NAVIGATING THE CONUNDRUM OF ‘CONSENT’ THROUGH

APPLICATION OF DOCTRINE OF GROUP OF COMPANIES IN

ARBITRATION

Abstract

The complex task of balancing the 'Group of Companies' theory with the fundamental idea of
autonomous legal personality, as established in the landmark Salomon v. Salomon decision, is a
constant in India's arbitration environment. According to this case law, the goals of a firm's
promoters are moot since the corporation retains its own corporate identity even when it acts as
an agent. Moving away from a limited approach that limited arbitration to signatories, the 1996
Arbitration and Conciliation Act represented a paradigm change. The 'group of companies idea
was introduced into the Indian legal system in the landmark case of Chloro Controls India (P)
Ltd v. Severn Trent Water Purification Inc in 2013, which was a watershed event. Based on the
wording "claiming through or under" in Section 45 of the Act, the Supreme Court broadened the
scope of arbitration to include organizations that were not directly involved in the agreement, as
long as there was a clear intention to bind both parties.

The group of companies doctrine was further developed and clarified by subsequent verdicts,
such as Mahanagar Telephone Nigam Ltd v. Canara Bank. Beyond the simple act of signing,
other factors were taken into account, such as participation in the negotiating of contracts, the
idea of a singular economic reality, and the establishment of prima facie evidence at the referral
stage. Cox & Kings Ltd. v. SAP India (P) Ltd. was the result of a final decision that cleared the
confusion caused by the haziness of Indian arbitration law on the subject. India has evolved its
jurisprudence from a rigorous application of the Salomon principle to a more nuanced adoption
of the 'group of firms' doctrine, reflecting its goal of an arbitration-friendly jurisdiction and its
efforts to navigate the dilemma of consent.

Domestic Backdrop

Judicial pronouncements in India have been the most viable expansionist strategy in its quest
towards becoming an arbitration amiable jurisdiction. The 'Group of Companies' theory
encounters a significant obstacle when one examines the principle of independent legal identity,
as established in the case of Salomon v. Salomon.1 The crux of this legal precedent is that the
House of Lords determined that the company, even though it acted as an agent for Salomon, was
a properly established corporation. Therefore, "the intentions of those involved in promoting the
company are completely irrelevant when considering its rights and obligations."The notion of

1[1896] UKHL 1, [1897] AC 22

imposing responsibility on a party who has not signed an arbitration agreement appears to
contradict the principle of distinct legal entity established in the Salomon case and followed by
the English Courts and most common law jurisdictions.

The contemporary facet of the usage of literary expression ‘claiming through or under’ in
Section 45 of Arbitration and Conciliation Act, 1996 is ambiguous for the determination of the
inclusion of ‘group of companies’ under the scope of the legislative provision. Prior to the
implementation of the Arbitration and Conciliation Act, 1996 ("Act"), Indian courts used a
narrow approach, confining arbitration to only those who have signed the agreement.
Subsequently, with the implementation of the Act, the courts embraced a more permissive stance
and acknowledged the potential for imposing legal obligations on individuals or entities that did
not directly sign the agreement, albeit under extraordinary circumstances. The Supreme Court's
ruling in the case of Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc (2013) 2
was a notable milestone, as it introduced the application of the group of companies concept
inside the Indian legal framework for the first time. The Court determined that a party who did
not sign the agreement might be compelled to participate in arbitration provided there was a clear
purpose to obligate both those who signed the agreement and those who did not. Furthermore, it
used the phrase "claiming through or under" in the legislation to broaden the reach of arbitration
to include individuals or entities that did not originally sign the agreement.

In later rulings, such as Mahanagar Telephone Nigam Ltd v. Canara Bank 3, the Supreme Court
continued to enhance and clarify the group of companies theory within the Indian setting. The
analysis also considered other elements, including the involvement of the non-signatory in the
contract's negotiation or execution, the concept of single economic reality, and the first
conclusion of prima facie evidence at the referral stage. The absence of lucidity and consistency
in the Indian arbitration law on this matter has resulted in perplexity and ambiguity for both the
parties involved and the arbitrators. Hence, it was imperative for the Supreme Court of India to
make a conclusive and authoritative ruling on this matter, which was ultimately delivered in the
contemporary verdict of Cox & Kings Ltd. v. SAP India (P) Ltd. 4 Conversely, the Australian
High Court is in consonance with the Indian Supreme Court's stance on expanding the
enforceability of an arbitration agreement to include individuals or entities that are not
signatories.5

Decoding SC’s Stance Through Cox & Kings Ltd Judgment6:

A. Consent

2 (2013)1SCC 641
3 2023/DHC/001430
4 2023 INSC 1051
5 Rinehart v. Hancock Prospecting, [2019] HCA 13
6 supra
The Supreme Court noted that determining who qualifies as a "party" to an arbitration agreement
is essentially a matter of consent. The Supreme Court observed the following through the judicial
pronouncement of Cox & Kings:

● Group corporations have become an integral part of today's economic landscape and
corporate structure. The party signing the arbitration provision is not necessarily the same
party negotiating or carrying out the core duties of the contract. An overemphasis on
formal consent in such a case would cause the arbitration agreement to exclude non-
signatories, which would cause disputes to be fragmented and lead to several processes.

● Arbitration is a contractual liaison, and an agreement to arbitrate, being a product of a

contract, is likewise subject to the fundamental rules of contract law. The contractual
concepts of privity of contract, consensus ad idem, explicit and implicit consent, etc., are
fundamental in establishing a legitimate arbitration agreement.

● The matter of enforcing an arbitration agreement against a party who did not originally
sign it is mostly dependent on the unique circumstances and facts of the case.

● According to Indian contract law, acts or behavior may serve as evidence of a party's
willingness to be legally bound by a contract. This notion of implicit consent also applies
to an arbitration agreement.

● The phrase "non-signatories" is more appropriate than the customary term "third parties"
to represent circumstances when permission to arbitration is given by methods other than
signing or explicit agreement.

B. Definition of ‘Party’ and the requisites to be qualified as a ‘party’

In order for an arbitration agreement to be considered genuine and capable of being enforced, the
Supreme Court has established that it must satisfy the criteria outlined in Section 7 of the Act,
which encompasses two distinct elements:

Regarding the substance, Section 7 is based on the legislative intention that any legal connection,
including those without a contract, might be the subject of an arbitration agreement if the acts or
behavior of the individuals or organizations involved have created a relationship.

The formal side of the matter is that Section 7(3) requires the presence of a documented
arbitration agreement. Section 7(4) specifies three situations in which an arbitration agreement
can be considered to be in writing:
1. If it is signed by all parties involved.
2. If it is documented in a written exchange, such as letters, telex, telegrams, or other forms of
telecommunication, including electronic communication, that provide evidence of the agreement.
3. If it is mentioned in a written exchange of statements of claim and defense, where one party
alleges the existence of the agreement and the other party does not deny it.

The Supreme Court has noted that these three factors are aimed at ascertaining the "mutual
intention of the parties" to be legally bound by an arbitration agreement.

As a result, the Supreme Court has also noted that Section 2(h), when combined with Section 7
of the Act, does not explicitly mandate that the "party" must be a signatory to an arbitration
agreement. Therefore, the Supreme Court has definitively resolved the matter as follows:

i) The term "parties" as defined in Section 2(1)(h), in conjunction with Section 7 of the Act,
encompasses both signatory and non-signatory parties.

ii) The behavior of parties who did not sign the agreement may indicate their agreement to be
legally bound by the arbitration agreement. The concept of the group of companies doctrine is a
separate legal principle that arises from a combined interpretation of Section 2(1)(h) and Section
7 of the Arbitration Act.

iii) The application of the group of companies doctrine is based on the principle of preserving the
independent status of companies within a group, while establishing the shared intention of the
parties to include a non-signatory party in the arbitration agreement. It is important to note that
the group of companies doctrine only applies to the parties involved in the arbitration agreement,
and not to the underlying commercial contract. As a result, someone who did not sign the
agreement might nevertheless be considered a participant in the arbitration agreement, even if
they are not officially involved in the main contract.

According to the Supreme Court, the main way to apply the doctrine is to look at the facts and
figure out what the parties' intentions were. The circumstances surrounding the non-signatory
party's involvement in the negotiation, performance, and termination of the underlying contract
including such agreement might provide insight into their purpose. In addition, the non-
signatory's engagement in the contract's performance should be positive, direct, and significant,
rather than just accidental.

The court has also noted that the burden of proof is with the party seeking the non-signatory's
joinder to the arbitration agreement to demonstrate, via objective evidence, that the non-
signatory's engagement was conscious and purposeful. The concept of separability is approached
in a novel and distinctive way by Cox & Kings. According to the theory, the arbitration
agreement stands on its own and may be considered in isolation from the main contract.
Although the agreements themselves may differ, the fact that the same parties are involved in
both shows that a coalition of parties is possible.

It seems that the traditional understanding of the separability idea has been broadened by the
Supreme Court's decision in the Cox & Kings case. It is the non-signatory's commitment to be
bound by the arbitration agreement, not the underlying contract that includes it, that is the most
important factor in determining whether they are included in the arbitration agreement. It is
therefore possible for the arbitration agreement to include other parties other than those involved
in the main agreement, and vice versa. According to Cox & Kings, arbitration is becoming more
important in India as a method of conflict settlement. Justice Surya Kant, writing in his
concurring opinion on the referral, emphasized the merit and significance of the idea. By
addressing the avoidance of arbitration and providing a solution for handling multi-party
complicated business transactions, this approach lessens the load on the judicial system.

Breaking down “Claiming through or under” in legislative provisions

The Supreme Court (SC) has determined that its previous approach in the Chloro Controls7 case,
where it attributed the group-of-companies concept to the phrase "claiming through or under",
was incorrect and contradicted established principles of contract law and corporate law.
Therefore, the Supreme Court definitively resolved the matter as follows:

- The individuals who are "claiming through or under" can only assert a right in a
derivative capacity, meaning that their right is derived from the party who is a part of the
arbitration agreement.
- The usual situations where a person or entity can claim through or under a party include
assignment, subrogation, and novation. Those who claim through or under do not have an
independent right to be considered as parties to the arbitration agreement, but rather as
successors to the interests of the parties who signed the agreement. A mere legal or
commercial connection is not enough for a non-signatory to claim through or under a
signatory party.

Furthermore, the Supreme Court has noted that the notion of a "party" is separate and distinct
from the notion of "persons claiming through or under" a party to the arbitration agreement. The
group of businesses doctrine is used to enforce the arbitration agreement against a party that did
not directly sign it, thus allowing them to enjoy the advantages and assume the responsibilities
that arise from or are granted during the execution of the contract. The application of the "single
economic entity" criterion alone is insufficient to justify the invocation of the group-of-

7 supra
companies doctrine. The application of the group-of-companies concept cannot be justified by
the notion of alter ego or breaching the corporate veil.

Section 9 of the legal provision permits a "party" to approach the court in order to request
temporary remedies, without requiring the inclusion of the words "claiming through or under".
According to the Supreme Court, if a non-signatory is found to be a genuine party to the
arbitration agreement by a court or tribunal, that non-signatory may also request interim
remedies under Section 9 of the Act. When an individual or organization that has not signed a
contract is included as a party in either Section 8 or Section 11, the court should initially assess
the validity or existence of the arbitration agreement. The final decision on whether the non-
signatory is obligated by the arbitration agreement should be left to the arbitral tribunal during
the Section 16 stage.

Justice Narsimha, in his concurring opinion, states that determining whether a non-signatory may
be included as a party to an arbitration agreement is a matter of interpreting the contract. The
arbitral tribunal should make the first decision on whether the non-signatory's permission or
intention to arbitrate is clearly absent, unless the court is fully satisfied of this fact. He reiterated
his previous stance that Section 7 of the Act should be construed with adaptability and
intentionality to fulfill the genuine intents of the parties involved and the practical concerns of
modern commercial transactions. In order to determine whether the parties have shown an
intention to engage in arbitration, their acts must be assessed in an unbiased and situational
manner.

Additional theories and ideas used to enforce arbitration agreements against parties who did not
originally sign them include the alter ego theory, the penetrating the corporate veil doctrine, and
the single economic unit principle. The link and differentiation between the group of businesses
doctrine and these other ideas and principles were further elucidated. The court determined that
the conception of a consortium of companies was separate and unrelated to these other notions
and principles. The court determined that the "persons claiming through or under" a party to an
arbitration agreement cannot be used as the foundation for the "group of companies doctrine," as
outlined in sections 8 and 45 of the Act. This ruling definitively resolves the long-standing
dispute over the legal obligation of third parties to engage in arbitration procedures.
Additionally, it provides a comprehensive and pragmatic framework for the implementation of
the group of enterprises idea in India.

As previously shown, the Supreme Court has streamlined the applicable legislation by rendering
decisions on a diverse array of matters pertaining to the topic. Non-signatories are often only
bound by an arbitration agreement in exceptional instances when the situation clearly warrants it,
rather than as a common practice. According to the Supreme Court's ruling, the party demanding
the impleadment of a non-signatory now has the responsibility to establish that they are parties.
The decision emphasizes that being a signatory is the sole need for someone to be considered a
party. The 'Group of Companies' hypothesis is a significant aspect in evaluating whether non-
signatory conduct may be considered as implicit or explicit agreement. The Supreme Court of
India has recommended using this theory, along with other variables, for making this
determination. Indian courts should exercise caution and avoid making hasty judgments in cases
involving several contracts and the inclusion of non-signatories in a unified arbitration process.
Although the Supreme Court has provided valuable guidance on when the 'Group of Companies'
concept may be used, it is important to carefully consider the specific circumstances of each
case. It is crucial to meticulously examine the facts of each case in isolation and thereafter
evaluate them against the specified criteria. The current judgment seems to be an advancement
in the right direction for Indian arbitration law, although businesses may try to sidestep the
enforceability of arbitration agreements by drafting increasingly complex multi-party contracts.
Considering that companies are only forming intricate corporate structures to avoid legal
obligations, it is imperative that tribunals and courts set clear criteria for the appropriate
application of veil piercing principles and assess whether such application is justified.

Conclusion

The determination of an individual's standing as a "party" to an arbitration agreement extends

beyond the mere act of signing the contract. Interconnected transactions among affiliated
companies within a group might indicate agreement to be legally obligated by the arbitration
agreement. When a consortium of firms want for the arbitration agreement to only pertain to the
specific company that entered into it, they must exercise caution in ensuring that the agreement is
meticulously formulated and that their subsequent activities align with this intention.
Furthermore, it is important for them to exercise caution and refrain from interfering in the
negotiations or implementation of contractual obligations of another subsidiary, unless there is a
legitimate need to do so. Furthermore, the parties have the option to use specific language in the
contract to explicitly express this provision.

Possible impediments include concerns over the rights and interests of parties who have not
signed the agreement, as well as potential ambiguity and uneven implementation of the group of
enterprises doctrine due to its case-specific nature. Complying with foreign components in the
arbitral verdict might provide challenges when dealing with international law, seats, or
currencies. To surmount these challenges and institute an effective and equitable arbitration
process, much deliberation and implementation are necessary. When dealing with these issues, it
is important for the courts, parties, and practitioners to remain calm and use tactfulness. Further
investigation and examination of the issue are necessary, along with ongoing communication and
collaboration between the Indian and international arbitration organizations.