The Supreme Court in Oil and Natural Gas Corporation Ltd. vs Discovery Enterprises Pvt. Ltd explained the ‘Group of Companies’ doctrine which says that an arbitration agreement entered into by a company within a group of companies, can bind its non-signatory affiliates or sister concerns if the circumstances demonstrate a mutual intention of the parties to bind both the signatory and affiliated, non-signatory parties.
Further, the Court observed that a non-signatory may be bound to the Arbitration Agreement in 2 cases:-
1. There exists a group of companies; and
2. Parties have engaged in or shown conduct that indicates an intention to bind the non-signatory.
What does the doctrine say?
The group of companies doctrine states that a party, which is not a signatory to a contract containing an arbitration clause, may be bound by the agreement to arbitrate if it is an alter ego of a party which executed the agreement. “This constitutes a departure from the ordinary principle of contract law that every company in a group of companies is a distinct legal entity. A non-signatory may be bound by the arbitration agreement where: (i) There exists a group of companies; and (ii) Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.”
Relevant factors to apply the doctrine:-
- The mutual intent of the parties
- The relationship of a non-signatory to a party which is a signatory to the agreement.
- The commonality of the subject matter
- The composite nature of the transaction
- The performance of the contract
The Court also went on to explain that “In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors: (i) The mutual intent of the parties; (ii) The relationship of a non-signatory to a party which is a signatory to the agreement; (iii) The commonality of the subject matter; (iv) The composite nature of the transaction; and (v) The performance of the contract. Consent and party autonomy are undergirded in Section 7 of the Act of 1996. However, a non-signatory may be held to be bound on a consensual theory, founded on agency and assignment or on a non-consensual basis such as estoppel or alter ego.”