Supreme Court Rules Non-Signatories Can Be Bound By Arbitration Agreements

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In a landmark judgment, the Supreme Court of India has clarified the scope of the “group of companies” doctrine in arbitration, significantly impacting how arbitration agreements are interpreted and enforced. The Court’s decision, delivered by a Constitution Bench comprising Chief Justice DY Chandrachud and Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala, and Manoj Misra, establishes that non-signatories can be bound by arbitration agreements under certain conditions.

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The Court emphasized that arbitration is fundamentally a matter of contract, and consent is paramount. It stated,

“No one can be compelled to submit to arbitration without their consent.”

This principle underlines the importance of determining whether a non-signatory intended to create a legal relationship with the signatory and agreed to be bound by the arbitration agreement.

In the case of Cox and Kings Ltd v. SAP India Pvt Ltd, the Court held that the requirement of a written arbitration agreement does not necessarily exclude non-signatories. Chief Justice DY Chandrachud, while pronouncing the judgment, noted,

“The signature of a party in an agreement is the most profound expression of consent of a person to submit to jurisdiction. However, the corollary that persons who have not signed aren’t part of the agreement may not always be correct.”

The Court’s conclusions are pivotal in understanding the application of the “group of companies” doctrine. It includes recognizing both signatory and non-signatory parties under the Arbitration and Conciliation Act 1996, considering the conduct of non-signatories as an indicator of their consent, and maintaining the corporate separateness of the group of companies while determining the common intention of the parties.

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Justice Narasimha, in a separate but concurring judgment, highlighted the need for a balanced approach. The Court cautioned against brushing aside the decision of parties not to include someone in the arbitration agreement, while also recognizing the importance of not excluding individuals who have demonstrated an intention to be bound by the arbitration agreement through their conduct.

This judgment revisits and clarifies the application of the “group of companies” doctrine, previously questioned in cases like Chloro Controls India Pvt. Limited v. Seven Trent Water Purification Inc. The Court called for establishing the existence of a group of companies before applying the doctrine, emphasizing that it is a consent-based theory meant to ascertain the intention of both signatory and non-signatory parties.

The Supreme Court’s decision marks a significant development in arbitration law in India, offering clarity and direction on how arbitration agreements involving multiple parties and complex transactions should be interpreted and enforced. This ruling is expected to have far-reaching implications for businesses and legal practitioners dealing with arbitration in India.