Supreme Court Of India Upholds The 'Group Of Companies Doctrine'

AP
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A five-judge Bench of the Supreme Court of India, led by Hon'ble CJI D.Y. Chandrachud, delivered its judgment in the case of Cox and Kings Limited v. SAP India Private Limited...
India Litigation, Mediation & Arbitration
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A five-judge Bench of the Supreme Court of India, led by Hon'ble CJI D.Y. Chandrachud, delivered its judgment in the case of Cox and Kings Limited v. SAP India Private Limited, [Arbitration Petition (Civil) No. 38 of 2020], on December 6, 2023 pertaining to the issue of whether non-signatories to an arbitration agreement can be bound by the same, which involved a re-examination of the principles laid in the case of Chloro Controls India (P) Limited v. Severn Trent Water Purification ("Chloro Controls") [(2013) 1 SCC 641] and validity of the 'Group Companies Doctrine' in Indian arbitration jurisprudence.

Facts of the Case:

The dispute arose out of software licensing agreements entered into by Cox and Kings Ltd. with SAP India Private Limited wherein there existed a General Terms and Conditions Agreement containing an arbitration clause and agreement to be bound by the Arbitration and Conciliation Act, 1996 ("the Arbitration Act"). Although, the German parent company of SAP India Private Limited i.e., SAP SE, was not a party to the agreement; assistance had been provided by them when issues over the software project. The proceedings were adjourned by the National Company Law Tribunal in 2019 with Cox and Kings Limited facing insolvency proceedings. Nevertheless, Cox and Kings Limited initiated fresh arbitration and SAP SE was also notified to be made party to the arbitration although SAP SE was not a direct signatory to the arbitration agreement. Cox and Kings Ltd. argued that SAP SE, as the parent company, took responsibility for the project, implying consent to be bound by the agreement—a legal concept referred to as the 'Group of Companies Doctrine' ("Doctrine"). As SAP SE did not appoint an arbitrator, Cox and Kings Limited approached the Hon'ble Supreme Court under Section 11 of the Arbitration Act to appoint one, wherein (the then) Hon'ble CJI Justice N.V. Ramana, referred the case to a larger Constitution Bench expressing concerns about the application of the Doctrine to the Arbitration Act and the extent of an arbitral tribunal's jurisdiction over non-signatories.

Issues:

The underlying issues to be determined by this Court was whether joinder of non-signatories as a 'party' is permissible under the Arbitration Act, the validity of the Doctrine and if joinder of a non-signatory is permissible, under what circumstances?

Findings:

While deciding on the issue of whether a non-signatory can be a 'party' under the Arbitration Act, this Court has emphasised on the age-old principle of party autonomy and mutual consent. The Bench asserted that consensus ad idem between parties formed the foundation of any arbitration, while establishing validity of the arbitration agreement in terms of satisfying all principles of contractual law while fulfilling the scope of Section 7of the Arbitration Act. It was noted that, while a signature is the most explicit way to signify this consent; the absence of a signature did not necessarily denote a lack of consent, especially in cases involving multiple parties. At this juncture, it must be discerned whether non-signatory entities consented to be bound as a 'party' to the arbitration agreement through their actions or conduct and their legal relationship. Thus, the requirement for ensuring written arbitration agreements is merely for establishing record of such consent.

This Court, while adjudicating on the validity of the Doctrine highlighted the fundamentals of corporate law pertaining to 'separate legal entity'. It is a quintessential aspect of corporate law that the Group of Companies Doctrine to pierce the corporate veil is used sparingly for prevailing justice and equity. Arbitrations cumulatively rely on principles of intention and conduct of parties to effectively bind parties that may not have expressly signed the arbitration but are 'veritable parties' to the dispute. Considering complex transactions, the Doctrine plays a vital role which examines the corporate group structure and binds the non-signatory to the arbitration agreement. A vital facet while establishing the corporate group structure to hold a non-signatory, that seems to be a veritable party, bound to any arbitration agreement; is a fact specific analysis of the surrounding conduct and common intention of the non-signatories, nature of the composite transactions and essentially the participation of the non-signatory in the underlying contract.

Therefore, the Hon'ble Court drew a distinction between the 'party' and persons 'claiming through or under', as had been propounded in the Chloro Controls case. Sections 2(1)(h) or Section 7 of the Arbitration Act have not used the term 'claiming through or under' as they are based on the principle of party autonomy. The Doctrine has its own independent existence under Indian arbitration jurisprudence, having its foundation rooted in mutual intent of the parties. Consequently, the approach of the Apex Court in Chloro Controls was held to be incorrect, and the Doctrine was disjointed from 'claiming through or under', whereby the latter only vets a derivative capacity in such persons.

Herein, the Court while arriving at its conclusion, also held that it is the arbitral tribunal which is equipped with the power of ascertaining the position of a non-signatory as a 'veritable' party to an arbitration while delving into all aspects of the dispute.

Key Take-aways:

  1. It is not essential for arbitration agreement to be 'written' and non-signatories may be a "party" based on their conduct;
  2. The Doctrine has an independent existence under the Arbitration Act. It is a fact-based examination which relies on corporate separateness of group companies while assessing the common intention of the parties;
  3. "Party" and "persons claiming through or under" are distinctive where the latter's right is merely derivative through the former's rights;
  4. The finding of Chloro Controls while combining the Doctrine to the phrase "persons claiming through or under" is incorrect;
  5. The principles laid down in Oil and Natural Gas Corp. Limited v. Discovery Enterprises Private Limited, [(2022) 8 SCC 42] would serve as a basis for application of the Doctrine.

Please find a copy of the judgment, here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Supreme Court Of India Upholds The 'Group Of Companies Doctrine'

India Litigation, Mediation & Arbitration

Contributor

Argus Partners is a leading Indian law firm with offices in Mumbai, Delhi, Bengaluru and Kolkata. Innovative thought leadership and ability to build lasting relationships with all stakeholders are the key drivers of the Firm. The Firm has advised on some of the largest transactions in India across various industry sectors. The Firm also, regularly advises the boards of some of the biggest Indian corporations on governance matters. The lawyers of the Firm have been consistently regarded as the trusted advisors to its clients with a deep understanding of the relevant business domain, their business needs and regulatory nuances which enables them to clearly identify the risks involved and advise mitigation measures to protect their interests.
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