Enforceability of Arbitration Agreements on Non-Signatory Parties

In the dynamic world of business, intricate commercial arrangements often involve numerous parties and complex agreements. Conflict resolution becomes a challenge as disputes arise, particularly when non-signatory entities are involved. Two landmark judgments by the Indian Supreme Court, Cheran Properties Ltd. v. Kasturi and Sons Ltd. & Ors., and ONGC vs. Discovery Enterprises Pvt Ltd, have shed light on the “group of companies” doctrine and its implications on arbitration agreements. 

The “group of companies” doctrine is based on the idea that the intention of the parties involved is paramount in determining the scope of an arbitration agreement. 

Cheran Properties Ltd. v. Kasturi and Sons Ltd. & Ors. In Cheran Properties Ltd. v. Kasturi and Sons Ltd. & Ors., the dispute revolved around an arbitration agreement between Cheran Properties Ltd. (CPL) and Kasturi and Sons Ltd. (KSL). While CPL was a signatory to the agreement, KSL and certain other companies were non-signatories. The primary question before the Supreme Court was whether the non-signatory entities could be bound by the arbitration agreement.

The “group of companies” doctrine, as enunciated in

Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc.,played a pivotal role in this case. The Supreme Court recognized that non-signatories could be bound by an arbitration agreement in specific circumstances and held that if the circumstances indicate a mutual intent between the signatories and non-signatories to be bound by the arbitration agreement, the non-signatories should also be considered bound by it.

ONGC vs. Discovery Enterprises Pvt. Ltd. (DEPL) A similar issue arose in ONGC vs. DEPL, involving a complex business arrangement between Oil and Natural Gas Corporation (ONGC) and Discovery Enterprises Pvt Ltd (DEPL). DEPL was a non-signatory to the arbitration agreement, leading to uncertainty regarding its obligation to comply with the agreement.

The Supreme Court’s approach in this case shared similarities with the Cheran Properties judgment. The Apex Court focused on the true intent of the parties involved, considering the core substance rather than mere form. The objective was to determine whether DEPL willingly assumed obligations and benefits within the business arrangement, regardless of its formal status as a non-signatory.

In ONGC vs. DEPL, the Supreme Court addressed the crucial factors that come into play when determining whether a non-signatory company within a group of companies would be bound by an arbitration agreement. These factors hold significant weight in establishing the binding nature of the agreement on entities that are not formal signatories:

Conclusion

In conclusion, the cases of Cheran Properties Ltd. v. Kasturi and Sons Ltd. & Ors. and ONGC vs. Discovery Enterprises Pvt. Ltd. offer significant insights into the complexities surrounding arbitration agreements involving non-signatory entities. The decisions in these cases uphold the principles of fairness and justice, ensuring that parties are held accountable for their actions, regardless of their formal status as signatories or non-signatories. 

Kautilya Kukunoor 

Associate Advocate – Compass Law Associates

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