The Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) has no explicit provision for the joinder of non-signatories to arbitration. However, the Indian courts are not far-off the concept of joining non-signatories to arbitration agreements. The parties, although exhibit their intentions to arbitrate by signing the agreements; the courts have devised the group of companies doctrine. Under this doctrine, the non-signatories are also included into the umbrella for efficient award making and enforcement. Borrowing precedents in relation to international commercial arbitration, the Supreme Court parted from the English Law and concluded the joinder of non-signatories, provided the parties to arbitration had a mutual intention to bind the non-signatories. Subsequently, several judicial pronouncements have expanded their interpretation on the doctrine of corporate veil and as to the principles of alter ego. Further, the suggestion of the Law Commission to expand the definition of Sections 8 and 2(1)(h) of the Act to include “persons claiming through or under the party to the agreement” is apparent to suffice the intent of the legislature. This interpretation is also consistent with the theme of Section 7 of the Act. The provision for agreement to be in writing does not preclude the probability of binding non-signatories.
Whilst we are aware of the positive changes brought about by Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. to the extent of inclusion of non-signatories, there is still certain ambiguity with regard to their acknowledgement in the arbitral process. The debate on whether the arbitral award is binding on such non-signatories varies from case to case, depending on their involvement and stake. The Supreme Court, in Gemini Bay Transcription (P) Ltd. v. Integrated Sales Service Ltd., exhaustively interpreted Part II of the Act and held that foreign awards shall be binding on non-signatories to the arbitration as well. However, a question arises as to whether their powers equate with the liabilities of a party to the arbitration as per Section 2(h) of the Act. A party to arbitration holds immense power and autonomy to choose the nature and seat of arbitration. Hence, considering the fact that such non-signatories are responsible inasmuch towards the fulfilment of the award as the signatories, they shall have an equal stake at altering the nature of the arbitration.
Section 2(1)(f) of the Act defines international commercial arbitrations (ICA). The provision is inclusive of all types of legal relationships, be it contractual or commercial. This establishes the fact that a lack of signature or involvement in the formation of the contract would not necessarily negate the stake of the non-signatory. Moreover, the phrase “where at least one of the parties” needs our due attention. As discussed, a non-signatory shall be a party to the arbitration and therefore, this provision shall be equally applicable to them. The provision further provides certain criteria establishing a foreign element, which if fulfilled by one of the parties to the arbitration shall make it an international commercial arbitration.
One such criterion for ICA is the focal point of central management and control in case of association or a body of individuals as per Section 2(1)(f)(iii) of the Act. In case such central management or control is exercised in any country other than India, the principles of ICA would apply. This provision thus indicates a progressive approach involving different parties including signatories and non-signatories by bringing about ICA in the picture. The non-signatory international party, incorporated outside India or an association or body of individuals having the management or control outside India would have the potential to alter the nature of arbitration from domestic to international commercial arbitration.
“Central Governance” vis-à-vis TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.
Despite such clear terms in the statute, we can witness a deviation in one of the landmark judgments TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.. This case involved two domestic Indian parties in an arbitration agreement, out of which one had its central governance outside India. The particular party sought the appointment of an arbitrator by the Supreme Court on the premise that the arbitration would come under the ambit of ICA under Section 2(1)(f)(iii). The Supreme Court, in this case, took a view that the Arbitration Act, 1996 does not permit the overlap of domestic arbitrations with international commercial arbitrations. It was therefore held that Section 2(1)(f) of the Act shall not be applicable to this particular arbitration agreement because both the companies were domiciled in India and therefore would be covered under sub-clause (ii) and not sub-clause (iii). The word “or” provided at the end of every condition in Section 2(1)(f) segregates and does not conjoint the provision. However, the Supreme Court, in this case, has overlooked the word, thereby not giving the provision its true meaning and purport. By doing so, it has narrowed down the scope of international commercial arbitrations. Albeit the judgments passed by the Court in PASL Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd. and Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd. have contrastingly broadened the scope of arbitration, there remains an ambiguity on the aspect of central governance.
TDM Infrastructure is followed by the decision in Larsen and Toubro Ltd. Scomi Engg. BHD v. Mumbai Metropolitan Region Development Authority. This decision seeks to read the word “an association” referred to in Section 2(1)(f)(iii) so as to include within a consortium consisting of two or more body corporate and at least one of whom being a body corporate incorporated in a country other than India. This highlighted the concept of central governance in case of the group of companies doctrine thereby considering the non-signatory parent/affiliate companies as parties relevant to determine the concept of ICA. Although the expression “a company or” which was originally at the beginning of Section 2(1)(f)(iii) came to be omitted by Act 3 of 2016 in view of the reasoning in TDM Infrastructure, the concept of a consortium consisting of two or more body corporates came to be read into Section 2(1)(f)(iii). The Court however, categorically observed that “an association” cannot be read with “body of individuals” and it has to be only understood as “consortium of body corporates”. Thus, in case of “association of persons” when even one of the body corporate is incorporated outside India, the arbitration will be deemed to be an ICA. However, the furore caused by TDM has left no scope for domestic arbitrations to take the colour of ICAs, statutorily. Further, the group of companies doctrine has emerged from judicial pronouncements, where the applicability is dependent on the precedents set. Hence, there is a lack of corroboration to establish the autonomy provided to such non-signatories to alter the nature of arbitration.
Although several prior judgments have attached a restrictive connotation to the scope of ICAs, the High Courts have rightly deviated and gradually taken a positive approach. As per Section 44 of the Act, foreign awards can be decided among parties in a “legal relationship”, whether contractual or not. This provision lacks the “foreign party” element as compared to Section 2(1)(f) of the Act. Therefore, a foreign award can be made regardless of the conditions of ICA as per the Act. The Court has read down the provision for arbitration to allow Indian parties to secure a foreign seat, thereby introducing ICA in the domestic arena.
With this move, the Courts have instilled confidence in parties with regard to the party autonomy principle of arbitration. It is pertinent to compare the two situations at hand. While a foreign award can be made despite a foreign element, a foreign party to arbitration still comes under the ambit of domestic arbitration. The contrasting tone can be set right with the needful interpretation of laws and applicability by the judiciary. A more futuristic approach can be adopted by the Indian courts to allow ICA as per the demand of parties, as the cornerstone of arbitration lies in autonomy and consent. Following the trail of principles of arbitration, the respite shall soon come to counterparts of parties to the arbitration.
† Associate at Thakkar and Pahwa Advocates.
†† Law Graduate, Institute of Law, Nirma University.