Binding non-signatories to arbitration

Binding non-signatories to an arbitration agreement to arbitral proceedings has always been an unsettled issue in several countries of the world. Here, we take a look at the Indian law on third parties to arbitration agreement.

Leaving aside the fundamental principle of privity of contract, an arbitration agreement is bound by the consent of the parties and must fulfill the requirements of an arbitration agreement defined in Article 7 of the UNCITRAL Model Law on International Commercial Arbitration, embodied in section 7 of the Indian Arbitration and Conciliation Act, 1996. This provision has been incorporated into legislation of most major jurisdictions of the world.

There are several theories for binding a non-signatory to an arbitration agreement in international arbitral practice. These include the ‘group of companies’ doctrine, lifting the corporate veil, equitable estoppel, agency and the alter ego doctrine. The tests for these often overlap, thus, in fact, more than one justification can be found for binding a non-signatory to an arbitration agreement.

Not all theories are accepted in all jurisdictions. The usual justification for looking beyond the signatories to the agreement is that consent is implied in those circumstances. Moreover, Article 7 of the Model Law although requiring an arbitration agreement to be in writing, does not mandate signature of the parties. Moreover, the standard for binding non-signatories is higher in common law countries than the civil law ones. This is because privity is an essentially common law concept and civil law jurisdictions stress on the principles of good faith and equity.

Under English law, thus, we can see that the ‘group of companies’ doctrine has been rejected [Peterson Farms v. C & M Farming]; the corporate veil is pierced only in exceptional circumstances such as when the company in question is a façade or sham [see Adams v Cape Industries Plc.] and, together with control over the signatory company, there existed a degree of impropriety [see Hashem v. Shayif].

The corporate veil has been lifted on several occasions by the Indian judiciary, however, those have been in context of taxation, contract or company law [see New Horizons Ltd. v Union of India, Delhi Development Authority v Skipper Construction Co., State of U.P. & Ors. v Renusagar Power Co. & Ors., Life Insurance Corporation of India v Escorts Ltd.]. Arguably, if rights or liabilities under a contract can be extended to non-signatories, the same may be extended to arbitration clauses as well. Moreover, Indian courts have been known to follow English common law decisions, especially where (as in this case) statutory provisions are almost identical.

In the recent Supreme Court decision Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. [discussed at the Indian Corporate Law Blog], the analysis of the Court centred around the textual interpretation of section 7 of the Arbitration and Conciliation Act, 1996. The Court undertook a “plain, simple and normal reading of section 7 of the Act”. Further, it held that­ if the signatories to the arbitration agreement had intended that a third party would be bound by the agreement, they would have so specified while signing the agreement.

None of the documents exchanged between the appellant and first respondent referred to the arbitration agreement entered into between the two respondents. U.S. decisions relied on by first respondent were rejected since the statutory provision in India was substantially different from that in the United States. Admittedly, the cases cited by first respondent were only from the United States and no decisions upholding a similar point of law from England were cited by respondent. However, this should not have stopped the Court from relying on English decisions on this point, especially since statutory provisions in England and India are both lifted from the UNCITRAL Model Law.


Until this decision on April 27, 2010, one could have safely assumed that non-signatories could be bound to an arbitration agreement in India by lifting the corporate veil, albeit, in extraordinary circumstances. This decision goes against the general international trend and yet again proves that arbitrating in India is becoming less and less predictable.