Trilegal Update | Supreme Court clarifies referral court’s role and considerations for binding non-signatories to arbitration proceedings

Partner: Payel Chatterjee, Senior Associate: Aman Singhania, Associate: Yuvraj Singh Sharma

1. Introduction

In deciding an application seeking appointment of an arbitrator, a three-judge bench of the Supreme Court provided much need clarity on two crucial aspects of arbitration law¹. The Court considered the ‘group of companies‘ and ‘composite transaction‘ doctrines to determine the circumstances in which a non-signatory could be compelled to participate in arbitration proceedings, based on its involvement in the underlying business dealings. The Court also examined the scope of a referral court’s jurisdiction to appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Act), vis-a-vis arbitral tribunal’s power to decide on its jurisdiction under Section 16. It held that the ultimate decision to bind non-signatories lies with the arbitrator while the referral court must only make a preliminary determination.

2. Factual background

The AMP Group and the JRS Group, connected by familial ties, co-owned various entities. A Family Arrangement Agreement (FAA) was executed between these two groups to govern the ownership, management, and exit mechanism of the various jointly held businesses, including Millenium Estates Pvt. Ltd. (Millenium) and Deegee Software Pvt. Ltd. (Deegee). On the other hand, a separate group, SRG Group, held 40% equity in Millenium and collaborated in Deegee. Although the SRG Group was not a signatory to the FAA, it played a crucial role in the negotiation and implementation of the agreement.

From 2013 to 2019, several disputes arose between these three groups, leading the AMP Group to approach the Supreme Court under Section 11(6) of the Act, seeking appointment of a sole arbitrator under the FAA for resolution of the disputes.

3. Submission of the parties

The AMP Group contended that while the SRG Group did not sign the FAA, it must be made a party to the arbitration proceedings as it was heavily involved in the pre-agreement negotiations and played an integral role in its implementation. In fact, successful execution of the FAA’s terms, particularly the share transfer and exit from Millenium and Deegee, was contingent upon the actions of the SRG Group. It had also participated in several communications and joint meetings between the signatories and was thus a de facto party to the agreement. Therefore, the AMP Group relied on the ‘composite transaction‘ and ‘group of companies‘ doctrines to submit that the SRG Group must be considered a party to the arbitration agreement by virtue of its involvement in the transactions.

On the other hand, the JRS and SRG Groups argued that the latter was not bound by the FAA as it was neither a signatory nor a part of the family, and the FAA explicitly defined the term ‘parties‘. Moreover, the terms of the FAA did not impose any obligations on the SRG Group, despite its business involvement with Millenium and Deegee. Any reference to the SRG Group in the FAA was only incidental and did not establish binding obligations. The clauses of the FAA also emphasised that disputes between the AMP and JRS groups could be resolved independent of SRG Group’s involvement. The SRG Group claimed that no arbitration notice was initially addressed to it, further supporting its position that it was not a party to the FAA or the arbitration agreement. Thus, the two groups contended that forcing a non-signatory into arbitration would violate the principles of party autonomy and freedom of contract.

4. Supreme Court’s analysis and decision

The Supreme Court allowed the petition under Section 11(6) and appointed a sole arbitrator to resolve the disputes between the AMP Group, JRS Group, and SRG Group. The Court undertook a two-pronged analysis to reach its decision, discussed below.

• Inclusion of non-signatories through group of companies and composite transaction doctrines
  The Supreme Court observed that under the ‘group of companies‘ doctrine, a non-signatory can be bound by an arbitration agreement if it is part of a group of companies involved in a single, common commercial transaction. Further, under the ‘composite transaction‘ doctrine, when a transaction involves multiple agreements that are interdependent and interconnected, a non-signatory to an agreement who is integral to the performance of that agreement can be compelled to arbitrate under its dispute resolution clause. In the present case, the Court noted that the SRG Group played a significant role in pre-agreement negotiations and execution of the FAA. Moreover, the FAA’s provisions relating to share transfers and exits from Millenium and Deegee required active involvement of the SRG Group, making it an essential and necessary party to the transaction, even if it was not a formal signatory. Accordingly, the Court decided to include SRG Group in the arbitration proceedings due to its significant involvement in the underlying transactions.
• Scope of referral court’s role under Section 11(6): Not to conduct a mini-trial
  The Supreme Court emphasised that a referral court’s jurisdiction while entertaining a Section 11(6) petition is limited to determining the existence of an arbitration agreement and whether, prima facie, the parties are bound by it.In the present case, the Supreme Court held that factual deliberations on whether non-signatories like the SRG Group are bound by the arbitration agreement under the FAA must be undertaken by the arbitral tribunal, under the principle of kompetenz-kompetenz. This principle, enshrined in Section 16 of the Act, empowers an arbitral tribunal to rule on its own jurisdiction, including whether non-signatories can be bound by the arbitration agreement.

  The Supreme Court also relied on its earlier decision in Cox and Kings Ltd. v SAP India Pvt. Ltd. to hold that while making a prima facie determination on whether a non-signatory may be bound by the arbitration clause or not, the referral court must not deep dive and conduct a ‘mini-trial‘ to conclusively decide the matter. (To read our earlier update on the Cox and Kings judgment, click here.) Instead, the arbitral tribunal must be allowed to assess, based on the factual matrix, whether the non-signatory had sufficiently participated in the transaction to be considered as bound by arbitration. The Supreme Court acknowledged the referral court’s powers to make a preliminary determination and refer the parties to arbitration.

5. Conclusion

The Supreme Court’s judgment is yet another pro-arbitration and progressive decision reinforcing globally established principles in the Indian context. Hopefully, this ruling settles the jurisprudence on binding signatories and emphasising the power of arbitral tribunals to decide this issue. Corporates intending to bind only the signatory companies to an arbitration agreement must ensure that the transaction is carefully structured, and the conduct of all parties is aligned around such intention with the necessary veils and checks. Unnecessary involvement in negotiations and performance of another group company’s contractual obligations must also be avoided. Additionally, parties may want to include express language in the contract to clarify their intention of limited involvement.

^[1] Ajay Madhusudan Patel & Ors. v Jyotrindra S. Patel & Ors. Arbitration Petition No. 19 of 2024 SCC OnLine SC 2597.

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