Enforcing arbitration agreements against a non-signatory

The author discusses enforcement of arbitration agreements against non-signatories in light of the famed ‘Amazon vs. Future Retail’ emergency arbitration matter.
Enforcing arbitration agreements against a non-signatory
Enforcing arbitration agreements against a non-signatory

Commercial arbitration represented via an arbitration agreement is nothing but a “creature of consent” to resolve disputes. While it binds the formal signatories to the mutually assented contract, the law on binding non-signatories to arbitration proceedings was ambiguous until a recent judgment by the Indian Supreme Court. This recent pronouncement in the case of Amazon.com NV Holdings LLC vs. Future Retail Ltd. & Ors. (Civil Appeal Nos. 4492-4493 of 2021), the famed ‘Amazon vs. Future Retail’ emergency arbitration matter has clarified that non-signatories are bound by the original agreement and gain from it in certain circumstances.

Before diving into judicial pronouncements, it may be prudent to first acquaint ourselves with the statutory provisions in this regard. Section 7 of the Arbitration & Conciliation Act, 1996 which provides for the ingredients of an arbitration agreement mandates that the arbitration agreement be mutually accepted. Such consent ought to be free and expressly intended to submit the dispute to arbitration. Over the period, few principles were expounded that would qualify as exceptions of parties consenting to an arbitration agreement even if the party were non-signatory to such an agreement. This was done to address the issue of enforcement of arbitration agreement and an award.

A three-judge bench of the Supreme Court in Chloro Controls India Private Limited vs. Severn Trent Water Purification Inc. & Ors. (2013) 1 SCC 641) formulated a classification of relationships enabling non-signatories to be bound by the arbitration agreement and the award. These relationships can be classified under three broad categories.

The first exception entitles third party beneficiaries and guarantors, assignment and transfer of contractually arising rights, by way of ‘implied consent’. The second exception includes various principles including agency and principal, piercing of the corporate veil, relationships arising out of joint ventures, succession, estoppel and apparent authority. Finally, the third exception is that of the ‘group of companies doctrine’. This principle can be invoked in cases where the entity entering the arbitration agreement is a group of companies. Such an agreement binds the affiliates of the signatory if the circumstances demonstrate mutual and implied intention to include under its subjective scope, both signatory and non-signatory parties.

It may be noted that the ‘group of companies doctrine’ was recognized internationally by Dow Chemical vs. Isover Saint Gobain (ICC Award No. 4131, YCA 1984). It was exclusively recognized for the first time in the Indian literature by the Indian Madras High Court in the case of SEI Adhavan Power Pvt. Ltd. vs. Jinneng Clean Energy Technology (2018 (4) CTC 46). The doctrine implies that mutuality of intention, tacit conduct and role of non-signatory in performance of the contract are the key attributes that need to be established to refer non-signatories to arbitration. Such exceptions are further examined from the viewpoint of the manner of performance of a contract, common objective and interests in the subject matter, and composite transaction between the parties.

In the context of international commercial arbitration, Indian courts have made an active effort in bringing commercial laws at par with the sense of business efficacy. Indian courts have elaborately and interpreted the group of companies doctrine, and thereby helped develop the principle in the context of relevant circumstances. Until the pronouncement in Amazon vs. Future Retail (supra), the Indian Supreme Court had not explicitly delved on the issue of application of this doctrine to bind non-signatories to an arbitration agreement. However, the doctrine of a group of companies, akin to the principles of agency and implied consent has been discussed in the Chloro Controls case (supra), Cheran Properties Limited vs. Kasturi and Sons Limited and Others (2018) 16 SCC 413 and Ameet Lalchand Shah and Others vs. Rishabh Enterprises and Others (2018) 15 SCC 678 to bind non-signatories to arbitration awards. However, the doctrine was accepted by the Supreme Court in the case of Mahanagar Telephone Nigam Ltd. vs. Canara Bank and Others (2020) 12 SCC 767 and reiterated in the ‘Amazon vs. Future Retail’ case (supra).

In the context of the aforesaid debate, while the growing acceptance of ‘group of companies’ contributes to a sense of business efficacy, the Indian Supreme Court would do well to elucidate the due process behind the applicability of the doctrine. The far-reaching scope of doctrine as set out in the Chloro Controls case (supra) and Cheran Properties case (supra) could have had dangerous consequences for businesses where the thresholds of intent and conduct were set so broad. Fortunately, in the MTNL vs. Canara Bank (supra) case, lowered the thresholds of implied consent and the scope of a ‘group’ of companies. It had however become essential for the Indian Supreme Court to revisit the doctrine to determine the jurisprudencial basis of the doctrine and applicability thereof, which was finally done in the Amazon vs. Future Retail case (supra).

It is however imperative that the courts clarify the contradiction between a historical and practical approach to arbitration as a creature of contract. One may observe that all doctrines with the exception of ‘the group of companies doctrine’ were not formulated for the needs of arbitration but merely borrowed from general corporate laws and contract laws. While, strict consent-based tests seem to be an endless circle where other considerations like privity to contract, conduct, intention etc. take precedence, a judicious solution ought to be crafted to avoid any compromise.

Author: Trisha Shreyashi is a legal professional. She is presently pursuing Masters in Law (LL.M.) at National Institute of Securities Market (NISM), Mumbai.

Related Stories

No stories found.
Bar and Bench - Indian Legal news
www.barandbench.com