Group Companies Doctrine: Application of the Doctrine at the Referral Stage

The judgment by the Constitution Bench of Hon’ble Supreme Court in Cox and Kings Ltd. v. SAP India (P) Ltd., 2023 SCC OnLine SC 1634 (“Constitution Bench Judgment”) has set out a pivotal course in jurisprudence concerning the Group Companies Doctrine (“the Doctrine”). However, the stage is now set for the Courts exercising jurisdiction under Section 11 of the Arbitration Act, 1996 (“the Act”).

The Constitution Bench judgment is fairly recent, but the Hon’ble High Courts have already examined the applicability of the Doctrine on the basis of the Constitution Bench judgment while exercising their jurisdiction at the stage of Section 11 of the Act. Interestingly, different benches of the same Hon’ble High Court have either chosen to trigger the application of the Doctrine at the Section 11 stage itself or leave it to the arbitrator/ arbitrator tribunal.

In a recent judgment in Moneywise Financial Services Pvt. Ltd. v. Dilip Jain and Ors., 2024 SCC OnLine Del 1896, a Hon’ble High Court was dealing with the application of the Doctrine to signatories, non-signatories and guarantors with respect to a loan agreement. The Hon’ble Court after relying on the Constitution Bench judgment, in Para 15 of the judgment, has held the Court in Section 11 jurisdiction is only required to see the existence of the arbitration clause and the issue of non-signatory party shall be left open for the arbitral tribunal to decide.

A coordinate Bench of the same High Court has in Vingro Developers Pvt. Ltd. v. Nitya Shree Developers Pvt. Ltd., 2024 SCC OnLine Del 486 has applied the Doctrine somewhat differently. The Court was posed with the question of whether directors of a company be made a party to an arbitration. In this judgment as well, the Hon’ble Court has stated that while exercising jurisdiction under Section 11, it should confine itself to only examining the existence of the arbitration agreement. However, while relying on the Constitution Bench judgment, the Court has in Para 24, held that to bind a non-signatory to an arbitration agreement, there must exist a common intention between the parties to do so. The relationship between the parties and the circumstances of the same should also be examined to understand the intention of the parties. The relationship between the directors of the company and the company is that of a principal and agent as under Section 182 of the Indian Contract Act, 1872 (“ICA”) and therefore, as per Section 230 of the ICA, the directors cannot be bound by contracts on behalf of the principal, i.e., the company. Therefore, the Court held that the facts of the case are distinguishable and therefore the Doctrine as per the Constitution Bench judgment does not apply. 

Two different Benches of the same Hon’ble High Court have in one case left the determination of the applicability of the Doctrine to the arbitrator and in another case has held the Doctrine to be inapplicable thereby refusing to implead directors as parties to the arbitration. This may seem to be contrary but, actually, this is in line with the Constitution Bench judgment, where the Hon’ble Supreme Court has clearly stated that, at the stage of Section 11, the referral Court will be required to prima facie rule on (i) the existence of the arbitration agreement and (ii) whether the non-signatory is a veritable party to the arbitration agreement.

In the event the determination of a party being veritable is a complex question, then the referral Court should leave it for the arbitral tribunal to decide whether the non-signatory party is a veritable party on the basis of the factual evidence and application of the Doctrine, while adhering to the principles of natural justice. The determination by an arbitral tribunal shall also be in line with the doctrine of competence-competence.

Therefore, it may be concluded from the above two recent judgments of the Hon’ble High Court that the referral Court, at first instance, has to see whether a determination of veritable parties is complex within the factual matrix of each case. Thereafter, if the determination is indeed complex, the referral Court should leave it to the arbitrator/ arbitral tribunal to determine. In other words, one may conclude that the applicability of the Doctrine at the stage of Section 11 shall be on case-to-case basis.

About the authors: Sonal Kumar Singh is the Managing Partner of AKS Partners. Obhirup Ghosh is a Senior Associate at the Firm.