In the case of Cox and Kings Ltd. v. Sap India Pvt. Ltd. & Another, Arbitration Petition (Civil) No. 38 of 2020 dated 06.05.2022, a Single Bench of the Supreme Court examined the ‘Group of Companies’ Doctrine and made key observations regarding the binding of non-signatories to the Arbitration agreement.
FACTS
Cox and Kings Ltd. (hereinafter referred to as “the Applicant”) and Sap India Pvt. Ltd. (hereinafter referred to as “Respondent No. 1”) entered into an SAP Software End User License Agreement and SAP Enterprise Support Schedule, under which the Applicant was made a licensee of certain ERP software developed and owned by Respondent No. 1.
Respondent No. 1, and Indian subsidiary of Respondent No.2, approached the Applicant in 2015, when the Applicant was creating its own e-commerce platform, and offered the Applicant their Hybris Solution Software, claiming to be 90% compatible with the Applicant’s software.
The Agreement comprised of three separate transactions: first, the Applicant and Respondent No. 1 signed the Software License and Support Agreement, Software Order Form 3, dated 30.10.2015, for the acquisition of the SAP Hybris Software License. Second, on 30.10.2015, the parties signed the Services General Terms and Conditions Agreement (hereinafter referred to as the “GTC”), which outlined the terms and conditions for the SAP Hybris software implementation. Third, on 16.11.2015, the parties signed a Contract for software customization. Clause 15.7 of the GTC contained the Arbitration Clause.
Thereafter, dispute arose between the parties as Respondent No. 1 did not provide the services as per the GTC to the Applicant. The Applicant issued a Demand Notice to Respondent No. 1, to which Respondent responded with an alternative remedy. The proposed alternative remedy was rejected by the Applicant and the Applicant terminated the GTC.
As the dispute could not be resolved amicably after multiple correspondences and meetings, Respondent No. 1 issued a Notice invoking Arbitration, alleging unlawful termination of the GTC and demanding payment of Rs. 17 crores. The parties’ claims were adjudicated by an Arbitral Tribunal consisting of retired Supreme Court and High Court Judges.
During the Arbitral proceedings, the Applicant filed an application before the Arbitral Tribunal under Section 16 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) alleging that the four agreements entered into between the parties are a composite transaction that should be treated as a single procedure.
Meanwhile, the National Company Law Tribunal (hereinafter referred to as “NCLT”) admitted an application filed against the Applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016. In light of the moratorium imposed on claims against the Applicant due to the beginning of the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”), the NCLT directed the parties to adjourn the Arbitration proceedings sine die on November 5, 2019.
Subsequently, the Applicant issued a new Notice invoking Arbitration, arraying Respondent No. 2 in the Arbitration proceedings. In the aforesaid Notice, the Applicant named its nominated Arbitrator and requested that the Respondents name an Arbitrator for the Tribunal’s formation. The Respondents, on the other hand, did not respond. As a result, the Applicant has preferred this Application for the appointment of an Arbitrator in an International Commercial Arbitration under Section 11 of the Act.
ISSUES BEFORE THE SUPREME COURT
- Whether Respondent No. 2 is liable to join the Arbitration proceedings, filed by the Applicant, along with Respondent No. 1?
- Whether the doctrine of ‘Group of Companies’ apply to Respondent No. 1 and Respondent No.2 under the current circumstances?
CONTENTIONS OF THE PARTIES
The Applicant submitted that Respondent No. 1 is Respondent No. 2’s wholly-owned subsidiary and proprietary firm, and as Respondent No. 2 licenses the program to Respondent No. 1, performance of the contractual obligations would be impossible without Respondent No. 2’s involvement. As a result, the four agreements collectively form a composite agreement, and both Respondent Nos. 1 and 2 are parties to a single, interconnected transaction.
The Applicant contended that as per the agreements and email correspondences, Respondent Nos. 1 and 2 and the Applicant were in ad idem for the implementation and execution of the agreements. When Respondent No. 1 failed to carry out the agreement, Respondent No. 2 assumed responsibility for resolving the Applicant’s issues.
The Applicant relied on the Three Judge bench decision of the Supreme Court in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 (hereinafter referred to as “the Chloro Controls decision”), to support its claim that Arbitration can be invoked even against non-signatories if the circumstances show that it was the parties’ mutual intention to make non-signatories bound by the Arbitration agreement.
The Applicant argued that there are no claims in common between the current Arbitration proceedings and the previous adjourned Arbitration proceedings. The Applicant stated that given the limited scope of Section 11 of the Act, the Court’s participation should be confined to examining the existence of the Arbitration agreement.
Respondent No. 1 contended that the material facts about the Applicant’s past attempts to prevent the formation of an Arbitral Tribunal in the previous Arbitral proceedings have been withheld by the Applicant. Respondent No. 1 emphasized on the fact that when the Arbitration was first invoked under Clause 15.7 of the GTC, the Applicant had challenged it as void ab initio.
Further, Respondent No. 1 argued that the Applicant opted to submit similar allegations through a new Notice of Arbitration one day after the start of the CIRP and the implementation of the moratorium, and obliquely arrayed Respondent No. 2 as a party to inflate its claim. Relying on the established law, Respondent No.1 submitted that the principle of Res Judicata is applicable on Arbitral proceedings.
Respondent No. 2 submitted that it is not a signatory to the Arbitration agreement, and never consented, either expressly or impliedly, to be bound by the Applicant’s and Respondent No. 1’s agreements. Respondent No. 2 stated that it is a separate and independent legal entity from Respondent No. 1, as it is a foreign entity with no business dealings in India.
Respondent No. 2 argued that the communications cited by the Applicant show that Respondent No. 2 made no commitment towards the Applicant and that Respondent No. 2 never participated in the contract negotiations between the Applicant and Respondent No. 1.
Lastly, Respondent No. 2 contended that the doctrine of “Group of Companies” does not apply in the present circumstances, as Respondent No. 2 is not only a non-signatory but also never took part in the contract drafting process. Furthermore, Respondent No. 2 emphasized on the submission that it did not agree to be bound by any of the agreements between the Applicant and Respondent No. 1.
DECISION AND FINDINGS
The Hon’ble Supreme Court resolved to examine the scope of the “Group of Companies” doctrine and noted that the said doctrine had been used in a variety of ways since it was first articulated in the Chloro Controls decision. Thus, the Supreme Court was of the view that it is necessary to look into the reasoning behind the doctrinal approach taken by the Supreme Court in the Chloro Controls decision.
The Supreme Court observed that Arbitration is a contractual creation that has been given statutory support under the Act, in order to promote party autonomy, speedy resolution, and an effective alternative remedy. The Supreme Court noted Multiparty and multiclaim proceedings are one of the most difficult areas within the Alternate Dispute Resolution mode of Arbitration, both theoretically and practically. Similarly, the Supreme Court stated that the “Group of Companies” doctrine is one such instance where third parties are bound by an Arbitration agreement.
The Supreme Court cited the decision in Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain, (ICC Case No. 4131) (hereinafter referred to as “the Dow Chemical decision”) and noted that the Group of Companies doctrine originated from the said decision. The Supreme Court however emphasized on the fact that the Dow Chemical decision arose from situation where a non-signatory did not resist Arbitration. Rather, the non-signatory wished to join the Arbitration already initiated by its affiliates.
Then, the Supreme Court took notice of the first ever Indian case that dealt with the doctrine of “Group of Companies”. In the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531 (hereinafter referred to as “the Sukanya Holdings decision”) the Supreme Court held that Section 8 of the Act does not permit for the bifurcation of causes of action in Arbitration, and nonparties to an Arbitration agreement cannot be included in the same Arbitration.
The Supreme Court thereafter noted that the Chloro Controls decision was the next significant case involving the “Group of Companies” doctrine. In the Chloro Controls decision, the Supreme Court had to resort to Section 45 of the Act for the appointment of Arbitrator, as the case involved multiple foreign parties.
The Supreme Court accepted the “Group of Companies” concept as a sufficient basis for establishing legal relationship, while expounding the concept. Elaborating on the elements of doctrine, the Supreme Court also considered the parties’ intent as to whether they were ad idem to treat a non-signatory as a party to the Arbitration agreement.
On one hand, the Supreme Court fixed the bar for Arbitration to be a consensual process, and on the other hand, the Supreme Court held that the doctrine of “Group of Companies” is applicable on the contractual terms which bind a party to Arbitration.
In the Chloro Controls decision, the Supreme Court observed that the Sukanya Holdings decision was found to be inapplicable for the interpretation of Section 45 of the Act. The Supreme Court opined that the ratio in the Sukanya Holdings decision was limited to Arbitrations conducted under Part I of the Act.
In addition, the Supreme Court stated that the 246th Law Commission Report recommended amending Section 2(1)(h) and 8 of the Act to change the definition of ‘party’ under Part I of the Act to “a party to an Arbitration agreement or any person claiming or through or under such party” in order to correct the anomaly identified by the Supreme Court in the Chloro Control decision.
The Supreme Court noted that the Act’s definition of “party” under section 2(1)(h) refers to “a party to an arbitration agreement”, and thus, the said definition cannot be interpreted to mean only a “signatory” to an Arbitration agreement, as there are various instances and contexts in which even a “non-signatory” to an Arbitration agreement can be considered a “party.”
The Supreme Court also pointed out that the 2015 Amendment to the Act made four changes to Section 8 of the Act. Firstly, the definition of “party” was broadened to encompass people who claim “through or under.” Secondly, the revision clarified the scope of court intervention, stating that it should be restricted to a prima facie review of the Arbitration agreement’s existence.
The Supreme Court noted that the areas left unanswered by the Supreme Court in the Chloro Controls decision resulted in a broad-based construction of the “Group of Companies” doctrine that may not be appropriate and would clearly conflict with unique legal identities of firms and party autonomy.
Thus, the Supreme Court held that the aforementioned concept of “Group of Companies” as laid down in the Chloro Controls decision cannot sustain in a jurisdiction that values party autonomy. The Supreme Court observed that a reexamination of the doctrinal components of the “Group of Companies” doctrine is clearly required.
Subsequently, the Supreme Court took note of the decision in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, wherein it was held that the ambit of judicial interference under Section 8 and Section 11 of the Act is similar. The amendment to Section 8 of the Act rectified the shortcomings pointed out in Chloro Controls decision with respect to domestic Arbitration.
However, the Supreme Court observed that in a multiparty Arbitration, jurisdictional concerns such as whether certain parties are bound by a particular Arbitration, under the Group Company doctrine or good faith, etc., pose complex factual matters that are best left to the Arbitral Tribunal to resolve. On this front, the Supreme Court stated that the amendment to Section 8 of the Act demonstrates the legislative purpose to restrict court interference at the stage of reference.
The Supreme Court opined that while the statutory texts of Sections 8 and 11 of the Act differ, they are not fundamentally different, and both Sections provide for limited judicial action at the reference stage. While examining a matter under Section 8 of the Act, the Court may decide to focus on the questions that need to be resolved regarding the Arbitration agreement’s legitimacy. If the Court cannot determine on the Arbitration agreement’s legitimacy on a prima facie basis, the Court should halt its examination and simply refer all of the matters to Arbitration for resolution.
The Supreme Court further noted that the case was primarily concerned with the scope of judicial intervention during the referral stage. It did not, however, have the opportunity to investigate the jurisprudential foundation of the “Group of Companies” theory or the needed ingredients to submit a “non-signatory” to Arbitration. The scope of judicial referral at the level of Sections 8 and 11 of the Act, in particular, has to be reconsidered in light of the scope of the Act’s unamended Section 2(1)(h).
In light of the foregoing discussion, the Supreme Court decided to refer the issue of the interpretation of the terms ‘claiming through or under’ as contained in amended Section 8 of the Act in relation to the doctrine of “Group of Companies” to a larger Bench for clarification. The Supreme Court noted that it doubted the correctness of the law laid down in the Chloro Controls decision, as the said decision was based more on economics and convenience, rather than law.
AMLEGALS REMARKS
The present-day Arbitration Law in India has been shaped by numerous amendments issued by the Indian legislature, along with multiple judicial precedents laid down by the Courts to ensure that the Arbitration procedure in India is in accordance with the principles of natural justice.
One of the essential aspects of Arbitration law concerning incorporated entities is the doctrine of “Group of Companies,” which relates to multi-party and multi-claim proceedings. In the instant case, the Supreme Court took it upon itself to examine the relevancy of judicial precedents settled by the Supreme Court and other lower Courts with regards to the doctrine of “Group of Companies.”
In the process of examining the existing precedents, the Supreme Court was of the opinion that the ratio set by the Chloro Controls decision was parochial, in a sense that the law laid down by the Supreme Court, in the said case, seemed to be more based on economics and convenience, rather than law, which the Single Bench of the Supreme Court did not consider to be a correct approach.
Therefore, as the question of law in the Chloro Controls decision is likely to impact and have judicial value over many contractual disputes between parties, the Supreme Court referred the aspect of interpretation of ‘claiming through or under’ as occurring in amended Section 8 of the Act in relation to the doctrine of “Group of Companies “to a Larger Bench of the Supreme Court to provide further clarity on the said aspect.
–Team AMLEGALS, assisted by Mr. Vishal Lodhi (Intern)
For any queries or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.
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