What is the ‘Group of Companies’ Doctrine?

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What is the ‘Group of Companies’ Doctrine? Blog Image

Overview:

A Constitution Bench of the Supreme Court recently held that an arbitration agreement can bind non-signatories as per the "group of companies" doctrine.

About ‘Group of Companies’ Doctrine

  • The "group of companies" doctrine states that a company that is a non-signatory to an arbitration agreement would be bound by the agreement if such a company is a member of the same group of companies that signed the agreement. 
  • The doctrine deems that the parties to the arbitration agreement mutually intended for such a non-signatory to be bound by it.
  • Arbitration is a mechanism to resolve disputes between parties without going to court. A neutral person is appointed to adjudicate the dispute, and the judgment of an arbitrator is legally enforceable.
  • The "group of companies" concept, unlike other non-signatory theories that are based on domestic law principles, is based on international arbitration jurisprudence.
  • The doctrine was first recognised by the Indian Supreme Court in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. (2013). Since then, Indian courts have applied the doctrine to bind group companies of signatories to arbitration agreements.
  • The Supreme Court in ONGC Ltd. vs. Discovery Enterprises (P) Ltd. came up with certain factors to be considered in order to decide whether the Doctrine would find application or not, being:
    • the mutual intent of the parties
    • the relationship of a non­-signatory to a party which is a signatory to the agreement
    • the commonality of the subject-matter
    • the composite nature of the transaction
    • the performance of the contract
  • The main purpose behind bringing the 'group of companies' doctrine in India was to prevent fragmentation of disputes in composite transactions i.e., disputes consisting of several parties and multiple contracts.
  • Recent Supreme Court Ruling:
    • The Court held that it is not necessary that only persons who are signatories to the arbitration agreement will be bound by the arbitration agreement.
    • The requirement of a written arbitration agreement does not mean that non-signatories will not be bound by it, provided there is a defined legal relationship between the signatories and the non-signatories and that the parties intended to be bound by it by the act of conduct.
    • Non-signatories, by virtue of their relationship with the signatory parties and their commercial involvement in the subject matter, are not total strangers to the arbitration agreement.

Q1) What is a Constitution Bench of the Supreme Court?

Generally, most of the cases before the SC are heard by a division bench (2 or 3 judge members). If a case is likely to have a larger national impact or it is likely to decide the law for good, a constitution bench is formed. The Constitution bench gives an overarching view on a question of law and defines a path the law will take in the future. It will have five or more judges of the SC.

Source: Arbitration Agreement Can Bind Non-Signatories: Supreme Court Upholds 'Group Of Companies' Doctrine