Signing an arbitration clause or an arbitration agreement used to be the only way by which you can bind parties and make them submit themselves to an arbitration. In many cases, defending parties used to challenge the binding nature and enforceability of the arbitration clause in a contract, to get out of the arbitration clause. But over a period of time, the global arbitral community understood that the effectiveness of an arbitration cannot be achieved by sticking into the old policy of binding only the parties who signed an arbitration agreement. This realization emerged from the situations frequently faced by arbitrators and parties where parties to an arbitration proceeding was controlled by other companies, who were not bound by the arbitration agreement. These main parties tried to frustrate the outcome of the arbitration, when they loose the case. Many of the arbitration awards became paper awards because the parties to arbitration agreement did not have the required financial capacity to satisfy the awards. Such situations arose because the group companies or controlling companies did not leave these parties with sufficient money. Piercing the corporate veil or alter ego principles can be only rarely allowed by the National Courts because that option severely damages the concept of limited liability and other Company law principles. Hence Group Companies concept slowly got recognized internationally. By applying this concept, the arbitration tribunals while ruling on their jurisdiction started making non-signatories as parties to the arbitration on the ground that the arbitration agreement signed by group companies were binding on the parent companies as well. This concept was recognized by Supreme Court of India in the matter of Chloro Contols . Many criticized this concept because, it seriously challenged the limited liability concept of the Limited companies and parent companies started suffering due to the mistakes of subsidiaries and group companies. Doubting the correctness of the above said Chloro control judgement, the three Judge bench referred Cox and Kings to a larger bench. Hence there was a requirement of a balancing approach with reasonable legal backing to ensure justice. In the said process, Supreme Court of India has settled the law relating to the point of arbitration clauses binding non-signatories by way of a few well-reasoned judgments. The author endeavors in this article to explain the legal position in India.

The Judgment of the Supreme Court of India in Cox and Kings case is the landmark judgment of a five Judges Constitution Bench, which prescribed the tests that should be applied for bringing non-signatories as parties in an arbitration. This judgment also approved the requirements provided by the earlier bench of Supreme Court of India in Discovery Enterprises case . In the said judgment the Court wanted to adopt a balanced approach without compromising on the basic principles of Arbitration law, contract law, company law to ensure that the resultant legal framework is consistent with Internationally accepted practices and principles.

It was further held that the existence of group companies relationship is one of the essential factors to determine whether the conduct amounts to consent, but membership of the group alone is not sufficient in itself. Mere presence of a commercial relationship between signatory and non-signatory parties is not sufficient to infer “legal relationship” between and among the parties. If this factor is applied solely, any related entity or company may be impleaded even when it does not have any rights or obligations under the underlying contract and did not take part in the performance of the contract. The Common intention of the parties to bind the non-signatory party to the arbitration can be inferred from the “circumstances that surround the conclusion and characterize the performance and later the termination of the contracts”. In other words, it was held that a non-signatory party could be considered as a ‘true party” to the arbitration agreement on the basis of their role in the conclusion, performance, or termination of the underlying contract containing the arbitration agreement. Moreover, the presence of a strong organizational links and financial links between the signatory and non-signatory parties is only one of the factual elements that the Court or tribunal may consider determining the legal relationship between the signatory and non-signatory parties. The principle of “single economic entity” cannot be used as a sole basis to invoke the Group companies’ doctrine.

It was conclusively held that in deciding whether a company within a group of Companies which is not a signatory to the agreement would nonetheless be bound by the arbitration clause, the law considers the following factors:

Mutual intent of the parties
The relationship of a non-signatory to a party which is signatory to the agreement
The commonality of the subject matter
The Composite nature of the transactions and
The performance of the Contract

Further in a recent judgment dated 20th September 2024, in the matter of Ajay Madhusudan Patel and others Vs Jyotrinda S Patel (2024) SCC Online SC 2597, the Supreme Court of India once again confirmed the view taken in Cox & Kings case (Supra)that the issue of non-signatories becoming parties to an arbitration can be decided by an arbitration tribunal after taking into consideration the evidences produced by the parties and if the non-signatory is a veritable party as held in Cox and Kings. Even though the law relating to inference of a contractual relationship is not yet conclusive, the indicators for applying the group companies concept seems to be reasonably settled.

Non-Signatories can be Made Parties to an Arbitration - Supreme Court of India

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S. RAVI SHANKAR