In an important development for multi-party and multi-contract arbitration in
Background
The question of whether Indian courts could exercise their powers to refer parties in judicial proceedings involving non-signatories to arbitration - and similarly, to appoint arbitrators in matters involving non-signatories - has been considered from time to time. Mindful of the contractual nature of arbitration, Indian courts were hesitant to subject non-signatories to arbitration. However, in many cases, it was also obvious that disputes that were properly the subject matter of arbitration were sought to be resolved in courts (and arbitration avoided) by impleading non-signatories. This question frequently arose in the context of joint venture arrangements, involving multiple contracts with differing dispute resolution provisions, often between different affiliates belonging to the same group. Although the precise structure of such transactions and the combination of parties in dispute varied from case to case, the question remained the same: in multi-party and multi-contract transactions, what was the court's role in referring parties (including non-signatories) to arbitration and what were the limits of its powers?
The
The law laid down in Chloro Controls was followed and its applicability expanded by subsequent decisions. However, it came to be questioned by another three-judge bench of the Supreme Court in
Decision
Balancing Consent and Commercial Reality
Having noted that "consent forms the cornerstone of arbitrations" and that rules of privity apply, the Supreme Court proceeded to analyse the applicability of the Doctrine in Indian law.
Consent and non-signatory parties
The Court considered the definition of an arbitration agreement under Section 7 of the Arbitration and Conciliation Act 1996 (the "Act"). It noted that while the Act required an agreement to be in writing, there was no requirement that it be signed by all parties. An arbitration agreement could be evidenced in an exchange of communications. Thus, even those who had not signed the arbitration agreement (the "non-signatories") could be parties to an arbitration agreement if they had, in fact, consented to the arbitration agreement. The Court noted that this was not a question of extension of an arbitration agreement to third parties, but rather a process of identifying the real or 'veritable' parties to the dispute. The Court felt there was a need to adopt a modern approach to consent to better deal with the commercial reality of composite transactions involving several interrelated agreements and parties.
The Doctrine
The Court noted that the Doctrine "is a means of identifying the common intention of the parties to bind a non-signatory to [an] arbitration agreement by emphasizing and analysing the corporate affiliation of the distinct legal entities". The Court distinguished between the doctrine of "alter ego" and the (group of companies) Doctrine. It noted that while the doctrine of alter ego involves disregarding the separate legal identity of a corporation, the Doctrine does not disrupt the legal personality of the entities involved. Instead, it is a means to ascertain the true intention of parties to determine the parties (signatories and non-signatories) to the arbitration agreement and applies without the necessity of piercing the corporate veil.
Application of the Doctrine
The Court held that the factors laid down in a previous case of
- 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 transactions; and
- The performance of the contract.
Distinction between "party" and person "claiming through or under"
The Court found the reasoning in Chloro Controls, insofar as it traced the existence of the Doctrine to the phrase "claiming through or under", to be erroneous. Instead, it clarified that the Doctrine is based on the principle of the mutual intent of parties to be held to a commercial bargain. The phrase "claiming through or under" referred to entities who are successors-in-interest and act in a derivative capacity, substituting the signatory party to the arbitration agreement such as on assignment, subrogation or novation. They did not include companies with independent legal personalities, even where they were members of the same group.
Standard of determination at the referral stage
The Court clarified that there should be minimal judicial intervention by courts. In the context of applications to refer parties to arbitration, courts must determine "prima facie" whether a valid arbitration agreement exists. A detailed analysis or a decision on the merits of the case is not necessary. Similarly, for appointment of arbitrators, courts are approached only when the agreed appointment procedure fails and the scope of review is limited to an examination of the arbitration agreement. Any detailed assessment must be left to the arbitral tribunals, which are empowered to determine the limits of their own jurisdiction.
Comment
The decision in
It makes clear that being a signatory to an arbitration agreement is not the sole determinant of being a 'party' to the arbitration agreement. Where companies are part of a group, and there are interrelated dealings, such dealings could constitute consent to be bound by the arbitration agreement. When corporate groups intend for only the signatory company to be bound by the arbitration agreement, they should take care to ensure that the transaction is structured appropriately and their conduct is in line with such intention. They must also take care not to get involved without good reason in negotiations and performance of another group company's contractual obligations. Parties may also consider inserting clear language to this effect in the contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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