Originally rooted in French arbitration law, the Doctrine has gained significant prominence in India in the recent years. A crucial development in this context was the decision in case of Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc.^[4] (“Chloro Controls”), rendered in September 2012, which marked the Doctrine’s first application within the Indian arbitration framework. While Chloro Controls was restricted to a foreign seated arbitration, pursuant to the judgment, the courts expanded the application of the Doctrine to domestic arbitrations and also enforcement of awards.

The concept of impleading third parties to arbitrations has always been met with criticism on the ground that it is antithetical to party autonomy and consent which are hallmarks of arbitration.

Recently, in early 2022, almost ten years after the decision in Chloro Controls, the Indian Supreme Court (“Supreme Court”), raised doubts on the correctness of the Doctrine and the manner in which it was being applied. The issue of the applicability of the Doctrine was referred to a five-judge Constitutional bench, i.e. on “whether the ‘Group of Companies’ doctrine as expounded by Chloro Controls Case (supra) and subsequent judgments is valid in law.” In December 2023, the Constitutional bench of the Supreme Court, rendered its decision in the case of Cox & Kings Ltd. v. SAP India Pvt. Ltd. & Anr.^[5] (“Cox & Kings”). While upholding the validity of the Doctrine, the Supreme Court narrowed its scope and emphasized that it is a consent-based doctrine; mere membership of a non-signatory in a group of companies would not be sufficient to bind such non-signatory to the arbitration agreement without any indication as to the mutual intention of the parties to do so.

Consent reigns supreme

Arbitration is based on consent; parties mutually agree that arbitration will be the best means of resolving their differences. Such agreements constitute a contractual commitment between two or more parties to use arbitration for dispute resolution. Since arbitration agreements are inherently contractual, they are governed by the doctrine of privity and other standard contract law rules. According to the well-established doctrine of privity, a contract can only give rights or impose responsibilities on the parties to it. Only the parties to the contract are obligated to fulfil their end of the bargain and be eligible for benefits under the contract. Consequently, only parties to the contract can sue or be sued for damages. A third party who has not entered into the contract cannot be forced to participate in legal proceedings arising from it as that would “violate the sacrosanct principles of privity of contract”^[6]. Therefore, in many ways the Doctrine is antithetical to concepts of privity which we will examine through the course of this article.

Section 7 of the Arbitration and Conciliation Act, 1996 (“Act”) defines an arbitration agreement to mean an agreement by the parties to submit to arbitration all or certain disputes which have arisen or may arise between them in respect of a defined legal relationship. This legal relationship is based on a contract entered into between the parties. Section 7(3) of the Act requires the arbitration agreement to be in writing. The courts have, based on this requirement of the agreement to be in writing, refused to bind non-signatories to the arbitration agreement.

In the case of Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr.^[7], the Supreme Court was called upon to decide whether an “arbitration clause found in a document (agreement) between two parties, could be considered as a binding arbitration agreement on a person who is not a signatory to the agreement”. The court emphasized the requirements for an arbitration agreement under Section 7 of the Act. In fact, the court went on to hold that while a contract can be entered into orally, or impliedly, that will not be sufficient for an arbitration agreement. The court’s interpretation underscored that for arbitration proceedings to commence, there must be an explicit written arbitration agreement in place between the disputing parties.

This issue came up again before the Supreme Court in the case of S.N. Prasad v. Monnet Finance Ltd. & Ors. ^[8] The question for determination was whether the guarantor of loan who is not party to the loan agreement could be made party to the arbitration proceedings. Relying on Section 7 of the Act, the Supreme Court held that arbitration can only be invoked if there exists a formal agreement to arbitrate between the concerned parties. The Court further held that “[i]f there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non parties to the arbitration agreement, reference to arbitration or appointment of arbitrator can be only with respect to the parties to the arbitration agreement and not the non-parties”.

A similar issue had already been decided by the Supreme Court in the case of Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya & Anr.,^[9] where an application under Section 8 of the Act seeking reference of a dispute to arbitration, was filed in a suit. The suit concerned the dissolution of a partnership. However, all the defendants in the suit were not parties/ signatories to the partnership deed. The court in this case had categorically held that terms of the partnership deed including the arbitration clause contained in the deed would not bind the defendants who were not parties to the partnership deed. Since the respondents sought to recover an amount based on an agreement not covered by the arbitration clause, and because it is impermissible to refer part of the dispute to arbitration while adjudicating the rest in court, the application was dismissed.

Therefore, the Supreme Court was consistent in its approach that non-signatories to an arbitration agreement, cannot be forced to arbitration.

The introduction of the Doctrine: Chloro Controls India Pvt. Ltd. v Severn Trent Water Purification Inc.

This approach changed for the first time with the decision in Chloro Controls. In Chloro Controls, the Supreme Court was dealing with an appeal from a decision of the High Court of Bombay which referred all the parties to a suit to arbitration. This reference included parties who were non-signatories to the arbitration agreement. The facts in Chloro Controls involved several interconnected agreements between different parties, where few agreements did not have an arbitration clause. The main issue before the Supreme Court was whether the parties to these interconnected agreements could be consolidated into a single arbitration proceeding under Section 45 of the Act^[10], which empowers the judicial authority to refer disputes to arbitration when there is an arbitration agreement. One of the questions before the court was “the ambit and scope of Section 45 of the [Act]?”, in order to decide whether non-signatories to the agreement could be referred to arbitration.

The Supreme Court analyzed section 45 of the Act, which according to it was “worded in favour of making a reference to arbitration when a party or any person claiming through or under him approaches the Court”. This was contrasted with Section 8 of the Act, which refers a ‘party’ to arbitration for disputes seated in India. The court noted the variance of language in Section 45, which includes ‘any person,’ indicating a legislative intent to broaden the scope beyond just the signatories of the arbitration agreement. The court interpreted “claiming through or under” to include entities integral to the transaction, even if they were not direct signatories. This applies especially to entities involved in interconnected agreements that are part of a composite transaction, as they derive their rights from or are closely associated with the signatories to the arbitration agreement.

The Supreme Court referred to the Doctrine as relied in Russell on Arbitration (23^rd Edn.), i.e. “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”. It emphasized that a non-signatory or third party could only be subjected to arbitration in exceptional cases, where intention of parties being a significant feature has been established. Other tests which were laid down were “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”. A composite transaction would be where the fact that a party is a non-signatory to one agreement is insignificant because the performance of that agreement would be meaningless without the performance and fulfillment of the main agreement to which the non-signatory is a party.

The court also cautioned that the Doctrine did not have universal acceptance and that pleas have to be examined carefully before applying the Doctrine. The court also delved into “the necessity of a common subject-matter and composite transaction” as an important factual indicator when dealing with multiple parties. The court observed that the commonality of the subject matter would indicate that the conduct of the non-signatory party must be related to the subject matter of the arbitration agreement. For instance, if the contract underlying the arbitration agreement pertains to the distribution of healthcare goods, the non-signatory party’s actions should also be related to such contractual duties and obligations that may be pertaining to distribution of healthcare goods. Establishing this connection is crucial to demonstrate that the non-signatory party consented to arbitrate regarding this specific subject matter.

In the facts of the case, given the structure of the transaction, and the composite nature of the agreements, where performance of all agreements was so found to be intrinsically inter-linked with other agreements, the court referred all the parties to all the interconnected agreements, including those where no arbitration was agreed upon, to arbitration.

The aftermath of Chloro Controls: Challenges and Contradictions

 Chloro Controls became a landmark decision which brought about a change in the legal regime. In 2015, the Law Commission of India came out with its 246^th Report, suggesting amendments in Section 2(1)(h) and Section 8 of the Act to align the law with the Chloro Controls decision. The aim was to amend the definition of “party” to include the phrase “or any person claiming through or under such party”, thereby bringing Part I of the Act at par with Section 45 in Part II of the Act.

Following the Law Commission’s suggestion, the Arbitration and Conciliation (Amendment) Act, 2015, was enacted, broadening the definition of “party” under Section 8 to encompass “or any person claiming through or under him”. However, the proposed amendment to Section 2(1)(h) did not materialize. As a result, Section 2(1)(h) still defines “party” simply as “a party to an arbitration agreement” without incorporating any reference to individuals claiming through or under such parties.

Consequently, the impact of this situation is that although a non-signatory could be compelled to participate in arbitration proceedings under Section 8 of the Act due to the inclusion of the phrase “or any person claiming through or under him,” they will not be allowed to benefit from other sections such as Section 9 to seek interim relief or Section 34 to challenge the award. These sections explicitly refer only to “parties” involved in the arbitration agreement and do not extend their scope to include individuals who claim through or under such parties.

Following Chloro Controls, there were several decisions which determined the issue of including non-signatories in arbitration proceedings. However, the courts in India interpreted the Doctrine differently, leading to inconsistencies in its application.

In Cheran Properties v Kasturi and Sons,^[11] (“Cheran Properties”) the Supreme Court was faced with a situation where a dispute arose subsequent to transfer of shares to the nominee of a party to the main agreement containing the arbitration agreement. Relying on Chloro Controls, the court referred to various treatises on international arbitration such as Redfern and Hunter, Russel and Gary Born to hold that an arbitration agreement between two or more parties may operate to bind other parties as well. The Supreme Court noted that this body of literature recognised that third parties can be bound in variety of ways: in cases where it expressly consents, such as agency, assumption, assignment which are based on operation of law; in cases where there may not be express consent, such as by estoppel and alter ego doctrine or; the Doctrine which is a consent-based doctrine applied to identify the real intention of the parties in order to bind a non-signatory to an arbitration agreement. In the facts of the case, the court noted that the Appellant was aware of the share purchase agreement and in fact was bound by the arbitration agreement having expressly sought the allotment of shares in pursuance to it. Basis this, the Court observed that it was not open to the party opposing reference to arbitration to contend that while it may be bound by the other terms of the share purchase agreement, it would not be bound by the arbitration clause. Section 35 of the Act provides that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively.” This Court noted that the phrase “persons claiming under them” includes any individual whose role or status is derived from and aligns with a party involved in the proceedings. It held that a non-signatory, being a nominee of one of the signatory parties, was bound by the arbitral award since they were claiming under the signatory.

Notably, in Cheran Properties, the Supreme Court extended the Doctrine to enforce an award against a third party. In Chloro Controls as well as the treatises referred in Cheran Properties, the discussion is with respect to binding a third party to an arbitration agreement, such that it is involved in the arbitration process and has the opportunity to defend itself in the arbitration proceedings. However, in Cheran Properties, the court enforced the award against a third party who had not participated in  the arbitration proceedings.

Around the same time, in the decision of Ameet Lalchand Shah v Rishabh Enterprises,^[12] the Supreme Court applied the Doctrine to allow an application under Section 8 of the Act holding parties under four inter-connected agreements to be bound by the arbitration clause in the mother agreement even though one of the agreements did not have an arbitration clause. The basis of this decision was that all the four agreements were for a single purpose. This was the first case, where pursuant to amendment, non-signatories were impleaded in an arbitration based on the language of Section 8.

However, there are cases, where courts have been cautious and steered away from applying the Doctrine. In Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited^[13] (“Reckitt Benckiser”), the question before the court was whether Respondent No. 2, could be impleaded in the arbitration proceedings at the stage of appointment of arbitrator, despite the fact that it is a non-signatory to the agreement between applicant and Respondent No. 1. The court recognised that it would have to see “whether the indisputable circumstances go to show that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties, namely Respondent No.1 and Respondent No.2, respectively, qua the existence of an arbitration agreement between the Applicant and the said Respondents”. The Appellant’s argument was that the individual negotiating the agreement was acting for and on behalf of Respondent No. 2, as a result of which Respondent No.2 has assented to the arbitration agreement. However, the Respondent No. 2 demonstrated that the individual in question is an employee of Respondent No.1 and is not the promoter of Respondent No. 2. Moreover, while Respondent No.1 and Respondent No. 2 had a common parent entity, Respondent No. 2 had no presence or operation whatsoever in India and was not involved in the negotiation, execution and performance of the agreement. There is no privity of contract between Appellant and Respondent No.2. Based on these considerations, the court dismissed the application filed under Section 11 of the Act.

The decision in Reckitt Benckiser was important as the court laid emphasis on the intention of parties, rather than the entities just being part of a group of companies. However, these judgments were few.

The scope of Doctrine was expanded by the High Court of Delhi in its decision in Shapoorji Pallonji & Co. Pvt. Ltd. v. Rattan India Power Ltd. & Anr.^[14] In this case, the court held that when a party is a direct beneficiary of the contract, or alter ego of a signatory, it can be compelled to arbitrate. A similar observation was made in Oil and Natural Gas Corporation Limited v. M/s Discovery Enterprises Pvt. Ltd. & Anr.^[15],  by the High Court of Delhi where the Doctrine was applied to implead a non-signatory which was determined to the alter ego of a signatory. These decisions have blurred the lines between the consensual and non-consensual theories of impleading a non-signatory to arbitration.

In MTNL v. Canara Bank & Ors.,^[16] the Supreme Court deduced intention of parties to bind a non-signatory from the fact that the non-signatory was “engaged in the negotiation or performance of the commercial contract”. It also envisaged a situation where funds of one company are used to financially support or restructure other members of the group of companies and that such a tight group structure with strong organizational and financial links would constitute a single economic unit or a single economic reality, making it a strong ground for application of Doctrine.

With the passage of time, the scope of Doctrine underwent a colossal change, where instead of being the exception it was applied as the norm.

Another issue which cropped up during this time is whether arbitrators had the power to implead non-signatories or this power only vests with the court. In Sudhir Gopi v. IGNOU,^[17] and Arupri Logistics Pvt Ltd. v. Vilas Gupta,^[18], the Delhi High Court observed that arbitrators are the creature of parties’ consent, and therefore cannot implead parties who have not agreed to resolve its disputes by arbitration. Granting the Arbitral Tribunal jurisdiction to adopt alter ego or the Doctrine would allow it to compel the participation of a party who had not formally agreed on the issues to be arbitrated. Such a move would go beyond the terms of the arbitration agreement and violate the core idea of arbitration, which is based on voluntary participation and agreement among the parties involved.

Cox & Kings: A Turning Point

Finally, in Cox & Kings v. SAP India Ltd.^[19] three judges of the Supreme Court doubted the correctness of the Doctrine on the ground that “it is premised more on economic efficiency rather than law”. The court disagreed with the Chloro Control judgment and its reliance on the phrase “claiming through or under” in Section 45 of the Act, as well as the subsequent judgments which expanded the scope of Doctrine to Section 8 and Section 35 of the Act.

This case arose from a petition filed under Sections 11(6) and 11(12)(a) of the Act, seeking the appointment of an arbitral tribunal since the parties failed to do so in accordance with their arbitration agreement. The petition was brought by Cox & Kings in response to a dispute over three agreements between it and SAP India Private Limited (“SAP India”), an entirely owned subsidiary of SAP Se GmBH (“SAP Germany”). Disputes ensued, prompting the formation of a three-member arbitral tribunal to resolve the issues. Notably, SAP Germany was not named as a party in these proceedings by SAP India. Later, Cox & Kings issued a new arbitration notice to both SAP India and SAP Germany. When the parties failed to designate an arbitrator, Cox & Kings filed the Section 11 Petition with the Supreme Court of India, seeking to join SAP Germany to the arbitral proceedings using the Doctrine, citing Chloro Controls as support.

The reference was answered by a five-judge bench in Cox & Kings^[20] upholding the applicability of the Doctrine as a “consent-based theory” whose application is dependent on a range of factual circumstances to prove the mutual intention of all parties involved. The court noted that there is a need to seek “balance between the consensual nature of arbitration and the modern commercial reality where a non-signatory becomes implicated in a commercial transaction in a number of different ways”.

• Distinction between “lifting the corporate veil” and the Doctrine

In Cox & Kings, the Supreme Court elucidated the origin of the alter ego principle and the situation in which courts have to pierce the corporate veil, i.e. in situations where “a holding company completely dominates the affairs of the subsidiary company, to the extent of misusing its control, to avoid or conceal liability”. In such situations, even though each company is a separate legal entity, the courts would ignore the separate identity and treat them as a single entity.

The court then went on to confirm the difference between the Doctrine and the doctrine of alter ego, as  the alter ego principle ignores corporate separateness and the parties’ intention, instead prioritizes equity and good faith. In contrast, the Doctrine seeks to determine the true parties to the arbitration agreement by determining the intent of the parties involved while preserving the legal identity of the companies in question. As a result, the Doctrine cannot be applied based on alter ego or piercing the corporate veil concepts.

In fact, the court went a step ahead and specifically held that “presence of common shareholders or directors cannot lead to the conclusion that the subsidiary company will be bound by the acts of the holding company. …mere fact that the two companies have common shareholders or a common Board of Directors will not constitute a sufficient ground to conclude that they are a single economic unit”. The court recognised that such an approach would violate the basic tenets of company law as well as arbitration. This finding put a rest to any mechanical application of the Doctrine based on the mere fact that the companies belong to the same conglomerate or that a non-signatory was merely involved in the transaction without having much to do with the dispute. The court clarified a commercial relationship between signatory and non-signatory cannot extend to infer the existence of a “legal relationship” between the parties, as required by Section 7 of the Act.

• Determination of Mutual Intention

Since the mere membership of a group of companies is not sufficient, the court must identify the common intention of the parties to make the non-signatory a party to the arbitration agreement. This is a fact-based exercise which depends on various factors such as:

• • Relationship between and among the legal entities within the corporate group structure.
  • Involvement of the parties in the performance of the underlying contractual obligations has to be to an extent to make the other party believe that the non-signatory is a party to the contract.
  • Commonality of subject matter, i.e. conduct of the non-signatory party has to be with respect to the subject matter of the arbitration agreement.
  • Composite nature of the transactions i.e. whether agreements are consequential or in nature of follow up to a principal agreement. A composite transaction typically involves interconnected transactions where the execution and performance of ancillary agreements are necessary to facilitate or complete the principal agreement.
  • If the other party has legitimate reasons to rely on the appearance created by the non-signatory party that it is bound by the arbitration agreement.

While considering these factors, the court need not “delve deep into the intricacies of the human mind, but only consider the expressed intention of the parties”, which has to be ascertained based on contract and the surrounding circumstances.

The Court reaffirmed that the cumulative consideration of factors outlined in Oil and Natural Gas is required to determine the parties’ shared intent and the applicability of the doctrine that binds non-signatories to arbitration proceedings. It stressed that the party seeking to join a non-signatory must establish that these criteria are satisfied, whether before a court or an arbitral tribunal.

The court further held that once a non-signatory is held to be a party to the arbitration agreement, it can apply for interim relief under Section 9 of the Act. Therefore, it will be extended to all the benefits of a party under the Act.

• Threshold Standard for Joinder of Non-Signatories

The burden of proof to establish intention of the parties is high and lies on the party seeking application of the Doctrine. The court also laid down the standard of this burden of proof – “whether the non-signatory has a positive, direct and substantial involvement in the negotiation, performance or termination of the contract”. It has been made clear that a “mere incidental involvement” in the negotiation or performance of contract by the non-signatory is not sufficient to establish its consent to be bound by the arbitration agreement. There has to be conscious and deliberate conduct based on objective evidence.

Therefore, in situations where a subsidiary may carry out a specific task to assist the parent company in execution of the contract, or the parent company attends one negotiation meeting, would not be sufficient to implead the subsidiary or the parent company respectively.

• Divergence from the approach followed in Chloro Controls

The court also distinguished the interpretation of Doctrine in Chloro Controls where the courts relied on the phrase “claiming through or under” in Section 45 of the Act. A subsidiary may claim “through or under” a parent company based on its commercial relationship with the latter. However, this interpretation is contrary to the finding that a mere commercial relation is not sufficient to bind a party to an arbitration agreement. A subsidiary may derive interest or benefits from a contract but would not be covered under the expression “claiming through or under” merely because it shares a legal or commercial relationship with the parties.

This expression does not take into account the mutual intention of the parties. A party “claiming through or under” is used in context of successors in interest who act in a derivative capacity and replace the signatory. Whereas the Doctrine binds a non-signatory regardless of whether it is “claiming through or under” the signatory.

The court further elucidates that the words “claiming through or under” are not used in Section 7 or Section 2(1)(h) which defines party, as these clauses are based on consent and party autonomy. However, the phrase is used in Section 8, 35 and 45 given the context of the section.

Conclusion

Over the last decade, the Doctrine has significantly influenced Indian arbitration law. However, its application has also introduced additional loopholes for parties, complicating the legal landscape. While India recognises this Doctrine, its broad applicability led to the undermining of the foundational principles of consent and autonomy in contractual relationships. The recent landmark ruling by a five-judge Supreme Court panel in Cox & Kings, although notable, has highlighted the need for a more cautious and narrow application of the Doctrine. The challenge for courts and arbitral tribunals lies in accurately discerning and implementing the shared intentions of the involved parties without exacerbating these loopholes. Looking ahead, it has to be seen how subordinate courts will show judicial restraint and adhere to the idea of minimal court intervention, ensuring that the Doctrine is applied judiciously and sparingly. This is particularly since the Doctrine was being used as ammunition forcing a non-signatory to participate in arbitration proceedings when it was never the intent to do so.

Footnote

[1] Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413.

[2] Ibid.

[3] Cox & Kings Limited v. SAP India Private Limited And Another, 2023 SCC OnLine SC 1634, para 100.

[4] (2013) 1 SCC 641.

[5] Cox & Kings Limited v. SAP India Private Limited And Another, 2023 SCC OnLine SC 1634.

[6] Cox & Kings Limited v. SAP India Private Limited And Another, 2023 SCC OnLine SC 1634.

[7] Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. (2010) 5 SCC 306, para 13.

[8] S.N. Prasad v. Monnet Finance Ltd. & Ors (2011) 7 SCC 320, para 7.

[9] Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya & Anr., (2003)5 SCC 531.

[10] Section 45 is contained in Part II of the Act, which deals with Enforcement of Foreign Awards.

[11] Cheran Properties v. Kasturi and Sons, (2018) 16 SCC 413.

[12] Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678.

[13] Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited, (2019) 7 SCC 62.

[14] Shapoorji Pallonji & Co. Pvt. Ltd. v. Rattan India Power Ltd. & Anr., (2021) 281 DLT 246.

[15] Oil and Natural Gas Corporation Limited v. M/s Discovery Enterprises Pvt. Ltd. & Anr., 2020 SCC OnLine SC 1375.

[16] MTNL v. Canara Bank & Ors., (2020) 12 SCC 767.

[17] Sudhir Gopi v. Indira Gandhi National Open University and Anr., 2017 SCC OnLine Del 8345.

[18] Arupri Logistics Pvt Ltd. v. Vilas Gupta, 2023 SCC OnLine Del 4297.

[19] Cox & Kings Limited v. SAP India Private Limited And Another, 2023 SCC OnLine SC 1634.

[20] Cox & Kings Ltd. v. SAP India (P) Ltd. (2024) 4 SCC 1.

This article was originally published in BW world Co-written by: Shruti Sabharwal, Partner; Ananya Aggarwal, Counsel. Click here for original article

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