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º¬Ðß²ÝÉçÇø courts have taken a pro-arbitration stance that favours the consent of parties when it comes to directing non-signatories to arbitrate, writes former deputy advocate general Varun Kumar Chopra

The Group of Companies doctrine was recently reaffirmed by the Supreme Court in its judgment in Ajay Madhusudan Patel & Ors v Jyotrindra S Patel & Ors (2024). The court determined that a non-signatory affiliate could be obligated to comply with an arbitration agreement if all parties involved had a clear mutual intention.

This decision explicitly stated that courts should only conduct a prima facie evaluation of the intent of the parties involved in applications under section 11(6) of the Arbitration and Conciliation Act, and the arbitral tribunal should be responsible for making detailed determinations in accordance with the kompetenz-kompetenz principle.

In this regard, the issue of whether Indian courts can utilise their authority to direct parties in legal proceedings with non-signatories to arbitration ¨C and likewise, to appoint arbitrators in cases with non-signatories ¨C has been examined periodically. Aware of the contractual essence of arbitration, Indian courts were reluctant to impose arbitration on non-signatories. Nonetheless, in numerous instances, it was clear that disputes appropriately meant for arbitration were being pursued in courts (and arbitration evaded) by including non-signatories.

This issue often emerged in the context of joint venture agreements, which included various contracts with distinct dispute resolution clauses, frequently among different affiliates within the same organisation.

While the exact arrangement of these transactions and the mix of disputing parties differed from case to case, the central question persisted: In transactions involving multiple parties and contracts, what is the court¡¯s responsibility in directing parties (including non-signatories) to arbitration, and what are the boundaries of its authority?

The Supreme Court encountered this scenario in Chloro Controls India (P) Ltd v Severn Trent Water Purification Inc (2013). In a pivotal ruling, a three-judge panel of the Supreme Court directed the parties to arbitration, citing that non-signatory group companies were obligated by the arbitration agreement due to a shared intention of the parties involved.

The court noted that if a ¡°mother agreement¡± and various ¡°ancillary agreements¡± pertain to different aspects of a composite transaction, the arbitration clause in the mother agreement would be binding on all parties engaged in the transaction.

The court examined sections 8 and 45 of the Arbitration and Conciliation Act, 1996, which pertain to the authority of a judicial body to direct parties involved in a legal case to arbitration. It stated that an individual bound by an arbitration agreement, or a ¡°person claiming through or under him/her¡±, has the right to request referral of the parties to arbitration.

The court also interpreted the statutory language ¡°persons claiming through or under¡± to broaden the reach of arbitration clauses beyond the direct signatories, encompassing those who played a crucial role in the transaction but may not have explicitly agreed to the arbitration agreement.

The court reasoned that parties engaged in carrying out related contracts, even if they are not signatories to the primary agreement, could be viewed as ¡°claiming through or under¡± the signatories, particularly when these contracts formed part of a unified transaction. The principle established in the Chloro Controls case was adhered to and its relevance further extended by later rulings.

Nevertheless, it was scrutinised by another three-judge panel of the Supreme Court, in Cox and Kings Ltd v SAP India Pvt Ltd (2022). Challenging the validity of the ruling in Chloro Controls, the panel submitted the issue to a five-judge (constitutional) bench of the Supreme Court, which definitively ruled on the issue in the Cox and Kings case.

Observing that ¡°consent is fundamental to arbitrations¡± and that privity rules are relevant, the court then examined the doctrine¡¯s applicability within Indian law.

The court also examined the meaning of an arbitration agreement under section 7 of the arbitration act. It observed that although the act mandates a written agreement, it does not require signatures from all parties involved. An arbitration agreement might be demonstrated through a series of communications.

Therefore, individuals who did not sign the arbitration agreement (non-signatories) could still be considered parties to an arbitration agreement if they had genuinely agreed to it. The court remarked that this was not about extending an arbitration agreement to outside parties, but instead a method of determining the genuine or ¡°true¡± parties involved in the dispute.

Recognising the necessity of embracing a contemporary perspective on consent, the court aimed to more effectively address the commercial realities of composite transactions that involve multiple interconnected agreements and parties. It observed that the doctrine ¡°serves to ascertain the mutual intention of the parties to hold a non-signatory to an arbitration agreement by highlighting and examining the corporate relationship of the separate legal entities¡±.