A five-Judge Constitution Bench of the Supreme Court comprising of the Chief Justice of India (CJI) Dr Dhananjaya Y Chandrachud, Justice Hrishikesh Roy, Justice J B Pardiwala, Justice Manoj Misra and Justice Pamidighantam Sri Narasimha passed a Judgment dated 06-12-2023 in the matter of Cox and Kings Ltd. vs SAP India Pvt. Ltd. & Anr. Arbitration Petition (Civil) No. 38 of 2020 and made observations regarding whether non-signatory parties can be bound by an arbitration agreement.
This case was referred to the present Five-Judge Bench by a three-Judge Bench of the Apex Court in another matter, to reexamine the following issues:
(i) Section 8 of the Arbitration and Conciliation Act 1996 (Arbitration Act) (Power to refer parties to arbitration where there is an arbitration agreement) and Section 45 of the Arbitration Act (Power of judicial authority to refer parties to arbitration) provide that (a) if a request is made before a Court/judicial authority by a party to an agreement or any person claiming through/under him, (b) the Court/ judicial authority has to refer parties to arbitration, (c) if such agreement provides for arbitration.
(ii) Section 35 of the Arbitration Act (Finality of arbitral awards) also provides that “Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.”
(iii) The three-Judge Bench of the Supreme Court sought clarity on the interpretation of the phrase ‘claiming through or under’e. whether it includes group companies, as the Indian Courts have in earlier cases considered a group of companies as a single economic unit and hence, held them bound to an arbitration agreement signed by one of such companies.
Supreme Court Observations
1) That as per the ‘Group of Companies’ Doctrine:
1.1) Group companies mean “an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community”.
1.2) Group companies consisting of parent and subsidiary companies are created for various purposes such as for (i) limiting the liability of the parent company, (ii) facilitating international trade, (iii) entering into business ventures with investors, (iv) establishing domestic corporate residence, etc.
1.3) Further, as per the Principle of ‘Separate Legal Personality’, in the eyes of law, a company is a legal entity / person altogether different from its promoters, directors, shareholders, and employees.
1.4) The said Principle of ‘Separate Legal Personality’ also applies to corporate groups, as a result of which a parent company is generally not held liable for the actions of its subsidiary companies in which the parent company is a direct or indirect shareholder.
1.5) Similarly, a contract entered into by one member of a group will not be binding on the other members by virtue of the limited liability principle.
2) Further, the Companies Act, 2013 has also recognized a subsidiary company as a separate legal entity:
2.1) Section 2 (46) of the Companies Act 2013, “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies.
2.2) Section 2 (87) of the Companies Act 2013: “subsidiary company or ―subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company-
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation.—For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(c) the expression ―”company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;
2.3) Hence, although a holding company owns a controlling interest in the subsidiary company, they are considered as separate legal entities.
2.4) A three-Judge Bench of the Apex Court in Vodafone International Holding BV v. Union of India (2012) 6 SCC 613 had emphasised the principle of corporate separateness and observed that “though a subsidiary may normally comply with the request of a parent company it is not just a puppet of the parent company. The difference is between having power or having a persuasive position.”
3) However, in certain exceptional cases, the Courts may ignore the ‘Principle of Separate Legal Entity’ and treat a group of companies as a single economic entity:
3.1) In order to treat a group of companies as a single economic entity, two factors have to be taken into account: “first, the parent company owned all the shares of the subsidiary companies to the extent that it controlled every movement of the given subsidiary companies; and second, all the three companies in the group virtually acted as partners and could not be treated separately. Thus, the determination of whether two or more companies constitute a single economic entity depends upon the concerted efforts of the companies to act in pursuance of a common endeavour or enterprise.”
3.2) Thus, if a company has been used by its members and shareholders to carry out fraud or evade tax liabilities, in such situations, the Courts may ignore the corporate separateness and held the individuals also liable.
3.3) Further, in the case of group companies, where a holding company completely dominates the affairs of the subsidiary company and misuses its control to avoid or conceal liabilities, in such cases, the Courts may disregard the Principle of ‘Distinct Legal Personality’ between the two companies and treat them as a single entity and apply the Doctrine of “Alter Ego” to pierce the corporate veil and hold the parent company liable for the faults of the subsidiary company.
4) Similarly, in the context of the Indian Arbitration Act, disregarding the Principle of ‘Separate Legal Personality’, the ‘Group of Companies’ Doctrine may be used to bind a non-signatory company within a group to an arbitration agreement which has been signed by other member of the group, in the following circumstances:
i) All persons or entities who, by their conduct and relationship with the signatory parties, intended to be bound by the contract containing arbitration clause.
ii) In cases of complex commercial transactions such as construction contracts, long-term supply contracts, banking and financial transactions, maritime contracts, etc, multi-corporate structures such as joint venture, informal alliances etc, are formed to execute and perform such contracts. In such transactions, often, persons or entities, who are not signatories to the underlying contract containing the arbitration agreement, are involved in the negotiation, performance, or termination of the contract, without formally consenting to be bound by the ensuing burdens, including arbitration.
iii) Hence, in such cases, Arbitration Law has developed and adopted ‘Group of Companies’ Doctrine, i.e. to treat group of companies as a single economic entity and allow or compel non-signatory party to be bound by an arbitration agreement.
iv) “In other words, the group of companies doctrine is a means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement.”
v) “The other factors such as the commonality of the subject matter, composite nature of the transactions, and the performance of the contract ought to be cumulatively considered and analysed by courts and tribunals to identify the intention of the parties to bind the non-signatory party to the arbitration agreement.”
5) Thus, applying the aforesaid ‘Group of Companies’ Doctrine to the present case, the 5-Judge Constitution Bench held that in the following scenarios, a person or entity can ‘claim through or under’ a party under Sections 8, 35 and 45 of the Arbitration Act, so as to bind such person or entity to an arbitration agreement signed by the other party:
(i) In case of assignment, subrogation, and novation of contracts, the third party / assignees will step into the shoes of the signatory party that entered into the arbitration agreement.
(ii) Such persons claiming through / under, can assert a right in a derivative capacity to participate in the agreement i.e. only through the original signatory party.
(iii) Such persons claiming through or under, do not possess an independent right to stand as parties to an arbitration agreement, but only as successors to the signatory parties’ interest.
(iv) Hence, “a person claiming through or under a party to an arbitration agreement is merely standing in the shoes of the original party to the extent that it is merely agitating the right of the original party to the arbitration agreement”.
6) Therefore, the phrase ‘claim through or under’ under Sections 8, 35 and 45 of the Arbitration Act is used in the context of successors-in- interest / non-signatories that act only in a derivative capacity in respect of the signatory party to the arbitration agreement. But to the contrary, the ‘Group of Companies’ Doctrine is used to bind the non-signatory to the arbitration agreement so that it can agitate the benefits and be subject to the burdens of the contract.
7) The ‘Group of Companies’ Doctrine can thus, be used to bind a non-signatory party to the arbitration agreement regardless of the phrase “claiming through or under” under Sections 8, 35 and 45 of the Arbitration Act.
Hence, based on the aforesaid observations, the 5-Judge Constitution Bench of the Supreme Court held that the ‘Group of Companies’ Doctrine has an independent existence in the realm of Arbitration Law that can bind a non-signatory party to the arbitration agreement depending on the intention of such non-signatory party to be bound by the arbitration agreement.
The Indian Lawyer
 Section 8 of the Arbitration Act: Power to refer parties to arbitration where there is an arbitration agreement
(1)A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.
(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof:
Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.
(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.
 Section 44 of the Arbitration Act: Definition.—
In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—
(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.
Section 45 of the Arbitration Act: Power of judicial authority to refer parties to arbitration
Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it prima facie finds that the said agreement is null and void, inoperative or incapable of being performed.