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Group of companies doctrine in arbitration: The Supreme Court must close the door it opened

Before Chloro Controls, the Supreme Court had in Sumitomo Corporation v. CDS Financial Services (2008) discussed the possibility of adding non-signatories under Section 45 of the Act for reference. The Court declined to do so by reading the exclusionary definition of ‘party’ under Section 2(1)(h) into Section 45 and held that the provision could not have envisaged non-signatories. Subsequently, Chloro Controls overhauled this interpretation and used the text, “any person claiming through or under him” as a justification to bring to existence the group of companies doctrine into Indian arbitration law.

While it is true that the phrase “claiming through or under” in Sections 8 and 45 mean the inclusion of non-signatory third parties, it means as such after a sufficient legal or derivative contractual basis is established. For example, non-signatories may stake a claim in the arbitration proceedings after establishing derivative legal relationships with the signatory through assignment, agency, sub-contracts, or transfers. This does not infringe principles of consent and party autonomy required in valid arbitration agreements and also squarely fit the words in the phrase “claiming through or under” to include third parties.

The ideal interpretation of the phrase must remain narrow and not lose focus from the fact that “claiming through or under” conveys a “derivative” element. This means that while seeking the inclusion of third parties/non-signatories under this phrase, it must first be established that the right is contractually derived from the signatory, and also that it first vested in the signatory that the third party claims from. This ensures that no unwilling third parties are compelled by reference to arbitration proceedings due to their unwitting participation in the execution of ancillary contracts supporting a broader commercial purpose.

It is pertinent to note that ‘party’ in Section 2(1)(h) contemplates only the signatories to an arbitration agreement, and no derivative rights. It is suggested that this be amended to harmonize the wording used for parties in Sections 8 and 45. However, the interpretation of this phrase must indicate the inclusion of willing non-signatories only after derivative contractual rights from under the signatory are established. There must be no scope for applying the extra-legal economics-driven logic of ‘composite transactions’ from Cholo Controls.

Source: Barandbench

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