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Can an Arbitration Agreement be binding on the non-signatories to the Agreement?

Section 7 of the Arbitration and Conciliation Act, 1996[1], defines an Arbitration Agreement as an agreement signed by the parties to submit to the process of arbitration all or any certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

However, there are instances when a non-party or non-signatory to the arbitration agreement might be needed to be included as a signatory and the agreement to be made binding upon them in order to truly mete out justice. There is certainly an iota of doubt or hesitation while doing so because it is simply not a general practice to enforce any agreement upon those who have not agreed to the same or to be a party to it. This article explores the same question by looking at what both, International and Indian arbitration jurisprudence, have to say about it.

Arbitration Agreements under the Arbitration and Conciliation Act, 1996

An Arbitration agreement may exist in the form of an arbitration clause in any other agreement or a contract, or it may exist in the form of a separate agreement facilitating such an understanding between the parties which binds them to submit all or certain disputes for resolution using the process of arbitration.

It has been expressly provided in the Act that the arbitration agreement has to be in writing. The Act also defines some stipulations under which only the agreement will be considered to be in writing.

It is so only if the arbitration agreement is contained in:
  • A document signed by the parties
  • An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
  • An exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other;
  • Also for the purpose of the question of whether the agreement is in writing or not, any reference in a contract to any document which contains an arbitration clause will effectively constitute an arbitration agreement if the contract is in writing. It has been stipulated that any such reference to the concerned document while being made in the contract should have been made in such a way as to make that arbitration clause a part of the contract itself.
So far, by the definition of an Arbitration Agreement which has been provided in Section 7 of the Act, it has been made clear that to be a party of an arbitration agreement it has to be expressly stated by the parties in the form of a written document or there must exist some proof which can serve as a testament to the fact that the parties to the arbitration have expressly agreed to be part of the arbitration agreement with free consent.

Thus it may be understood that only the parties which have signed the agreement and have provided their consent for the same are to be bound to the provisions of the same. In other words there should be consensus ad idem, which simply means that the contracting parties must have the common intention to take the dispute to an arbitral tribunal to claim relief.

New York Convention and the Ambiguity as to Determining the Parties to the Agreement

Also the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, more commonly known as the New York Convention, states that the international arbitration agreements are to be binding on the parties involved. However, the convention rules provide no illumination to the question of the way as to determining those parties.

Thus, the answer to the question, Whether an Arbitration Agreement can be binding on the non-signatories to the Agreement? has to be developed and determined through case laws across jurisdictions.

What position do the courts take?

It has been seen in cases that the tribunals or courts have extended the arbitration clause to include parties which were not a signatory to the original arbitration clause or agreement. In most cases it has happened when such a party has had some corporate ties with either of the original signatories.

There are two doctrines which facilitate allowing the extension of arbitration agreements to bind even those who have not expressly become a signatory to the arbitration agreements. These two doctrines are group of companies and lifting or piercing the corporate veil.

Lifting or Piercing the Corporate Veil Doctrine

As it may be clear by the title, this doctrine is the same as the famous doctrine which is usually discussed under company law. In the same spirit as employed there, the doctrine is used to look under the corporate identity and the separate legal entity of any party to the agreement and thus helps to make sure that if a party to the agreement was meant to function as a dummy or a shell entity, the real player behind the veil which is responsible for pulling the strings of the apparently, shell entity.

It is needed to ensure that the spirit of the arbitration agreement which has been entered into is upheld and it continues to bind the real players behind the parties to the agreement so that the quintessence of arbitration and justice can be sustained.

Group of Companies Doctrine

As the name suggests, the group of companies doctrine makes it possible to include non-signatories as a party to and make the arbitration agreement binding on them in case this non-signatory forms a part of the same group of companies as one of the signatories to the arbitration agreement. Also, the question of whether the non-signatory concerned was intended to be included and bound by the arbitration agreement has to be taken in account for the purpose of this doctrine.

International Arbitration Law

In International Arbitration Law, the group of companies doctrine was first expounded upon in the International Chamber of Commerce case of Dow Chemicals Company & Ors. vs. Isover Saint Gobain[2](see here), commonly known as the 'Dow Chemicals' case. In the case, the dispute arose out of a number of contracts which had been entered into between Isover and several Dow Chemical Company subsidiaries but not Dow Chemical Company itself. Dow Chemical Company together with its subsidiaries commenced arbitration.

Is over had objected to the claims made by the Dow Chemical Company on the ground that the latter was not a party to the contracts as thus is not a signatory to the arbitration agreement. Is over had claimed that the Dow Chemical Company did not have jurisdiction to make claims in the arbitration proceedings. However, the tribunal in this case had upheld the jurisdiction of the Dow Chemical Company.

The arbitral tribunal in this case rendered its judgment by stating that:
By virtue of their role in the conclusion, performance or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appears to have been veritable parties to these contracts or to have principally concerned by them and the disputes which they give rise"[3]. This award was thereafter upheld by the Cour d'Appel de Paris, and has since acted as a precedent for a number of arbitral tribunals across jurisdictions, on the issue of non-signatories being bound by arbitration agreements. The Dow Chemicals case has been a precedent for a number of subsequent ICC cases.

Indian Arbitration Law

However, under the Indian jurisprudence the group of companies doctrine is a relatively novel concept. Also, unlike most jurisdictions, the Arbitration and Conciliation Act does not expressly recognize this doctrine. In India, the jurisprudential basis of the inclusion of non-signatories as parties in the arbitration agreement was heralded by the Chloro Controls vs. Severn Trent Water Purification Inc. & Ors[4](see here). In this case, the court recognised the fact that the group of companies doctrine had been widely adopted in a lot of jurisdictions such as England, France and US over the past few years.

However at the same time they noted that definite reference to the language of the contract and the intention of the parties must be ascertained with great caution.[5] Furthermore, the Court also stressed that, "intention of the parties is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties".[6]

In deciding the extent of the doctrine in Indian arbitration jurisprudence, the court had set out four factors which have to be paid heed to
  • the 'direct relationship' of the non-signatory to the party who is the signatory of the arbitration agreement
  • the 'direct commonality of the subject matter and the agreement' between the parties
  • the agreement concerned must be of such a compound nature that the performance of the principal agreement could have not been possible without aid, execution and performance of the supplementary or ancillary agreements
  • whether referring disputes under all agreements would serve the ends of justice

As a conclusion the Court said, An arbitration agreement entered into by one company which forms a part of a group of companies has the power to be binding upon the other non-signatory affiliates of that group of companies, if the circumstances show that it was the mutual intention of the parties to bind both the signatory as well as the non-signatory parties.

The judgment of Chloro Controls has set precedent for a number of cases where the Courts in India have taken a progressive approach.

Cheran Properties Ltd vs. Kasturi and Sons Ltd & Ors.[7]
In this case, the Court while observing the ratio decidendi of its judgement in the Chloro Controls case that an arbitration agreement entered into by a company within a group of companies could bind non-signatory affiliates, if the circumstances could demonstrate a mutual intention of the parties to bind both signatories and non-signatories. The Supreme Court, whilst passing this judgment, also noted the exceptional nature of this doctrine and held that its application largely depends on the construction of the arbitration agreement and the factual context of the dispute.

R.V. Solutions Pvt Ltd vs. Ajay Kumar Dixit & Ors.[8] (see here)
The Delhi High Court held that a non-signatory or third party could be subjected to Arbitration without its consent, only in exceptional cases. There needs to be either a direct relationship to the signatory party of the Arbitration Agreement, or commonality of the subject matter, or composite transactions in the agreement between the parties.

Kotak Mahindra Bank v. Williamson Magor & Co. Ltd. & Anr.[9]
Recently on March 5, 2021, the High Court of Judicature at Bombay further clarified on the doctrine in the case of Kotak Mahindra Bank v. Williamson Magor & Co. Ltd. & Anr., where the judgment discusses transactions carried out within a group of companies. The Court discussed that, "The circumstances in which they have entered into them [the transactions] may reflect an intention to bind both signatory and no-signatory entities within the same group.

In holding a non-signatory bound by an arbitration agreement, the court approached the matter by attributing to the transactions a meaning consistent with the business sense which as intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject-matter and the composite nature of the transaction weigh in the balance".

Furthermore, the Court was of the opinion that, "The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangement, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of the signatory".

Conclusion
Thus, it can be concluded that the trend in international arbitration as well as Indian arbitration jurisprudence is leaning towards the argument of including non-signatories as parties in an arbitration agreement and making such agreement binding on them. However, in the Indian context the Supreme Court of India has laid down some adequate tests and conditions which have to be taken into consideration before applying the group of companies doctrine and making the arbitration agreement binding on non-signatories also. However, the fact that an arbitration award can be enforced against a non-signatory does raise several concerns regarding due process and principles of natural justice.

Thus, in case of enforcing an award upon a non-signatory the proper due process and the principles of natural justice state that non-signatory should be given an equal opportunity to be heard before the tribunal and defend its claims in a proper manner. Noticeably, the courts and tribunals of UK and Singapore have taken an antagonistic stance on the group of companies doctrine and have rejected their applicability in such legal regimes.

This lays down the fact that the Indian courts should also proceed with caution and where multiple contracts between multiple parties are involved and inclusion of non-signatories to a single, composite arbitration is sought, the courts should undertake a detailed examination of the facts of each case should be made on their own merit.

End-Notes:
  1. The Arbitration And Conciliation Act, 1996, ACT No. 26 OF 1996
  2. The Dow Chemical Co. and others v. ISOVER Saint Gobain, ICC Case No. 4131, Interim Award of 23 September 1982
  3. Ibid
  4. Chloro Controls(I) P. Ltd vs. Severn Trent Water Purification Inc. & Ors., Supreme Court of India, 28 September, 2012, Civil Appeal No. 7134 of 2012
  5. Ibid
  6. Ibid
  7. Cheran Properties Ltd vs. Kasturi and Sons Ltd & Ors., Supreme Court of India, 24 April 2018, Civil Appeal Nos. 10025-10026 OF 2017
  8. R.V. Solutions Pvt Ltd. v. Ajay Kumar Dixit & Ors. 2019 SCC Online Del 6531 CS Comm 745/2017
  9. Kotak Mahindra Bank v. Williamson Magor & Co. Ltd. & Anr., High Court of Judicature At Bombay, 5 March 2021, Comm Arbitration Petition (L) No. 87 of 2020

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