- In Oil and Natural Gas Corporation Limited vs Discovery Enterprises Pvt Ltd. the Apex Court has held that a non-signatory can be bound by the arbitration agreement where:
- There exists a group of companies; and
- Parties have engaged in a conduct or made statements indicating an intention to bind the signatory.
- The Doctrine of ‘Group of Companies’ states that an arbitration agreement entered into by a company by a group of companies can bind the non-signatory affiliates if the circumstances show a mutual intention to bind both the signatory and the affiliated, non-signatory parties.
- In the instant case, the Arbitral Tribunal in a matter between ONGC and Discovery Enterprises Pvt Ltd. (DEPL) and others, in the interim award held that Jindal Drilling and Industries Limited (JDIL) was not a party to the arbitration agreement and thus, must be deleted from the array of parties. This order was challenged in an appeal which was dismissed. Appeal filed under section 37 of the Arbitration and Conciliation Act was dismissed by the Bombay HC. Aggrieved, the ONGC approached the Apex Court.
- The Counsel for the Appellant, ONGC contended that DEPL and JDIL are one single entity and thus ONGC is entitled to compel JDIL to participate in the arbitration proceedings so that the award can be enforced against it as well. It was also contended that the ‘Group of Companies’ doctrine would be applicable in the present situation. The argument advanced by the respondents is that the Group of Companies doctrine cannot be invoked in this case to indict JDIL for the acts or omissions of DEPL.
- Referring to the case of Chloro Controls Pvt. Ltd. vs Severn Trent Water Purification Inc. and ors. (2013) SCC the Apex Court observed that the Courts under English Law have developed the group of companies doctrine which postulates that an arbitration agreement which has been 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 ‘intention of the parties’ is thus, a very significant feature which must be established before the scope of the arbitration can be said to include the signatory as well as the non-signatory parties.
- While noting that this would only be in exceptional cases, the Court enumerated that these exceptions would be examined on the touchstone of:
- A direct relationship to the party which is a signatory to the arbitration agreement;
- Direct commonality of the subject matter;
- If the agreement is of a composite transaction where the performance of a mother agreement would not be possible without the performance of a subsidiary agreement.
- The group of companies doctrine has also been applied in the cases of Cheran Properties Ltd. vs Kasturi and Sons Ltd (2018) SCC and MTNL vs Canara Bank and ors. (2020) SCC.
- The Court further observed that a non-signatory can be bound by the group of companies doctrine as well as the doctrine of assignment, agency and succession.
- Thus the Court observed that the interim award of the Arbitral Tribunal would stand vitiated because of:
- The failure of the arbitral tribunal to decide upon the application for discovery and inspection filed by ONGC;
- The failure to determine the legal foundation for the application of the group of companies doctrine;
- The decision of the arbitral tribunal to decide upon the applications filed by ONGC only after the plea of jurisdiction was disposed of.
- Thus, the plea was allowed and the judgement of the HC was set aside.
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