In Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, it was observed that ordinarily, an arbitration takes place between persons who have been parties to both the arbitration agreement and the substantive contract underlying it. English Law has evolved the “group of companies doctrine” under which an arbitration agreement entered into by a company within a group of corporate entities can in certain circumstances bind non-signatory affiliates. The test as formulated, is as follows:
“Though the
scope of an arbitration agreement is limited to the parties who entered into it
and those claiming under or through them, the courts under the English Law
have, in certain cases, also applied the “group of companies doctrine”. This
doctrine has developed in the international context, whereby an arbitration
agreement entered into by a company, being one within a group of companies, can
bind its non-signatory affiliates or sister or parent concerns, if the circumstances
demonstrate that the mutual intention of all the parties was to bind both the signatories
and the non-signatory affiliates. This theory has been applied in a number of
arbitrations so as to justify a tribunal taking jurisdiction over a party who
is not a signatory to the contract containing the arbitration agreement.
This
evolves the principle that a non-signatory party could be subjected to
arbitration provided these transactions were with group of companies and there
was a clear intention of the parties to bind both, the signatory as well as the
non-signatory parties. In other words, “intention of the parties” is a very
significant feature which must be established before the scope of arbitration
can be said to include the signatory as well as the non-signatory parties.”
The
court held that it would examine the facts of the case on the touchstone of the
existence of a direct relationship with a party which is a signatory to the arbitration
agreement, a ‘direct commonality’ of the subject matter and on whether the
agreement between the parties is a part of a composite transaction:
“A
non-signatory or third party could be subjected to arbitration without their
prior consent, but this would only be in exceptional cases. The court will
examine these exceptions from the touchstone of direct relationship to the party
signatory to the arbitration agreement, direct commonality of the subject
matter and the agreement between the parties being a composite transaction. The
transaction should be of a composite nature where performance of the mother
agreement may not be feasible without aid, execution and performance of the supplementary
or ancillary agreements, for achieving the common object and collectively
having bearing on the dispute. Besides all this, the Court would have to
examine whether a composite reference of such parties would serve the ends of
justice. Once this exercise is completed and the court answers the same in the affirmative,
the reference of even non-signatory parties would fall within the exception
afore discussed.
Explaining
the legal basis that may be applied to bind a non-signatory to an arbitration
agreement, it was held thus:
“The
first theory is that of implied consent, third party beneficiaries, guarantors,
assignment and other transfer mechanisms of contractual rights. This theory
relies on the discernible intentions of the parties and, to a large extent, on
good faith principle. They apply to private as well as public legal entities.
The
second theory includes the legal doctrines of agent-principal relations,
apparent authority, piercing of veil (also called “the alter ego”), joint
venture relations, succession and estoppels. They do not rely on the parties’
intention but rather on the force of the applicable law.” Cheran Properties Ltd.v. Kasturi and Sons Ltd., (2018) 6 SCC 413.