The Supreme Court in the case Cox and Kings Ltd v. SAP India Pvt Ltd observed and has clarified that the principle of ‘alter ego’ or piercing the corporate veil’ cannot be on the basis for applying this doctrine.
The court in the case observed and has approved the ‘group of companies’ doctrine in the arbitration law jurisprudence.
The Constitution bench comprising of Chief Justice of India DY Chandrachud, Justice Hrishikesh Roy, justice PS Narasimha, Justice JB Pardiwala and Justice Manoj Misra in the case observed and has answered the reference which doubted the ‘group of companies’ doctrine wherein it allowed the non-signatory companies to be bound by arbitration agreement.
The bench headed by CJI Chandrachud in its judgement explained that the ‘group of companies’ doctrine does not dilute the separate corporate identity of different companies and the application of it is based on the conduct of non-signatories, which indicate an intention to be bound by the arbitration agreement.
The court in the case observed and has explained that the principle of alter ego disregards the corporate separateness and the intentions of the parties in view of the overriding considerations of equity and good faith. Thus, the group of companies’ doctrine facilitates the identification of the intention of the parties to determine the true parties to the arbitration agreement without disturbing the legal personality of the entity in question.
The court stated that the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies’ doctrine.
The court stated that the factors which needs to be considered for application of group of companies’ doctrine.
The participation of the non-signatory in the performance of the underlying contract is the most important factor to be considered by the courts and tribunals and the conduct of the non-signatory parties is an indicator of the intention of the non-signatory to be bound by the arbitration agreement. Thus, the intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances that surround the participation of the non-signatory party in the negotiation, performance, and the termination of the underlying contract containing such agreement.
Accordingly, the court stated that the non-signatory’s participation in the negotiation, performance, or termination of the contract can give rise to the implied consent of it being bound by the contract.