Why The Supreme Court Is Revisiting A Milestone In Arbitration

Party autonomy or consent is the key basis of arbitration and multiple court judgments have held that this understanding must be present in writing.

In 2012, however, the Supreme Court of India delivered an important judgment which made way for including those who may not have explicitly signed the arbitration agreement.

In what’s come to be known as the Chloro Controls case, the apex court held that a non-signatory can be made party to international arbitration proceedings if there was a legal relationship between them. The group of companies doctrine was accepted as a basis to establish this relationship.

Soon after, the Arbitration & Conciliation Act,1996 was amended to apply this principle to domestic arbitration. Since then, the group of companies doctrine has served as a basis to include non-signatories to an arbitration.

But now, a three-judge bench of Chief Justice of India Justice NV Ramana, and Justices Hima Kohli and Surya Kant has raised doubts on the correctness of principle laid down in Chloro Controls, prompting it to refer the issue to a larger bench.

The issue came up in a matter involving Cox and Kings and SAP India Pvt., and the attempt by the former to include Germany-based SAP SE GMBH to the arbitration proceedings. SAP SE GMBH argued that the group of companies doctrine was not applicable as it never participated in the negotiating process of the contract.

The apex court pointed out that amendments to the domestic arbitration law to incorporate the Chloro Controls principle has resulted in certain practical anomalies. For instance, while non-signatories can be made party to arbitration proceedings, they cannot approach courts to seek interim relief since the arbitration law lacks necessary amendments.

Similarly, the bench noted, contradictions exist in how Chloro Controls has been followed:

  • In Cheran Properties case, an arbitral award was enforced against a non-signatory even though it did not participate in the proceedings, extending the group of companies doctrine to even execution proceedings.

  • In another instance, the court refused to apply the ‘’group of companies’’ doctrine as the applicant failed to prove the commonality of intention to be bound by the arbitration agreement.

  • In Mahanagar Telephone Nigam Ltd. case, the court bound a third-party to arbitration on reasoning that a tight corporate group structure constituting a single economic reality existed.

The judgment in Chloro Controls case itself had a contradictory approach on when a third party may be bound by the arbitration, Justice Surya Kant noted in his separate opinion.

The bench held that it doubts the correctness of the law laid down in Chloro Controls and cases following it.

It framed the following questions for the larger bench:

  • Whether phrase ‘claiming through or under’ in sections 8 and 11 could be interpreted to include ‘group of companies’ doctrine. Section 8 allows a court to refer a party or any person claiming through or under him to arbitration, and Section 11 deals with appointment of arbitrators.

  • Whether the ‘group of companies’ doctrine, as interpreted by Chloro Controls case and subsequent judgments, is valid in law.

  • Whether the group of companies doctrine should be read the arbitration act or whether it can exist in Indian jurisprudence independent of any statutory provision.

  • Whether the group of companies doctrine be construed as a means of interpreting the implied consent or intent to arbitrate between the parties.

  • Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the group of companies doctrine into operation even in the absence of implied consent.

Revisit Exercise Must Be Done With Caution, Experts Say

Besides the correctness of Chloro Controls and subsequent judgments, the larger bench will also look at principles in other jurisdictions which have not yet been dealt with by Indian courts.

For instance, the Supreme Court notes, the doctrine originated in Dow Chemicals case before the International Chamber of Commerce. Here a non-signatory did not resist but actually wanted to join an arbitration initiated by a group affiliate.

The process should be carried out judiciously and with care, Shaneen Parikh, partner at Cyril Amarchand Mangaldas, said. The basic conditions of party autonomy and consent to arbitrate must be paramount in deciding each case, she said.

In the ongoing litigations, parties seeking inclusion of non-signatories to arbitration based on group of companies doctrine may face difficulties in view of observations of the Supreme Court and the reference, said Jatin Pore, partner at DSK Legal.

Therefore, the parties insisting on inclusion of non-signatories on basis of law laid down in Chloro Controls and cases following it may now face difficulties, Pore said.

The composition or the date on when the larger bench will hear the case is not known yet.

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