The Supreme Court on Wednesday widened the ambit of the term ‘‘party” under the arbitration law to include non-signatory firms within a group in an agreement by using the “group of companies” doctrine.
The group of companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement which has been signed by another member of the group.
In the normal course, since every company in a group has a separate legal personality, a contract formally entered by one member of a group will not be binding on the other members.
However, across the globe in a vast majority of advanced countries, the group of companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement.
Group companies are a set of separate firms linked together in formal or informal structures under the control of a parent company.
The group companies can be defined in the Indian context "as an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community".
The five-judge comprising Chief Justice of India D.Y. Chandrachud, Justices Hrishikesh Roy, J. B. Pardiwala, Manoj Misra and P.S. Narasimha passed the ruling while dealing with a dispute between Cox and Kings Ltd and SAP India Pvt. Ltd.
"This decision brought much-awaited clarity concerning the highly debated and misunderstood concept of Group of Companies’ Doctrine," Tejas Karia, partner, head – arbitration, Shardul Amarchand Mangaldas, said
"It will reduce the controversy pending on this issue before numerous arbitrations and court matters as it dilutes the requirement of written arbitration agreement signed by all parties for being joined in an arbitration," he said.