The recent judgment by the Supreme Court in the case of Oil and Natural Gas Corporation Limited (ONGC) v. M/s Discovery Enterprises Pvt Ltd (DEPL) & Anr delivered on April 27, 2022 touched upon the 'group of companies' doctrine which postulates that an arbitration agreement entered into by a company within a group of companies, can bind its non-signatory affiliates or sister concerns if the circumstances demonstrate a mutual intention of the parties to bind both the signatory and affiliated, non-signatory parties.
The arbitral tribunal in its interim award held that Jindal Drilling and Industries Limited (JDIL) was not a party to the arbitration agreement and must be deleted from the array of parties. The interim award was challenged under a Section 34 petition, which was dismissed. Thereafter an appeal filed under Section 37 of the Arbitration and Conciliation Act was also dismissed by the Bombay High Court. Aggrieved, ONGC approached the Supreme Court.
The Group of Companies Doctrine
A non-signatory may be bound by the operation of the group of companies' doctrine as well as by the operation of the principles of assignment, agency, and succession. A party, which is not a signatory to a contract containing an arbitration clause, may be bound by the agreement to arbitrate if it is an alter ego of a party that executed the agreement. This doctrine is therefore a departure from the ordinary principle of contract law that every company in a group of companies is a distinct legal entity. In other words, a non-signatory may be bound by the arbitration agreement where:
(i) There exists a group of companies; and
(ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory thus showing the mutual intent of the parties;
(iii) The relationship of a non-signatory to a party that is a signatory to the agreement;
(iv) The commonality of the subject matter;
(v) The composite nature of the transaction; and
(vi) The performance of the contract.
The decision of the Supreme Court in the 2013 case of Chloro Controls was the first to establish a precedent regarding the inclusion of non-signatories to the arbitration clause in the same dispute resolution proceeding. Before this, the apex court relied on Sukanya Holdings Pvt Ltd v. Jayesh H Pandya and Ors, which clearly stated that an arbitration agreement will only bind the parties which have entered into the same.
In the Chloro case, one of the parties was an Indian corporation and the other was a foreign company, and London was selected as the site of arbitration. Multiple contracts that were inter-related were not directly tied to the parties. In the process of determining whether non-signatory shareholders are parties to the arbitration or not, the Supreme Court mentioned that the decision in Sukanya was made in the context of Section 8 of the Act, but the Chloro Controls case fell under Section 45 of the Act. This allowed the Court more discretion in interpreting the Section.
However, before incorporating non-signatory parties, determining the parties' intentions was one of the most crucial factors to examine. The 2015 amendment to the Arbitration and Conciliation Act, 1996 and the 246th report of the Law Commission of India thereafter aided in incorporating the principle presented in Chloro Controls in the Act. The most prominent change of the 2015 amendment with respect to this subject matter was made under Section 8, where the word ‘party’ was replaced with ‘a party to the arbitration agreement or any person claiming through or under him’.
Thereafter, the Supreme Court in Cheran Properties Limited v. Kasturi and Sons Ltd laid down the scrutinized observation to be followed in awarding arbitral awards to non-signatories. It stated that an arbitral award may be binding on a third party if such party falls within the meaning of 'parties and persons claiming under them' under Section 35 of the Act.
Analysis and application of the law in place
In the ONGC case, however, the Supreme Court did not issue a binding ruling stating that JDIL should be a party to the arbitral proceedings, but instead left the topic to be determined by the newly constituted arbitral tribunal. However, by granting ONGC's appeal, the Supreme Court has broadened the scope of the "group of firms" theory. In noting that the aforementioned interim award was premature in the context of other petitions pending before the Court, the preceding decision has also broadened the scope of the court's authority which has been exercised at this point. By remanding the matter to the arbitral tribunal, the apex court has effectively held that a group company may be summoned and be a party to an arbitration agreement and proceeding even if (i) it is not a signatory, (ii) has no common shareholders or key personnel, and (iii) there is no composite nature of the transaction.
In addition, the Supreme Court also highlighted that an application for discovery and inspection should have been adjudicated by the arbitral tribunal before the application under Section 16 of the Act was decided. This finding constituted the basis for the issue to be remanded to the tribunal.
Therefore, the Supreme Court has effectively ruled that the arbitral tribunal must rule on all the evidence and applications relating to discovery filed by the parties before determining the applicability of the Group of Companies Doctrine and subsequently issuing an interim award pursuant to Section 16 of the Act.
The judiciary has come a long way from the Sukanya case to the ONGC case. It can be rightly said that Indian courts have eased into adopting the Group of Companies doctrine in contrast to the scepticism shown by other common law countries. The Indian courts have time and again made efforts towards broadening their approach, aided by the amendments to the Act, not only in the international arbitration scenario, but also in domestic arbitration.
Rimali Batra is Associate Partner and Mahip Singh Sikarwar is Principal Associate at DSK Legal.