Legal “existence” of an arbitration agreement: Constitution Benches of the Indian Supreme Court to revisit previous decisions on ‘group of companies’ doctrine and enforceability of unstamped agreements

Friday 21 October 2022

Mohit Rohatgi
Partner, Trilegal, Bengaluru

Kaustub Narendran
Associate, Trilegal, Bengaluru

Two issues of prime significance to the Indian arbitration regime have recently been referred by the Supreme Court of India (hereinafter “the Court”) to its Constitution Benches for resolution. In this article, the authors examine the underlying issues at stake and the legal context in which these questions assume significance.

Questions referred to Constitution Benches

  • First, in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021)[1]​​​​​​​​​​​​​​ (hereinafter “N.N. Global”) the Court was concerned with a case where the petitioner had filed a civil suit against the respondent for invocation of a bank guarantee provided by it under a sub-contract. The respondent resisted the civil suit on the basis that the sub-contract under which the concerned bank guarantee was provided contained an arbitration agreement and that the jurisdiction of the civil court was consequently ousted. The civil court rejected the respondent’s contention, but the Bombay High Court allowed the respondent’s appeal. 
    ​​​​​​​On further appeal before the Court, the respondent contended that since the sub-contract was not stamped (as required under the Maharashtra Stamp Act, 1958 (hereinafter “Stamp Act”)), the arbitration agreement comprised therein was rendered ‘unenforceable’. In this context, the Court doubted the correctness of certain previous decisions[2] declaring such arbitration agreements to “not exist” as a matter of law and sought reconsideration of the issue by a Constitution Bench of the Court. 
  • Second, in Cox & Kings Ltd. v. SAP India (P) Ltd., (2022)[3] (hereinafter “Cox & Kings”) the applicant, who had entered into four agreements with the first respondent (each of which contained an arbitration clause), approached the Court seeking appointment of an arbitrator for adjudication of its claims.

Insofar as the applicant sought reference of claims against the second respondent (parent company of the first respondent), this was resisted on the basis that second respondent was not a signatory to any of the agreements and was therefore not bound by the arbitration agreement.  In this regard, the Court expressed concerns over the disparate jurisprudence[4 regarding the ways in which a non-signatory to an arbitration agreement could be made a party thereto under the ‘group of companies’ doctrine and formulated certain questions for resolution by a Constitution Bench. 

Role of courts in pre-arbitral or institution stage

Both questions which attracted the attention of the Court in N.N. Global and Cox & Kings, and which have now been referred to Constitution Benches, bear strong relevance to the institution stage of an arbitration. At this stage, the Indian Arbitration and Conciliation Act, 1996 (hereinafter “the Act”) vests in courts the power and, in a sense, the duty to ensure that parties do not dodge the arbitration agreement. This is achieved through the ouster of jurisdiction of courts to adjudicate claims which form part of an arbitration agreement (Section 8 and Section 45) and by conferring upon courts the power to refer parties to arbitration/ constitute arbitral tribunals (Section 11). While the arbitral tribunal is empowered to determine issues relating to the validity or scope of the arbitration agreement, in discharging this supportive function under the Act, courts are nonetheless confronted with such threshold submissions at a pre-arbitral stage.

Section 8 and Section 11 of the Act form part of a common scheme, i.e. to promote dispute resolution through arbitration by reducing court interference. Although the court exercises similar jurisdiction in both cases,[5] the Act as originally enacted did not provide much clarity on the scope of enquiry exercisable by courts at the pre-arbitral stage. As the body of case law developed,[6]  it came to be generally accepted that the court must consider the validity of the arbitration agreement and whether an appropriate ‘party’ was before the court. Additionally, it was also held that in appropriate cases, the court may consider whether the claim was a ‘dead’ claim or related to a concluded transaction with mutual satisfaction. Other contentions of the parties were left to the jurisdiction of the arbitral tribunal. 

Reacting to these decisions, which left the door open for greater interference of the courts at the institution stage, the legislature amended the Act in 2015 and introduced a new Section 11(6A). Section 11(6A) clarified that the role of the court was confined “to the examination of the existence of an arbitration agreement”. In Duro Felguera S.A. v. Gangavaram Port Limited[7], the Court interpreted the amendment to Section 11 as follows:

“From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only into one aspect – the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple – it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”
(emphasis supplied)

While the amendment made to the Act in 2019 has omitted Section 11(6A) referred herein with a push towards appointment by arbitral institutions, the jurisprudence relating to the “existence” of the arbitral agreement continues to hold the field. 

Legal “existence” of an arbitration agreement

While at first blush, the test of ‘existence’ of an arbitral agreement seems straightforward. However, in practice the existence of an arbitration agreement has proven to be inextricably connected to issues surrounding its validity and the arbitrability of the claims. Legal validity of the arbitration agreement often involves an assessment of substantive law including compliance of the agreement with the mandatory laws, whereas the ‘arbitrability’ analysis includes inter alia the persons who may claim or be subject to claims under an arbitration agreement. The issues which are raised in N.N. Global and in Cox & Kings represent such cases where the Court was enjoined to consider the ‘existence’ of an arbitral agreement from these perspectives.

Validity of an arbitration agreement

The overlap between ‘existence’ of the arbitration agreement and its ‘validity’ may be gleaned from the following illustrative cases where reference to arbitration was denied: (i) when the insurer had not disputed or accepted liability and pre-conditions for triggering the arbitration agreement were not satisfied;[8] or (ii) where the Court found that a binding contract was yet to be entered into and the arbitration agreement relied upon therein would not apply.[9] In such cases, the Court relied upon the facts before it or the applicable law governing formation of contracts to rule that the arbitration agreement did not exist in the eyes of law. 

Referring to its various judgements on this issue, a 3-judge bench of the Court recently held as follows in Vidya Drolia v. Durga Trading Corpn[10] (hereinafter “Vidya Drolia”):

“A reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.
(emphasis supplied)

Against the backdrop of this growing jurisprudence on ‘existence’ of an arbitration agreement, the Court in N.N. Global expressed its reservations over its decision in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. [11] (hereinafter “Garware”), where the Court referred to mandatory provisions of the Stamp Act (for impounding unstamped instruments and prohibiting courts from admitting in evidence or “acting upon” such documents) and held: 

“[…] it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence, as has been contended for by the respondent. […] When an arbitration clause is contained “in a contract”, it is significant that the agreement only becomes a contract if it is enforceable by law. We have seen how, under the Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped.”
(emphasis supplied)

In N.N. Global, the Court took note of the fact that no stamp duty was payable upon an arbitration agreement under the Stamp Act. The Court also observed that since the arbitration agreement existed independently of the substantive contract, an infirmity in the main contract ought not to render the arbitration agreement unenforceable. Expressing its reservations with the decision in Garware (which appears to have been accepted by a co-ordinate bench of the Court in Vidya Drolia), the Court referred the issue to a Constitution Bench, 

Scope of an arbitration agreement

In Cox & Kings, the issue before the Court concerned the persons who may be bound by an arbitral agreement. In other words, the ‘existence’ analysis called for examination of the parties between whom the agreement to arbitrate could be said to exist. 

Section 8 of the Act, as originally enacted, required an application from a “party” to an arbitration agreement. This was interpreted[12] by the Court to imply that where a dispute involved multiple parties, some of whom were not signatories to the arbitration agreement, and where it was not possible to bifurcate the action on vis-à-vis the signatories to the arbitration, such disputes could not be referred to arbitration. In a subsequent landmark decision in Chloro Controls v. Severn Trent Water Purification,[13] (hereinafter “Chloro”), the Court relied upon the parallel provision in Section 45 of the Act (applicable to foreign-seated arbitrations) providing a reference to arbitration where a request is made by “one of the parties or any person claiming through or under him” to draw a distinction between a ‘party’ to an arbitration agreement and a ‘signatory’ thereto. In Chloro, the Court ultimately held that where intention to be bound by the arbitration agreement was established, even non-signatories could be bound by an arbitration agreement.

Following the decision in Chloro, the 246th Law Commission Report recommended an amendment to Act to redefine a ‘party’ (for the purpose of India-seated arbitrations) to include those claiming through or under a party. The amendment to the Act in 2015 retained the definition of a party (“party to an arbitration agreement”), however Section 8 of the Act was amended to bring it in line with Section 45 insofar as a reference could be sought by “one of the parties or any person claiming through or under him”. With this amendment, the Court has relied upon the language of Section 8 to justify different outcomes. For instance, the Court has: (i) ruled that non-signatories may be bound by the arbitration agreement in a “main agreement” where they are involved in a “single commercial project”;[14]  (ii) enforced arbitral awards against non-signatories who did not have opportunity to participate in the arbitral proceeding based on its interpretation of the “essence of the business arrangement” and the close relationship between parties;[15] and (iii) held parent companies to be bound by an arbitration agreement entered into by its subsidiary where there was “a tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality”.[16] 

After noticing these judgements, the Court in Cox & Kings expressed the need for a coherent and exhaustive treatment of the “group of companies” doctrine and in two separate but concurring opinions have referred certain specific questions to a Constitution Bench.


The references made by the Court in N.N. Global and Cox & Kings to Constitution Benches is a welcome development. Clarity and certainty of the law governing reference to arbitration would serve to amplify the confidence of commercial parties entering into arbitration agreements and assuage apprehensions that parties may seek to frustrate or delay arbitration. 

With the validity of the arbitration agreement forming a part of the analysis of its existence, the severability of the arbitration agreement assumes greater significance and has often been prioritised by the Court. For instance, the arbitration agreement was found[17] to be a “collateral contract” and enforced even though the substantive contract was not registered in accordance with the Registration Act, 1908. Similarly, the growing jurisprudence of the Court has distinguished between fraud relating to the substantive contract and that which permeates the arbitration agreement rendering it void.[18] Indian courts have often been confronted with cases where the party resisting arbitration contends that the substantive contract falls foul of mandatory law. This may include contentions that the contract failed to meet requirements under Indian law relating to stamping duty, registration, taxation, prior approval of Indian regulatory authorities etc. While the underlying or substantive contract may be liable to such restrictions, there are few restrictions deriving from such laws which apply directly to arbitration agreements. 

Keeping in view the legal separation of the arbitration agreement, assertions of parties that the infirmity in the underlying contract also permeates the arbitration agreement should be resisted. Often, the requirements of substantive law, applicability and/ or breach of such laws is a triable issue. They may require exhaustive submissions by the parties, assignment of responsibility for breach thereof and may even require consideration of evidence. Such issues may best be left to consideration by the arbitral tribunal. It is this legal separation of the arbitration agreement that is at the heart of the reference made by the Court in N.N. Global.

Insofar as the scope of the arbitration agreement is concerned, it is worth remembering that it is ultimately a creature of contract. To bind a party to such an agreement, the intention of the parties to be bound is of crucial relevance. While the judgements of the Court referred above have all recognized the same, the analysis of the “group of companies” doctrine in these cases was recognized by the Court to have been developed without sufficient nexus to the tethering contractual principles of consent. It is also important to recognise that the statutory basis of such rulings may require further examination. In the view of the authors, the language of Sections 8 and 45 of the Act relating to reference where “one of the parties or any person claiming through or under him” relates ultimately to the nature of the cause of action. To claim through or under a signatory, in its natural meaning should relate to the locus of the action and the manner in which it is transmuted from one party to the other. Classic examples of such derivation would be in cases of insolvency (where the liquidator would succeed to rights and contentions of the company), subrogation or perhaps in cases where a relationship of agency is established. 

This characterisation of a ‘party’ to an arbitration as to include those who claim through or under signatories does not, in the authors’ submission, naturally permit invocation of the “group of companies” doctrine. As observed by the Court of Appeal in City of London v. Sancheti[19] “a causal or commercial connection” was insufficient to bind non-signatories to an arbitration agreement. The doctrine (as so far framed in Indian jurisprudence) pertains to the proximate relationship/ control exercised inter vivos related entities resulting in identification of a “single economic reality”. This analysis, as rightly recognised by the Court in Cox & Kings, does not pertain to nature of the cause of action and its derivation to or upon non-signatories. 

Ultimately, the Constitution Benches of the Court are called upon to rule on the contours of the court’s role under the Act before referring parties to arbitration. On the one hand, the Court is likely to lay down the extent to which the arbitration agreement would be incubated from deficiencies in the main contract while on the other, guidance on the metric against which non-signatories may be compelled to participate in an arbitral proceeding is also expected. These rulings will not only have substantial bearing on the stages of reference to arbitration and constitution of the arbitral tribunal but also on the stage of grant of interim reliefs by Indian courts. All eyes are now turned to these decisions which are likely to clarify the law on these critical aspects.

    [1](2021) 4 SCC 379.

    [2]Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 which was cited with approval in Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1.

    [3]B2022 SCC OnLine SC 570. 

    [4]Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531; Chloro Controls v. Severn Trent Water Purification, (2013) 1 SCC 641; Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413; Reckitt Benckiser (India) (P) Ltd. v. Reynders Label Printing (India) (P) Ltd., (2019) 7 SCC 62; and Mahanagar Telephone Nigam Ltd. v. Canara Bank, (2020) 12 SCC 767 .

    [5]SBP & Co. v. Patel Engineering, (2005) 8 SCC 618.

    [6]SBP & Co. v. Patel Engineering, (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab, (2009) 1 SCC 267.

    [7](2017) 9 SCC 729.

    [8]United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC 607 and Oriental Insurance Co. Ltd. v. Narbheram Power & Steel (P) Ltd., (2018) 6 SCC 534.

    [9]PSA Mumbai Investments Pte. Ltd. v. Jawaharlal Nehru Port Trust, (2018) 10 SCC 525

    ​​​​​[10](2021) 2 SCC 1.

    [11](2019) 9 SCC 209.

    [12]Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 5.

    [13](2013) 1 SCC 641

    [14]Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678.

    [15]Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413.

    [16]Mahanagar Telephone Nigam Limited v. Canara Bank, (2020) 12 SC 767

    [17]SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66.

    [18]A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386; Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 and Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., (2021) 4 SCC 713

    [19]2008 EWCA Civ 1283.