Sec 45 of arbitration and conciliation act defines Power of judicial authority to refer

parties to arbitration.

The act states that anything contained in Part I or in the Code of Civil Procedure,
1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect
of which the parties have made an agreement referred to in section 44, shall, at the
request of one of the parties or any person claiming through or under him, refer the
parties to arbitration, 1[unless it prima facie finds] that the said agreement is null and
void, inoperative or incapable of being performed.

The Group of companies’ doctrine in arbitration law is based on the principles of

agency and implied consent. According to this doctrine if the corporate affiliations
among various legal entities imply that they were intended to be parties to the
agreement, then in those cases they shall be considered to be parties to the
arbitration despite their non-signatory status[1]. However, it is pertinent to note
that to bind the non-signatories to the arbitration clause, it must be shown that the
non-signatory company is an active participant in the contractual relationship.[2]

In the Indian context, this doctrine was first enforced in the case of Chloro
Controls India Pvt. Ltd v. Severn Trent Purification Inc[3]. Here the apex court
held that where the agreements are inter-connected and several parties are
involved in the execution of a single project through various agreements then all
of them can be made the parties to the arbitration. The court held that Section 45
of the Arbitration and Conciliation Act, 1996 also includes multiple and multi-
party agreements under the expression “person claiming through or under”.

Post Chloro Controls Case, the apex court in the case of Cheran Properties Ltd v.
Kasturi and Sons Ltd and Ors held that non-signatory organizations can also be
made parties to the arbitration. In order to determine if the non-signatories are
bound by the doctrine, the relationship of the signatory and the non-signatory
doctrine must be determined, the commonality of the subject matter must be
ascertained and the composite nature of the transaction must also be checked. The
court further observed that the intention must also be considered. It must be seen
whether the party who was not a formal signatory but has assumed the
responsibility to be bound, by the conduct of the signatory. However, the court
held that a non-signatory can be bound by a contract and be subject to arbitration
without their consent only in exceptional cases.

However, it is pertinent to note that a non-signatory cannot ipso facto become a

party to the arbitration. This can be understood with the aid of the Reynders Label
Case[4]. In the present case, the issue that arose was if there was clear mutual
intention among parties to bind the non-signatory party. In the present case, the
apex court based its decision taking into account the facts and circumstances of
this case. In the instant case, the second respondent was a Belgian Company. The
petitioner contended that while entering into the agreement it primarily relied on a
correspondence by an individual Mr. Fredrik who claimed he was the promoter of
the second respondent. He further claimed that he was representing the second
respondent in the negotiations and that the second respondent was an undisclosed
principal of the respondent one. The second respondent in turn submitted that Mr.
Fredrik was an employee of respondent one and thereby the second respondent
was not involved in the negotiations. It further submitted that they belonged to the
same parent company, however, they were two distinct legal entities and therefore
were not bound by the agreement and could not be bound by it. Taking into
account all the fact the Supreme Court held that Doctrine of Group of Companies
was not applicable in the present case since it neither a signatory to the agreement
nor did it have any sort of connection with the negotiation process and the
execution of the agreement. Here the Supreme Court further held that in order to
make the second respondent a party the petitioner must prove that the second
respondent had the intention to consent to the agreement of arbitration.

Furthermore, in the MTNL Case,[5] the issue was if the subsidiary which is a non-
signatory is bound by the arbitration agreement between its parent company,
Canara Bank, and MTNL. In the present case, the Canara Bank purchased bonds
issued by MTNL on behalf of its subsidiary CAFINA. Later when disputes arose
MTNL made CAFINA a party to the arbitration as well. Here the question was if
CAFINA is bound by the arbitration agreement?

Here the Supreme Court observed the non-signatory can also be a party to the
arbitration if the parties’ conduct exhibits their mutual intention to bind the
signatory and non-signatory. Furthermore, the Supreme Court also reiterate the
three factors which were also laid down in Cheran Properties’ case. Thus after
taking into account the facts, the Court held that CAFINA was bound by the
arbitration agreement.

So the from the fact given in the question, we can clearly establish that both the
party intended to be the part of agreement signatory or non-signatory, the matter
could be reffered under sec 45 of arbitration and conciliation act.

Also, the abovementioned case laws have played a significant role in shaping the
doctrine of Group of Companies in India. From the aid of the aforementioned
precedents, it can be said that the Doctrine of Group of Companies has been read
under Section 45 of the Arbitration and Conciliation Act, 1996. However, this
doctrine is to be used only in exceptional cases and after taking into account the
three factors laid down in the Cheran Properties Case. Moreover, this doctrine
cannot be used as a blanket rule and must be taken into account only after
examining the facts and circumstances of the case. Furthermore, companies cannot
be made parties to the arbitration merely because they are subsidiaries of the
parent companies, it must be shown that there was an intention to bind the non-
signatory party in the arbitration agreement in question.