 1996. However, a non-signatory may be held to be bound on a consensual theory, founded on agency and assignment or on a non-consensual basis such as estoppel or alter ego. The bench noted that by failing to consider the application for discovery and inspection, the Tribunal foreclosed itself from inquiring into whether there was sufficient material to establish the application of the group of companies doctrine."The failure of the Arbitral Tribunal to allow for discovery and inspection goes to the root of the process in as much as it disabled ONGC from pursuing its fundamental claim based on the application of the group of companies doctrine.", the court said.Thus the court held that the interim award of the first Arbitral Tribunal stands vitiated because of: (i) The failure of the arbitral tribunal to decide upon the application for discovery and inspection filed by ONGC; (ii) The failure of the ...

Group Of Companies Doctrine Can Be Applied To Bind Non Signatory To An Arbitration Agreement: Supreme Court

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