Indian Supreme Court upholds the group of companies doctrine

The Indian Supreme Court has settled a long-standing debate on the extension of arbitration agreements to non-signatories, holding that that the group of companies doctrine exists in Indian arbitration jurisprudence. Foreign investors in India should note that arbitration agreements concluded by local subsidiaries or joint venture partners may extend beyond the specific parties to the underlying contract (depending on the involvement of third parties in contract negotiation and performance).  

Background

The dispute arose out of a software licensing agreement between Cox and Kings and SAP India Private Limited (SAP India) for the development of an e-commerce platform. In view of delays in the implementation of the project, the parent company, SAP SE GmbH (SAP SE) provided certain assurances to Cox and Kings. As the parties failed to settle their disputes, Cox and Kings initiated arbitration proceedings against both SAP India and SAP SE. SAP SE resisted arbitration on the grounds that it did not participate in the negotiations, did not sign the contract, and did not consent to be bound by it.

The ruling of the Indian Supreme Court 

The Supreme Court held that the doctrine is a fact-based tool to identify the actual parties to a contract and ensure accountability of all parties who have “materially participated in the negotiation and performance” of a transaction.

The test is to determine whether the non-signatory had “a positive, direct, and substantial involvement” in the negotiation, performance, or termination of the contract. Further, the non-signatory should have “actively assumed obligations or performance upon itself” under the contract. The burden lies on the party seeking to extend the arbitration agreement.

Incidental involvement is insufficient. Similarly, merely belonging to the same group of companies will not meet the threshold for binding a non-signatory to the arbitration agreement. 

The Supreme Court has clarified that a first instance court asked to refer a non-signatory to arbitration can reach its conclusion on a prima facie basis but that the final decision rests with the arbitral tribunal. 

Why does it matter?

This judgement is important for the array of foreign companies concluding arbitration agreements when doing business in India or with Indian parties. It may result in a non-contracting foreign party inadvertently becoming the respondent in an arbitration. On the flip side, it may widen the scope of Indian companies that a foreign claimant could pursue in a commercial arbitration.

Typically, extension of an arbitration agreement to  non-signatories is determined by the law governing the arbitration agreement which, under Indian law, is the law of the main contract. However, the judgment does not expressly provide whether the doctrine applies only in the case of arbitration agreements governed by Indian law or also where the arbitration is seated in India, regardless of what law governs the arbitration agreement. Foreign parties concluding Indian law-connected arbitration agreements must therefore anticipate the possible implications of this ruling and pay close attention to how they structure contract negotiations and performance. A non-signatory’s conduct will be key to determining whether they have agreed to be bound by the arbitration agreement. Although not a guarantee, parties may benefit from a provision expressly stating that the agreement to arbitrate does not bind any non-signatories. 

Finally, although the Supreme Court has provided much-needed clarity on the validity and parameters of the group of companies doctrine in Indian arbitration law, given its fact-specific nature, its application is bound to be contentious. Parties looking for more certainty may therefore consider opting for English or Singaporean seats and governing laws which have (so far) rejected the application of this doctrine.

This material is for general information purposes only and is not intended to constitute legal or other advice. Regulation prohibits foreign law firms from practising Indian law. The contents of this publication do not constitute any opinion or determination of Indian law by us. Any comments in this publication are based on our experience as international counsel representing our clients in their deals and disputes which may have a connection with India. Freshfields does not practise Indian law and where Indian law advice is needed, we work alongside leading Indian counsel.