A. Background and questions before the constitutional bench.
In 2015, Cox and Kings Limited (hereinafter referred to as "Petitioner") entered into three agreements with SAP India Private Limited (hereinafter referred to as "Respondent No. 1") for availing certain software services. One of the agreements executed between the Petitioner and Respondent No. 1 was the General Terms and Conditions (hereinafter referred to as "GTC") containing the impugned arbitration clause. Disputes arose over following few years and, in 2019, the Petitioner commenced arbitration proceedings against Respondent No. 1 and its parent company (hereinafter referred to as "Respondent No. 2"). It is to be noted that Respondent No. 2 was not a party to the GTC.
Subsequently, since there was no response from either of the Respondents, the Petitioner filed an application under Section 11 (6) of the Arbitration and Conciliation Act, 1996 ("Act") before the Supreme Court of India. A three-judge bench of the Supreme Court while considering this application, sought to re-examine the validity of the 'group of companies' doctrine under Indian arbitration law and, if applicable, to determine its contours. Pertinently, application of the 'group of companies' doctrine could be said to interfere with established legal principles of party autonomy (that forms the bedrock of an arbitration agreement) and privity of contract. The matter was, therefore, referred to a Constitutional Bench comprising of CJI DY Chandrachud, Justices Hrishikesh Roy, PS Narasimha, JB Pardiwala and Manoj Misra, which delivered its verdict in the case of Cox & Kings Ltd. V. SAP India Pvt. Ltd, Arbitration Petition (Civil) No. 38 of 2020, on December 06, 2023.
B. Observation and findings of the Court
After a comprehensive analysis of the past rulings of the Supreme Court and international jurisprudence, the Court arrived at the following conclusions:
1.Definition of "Parties" under the Act and joinder of non-signatory parties.
a)The Court while expounding the definition of"parties" stated that Section 2(1)(h) read with Section 7 of the Act includes both signatory as well as non-signatory parties and that the requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.The Supreme Court was of the opinion that a "party" is not required to be a signatory to the arbitration agreement or the underlying contract, which is in line with the international jurisprudence that a signature is not necessary for an arbitration agreement. The Court drew reference to Article 7 (3) of the UNCITRAL Model Law, which provides that, "an arbitration agreement is in writing if its content is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means." Therefore, provided that the contents of the agreement are recorded, an arbitration agreement may be entered into any form, even orally or tacitly, eliminating the requirement of signatures or an exchange of messages between the parties.
b) Further the Court highlighted that, "conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement," basis which an arbitration agreement can either be express or implied, depending upon the action or conduct of the parties. Thus, it is not necessary for the parties to be signatories to the agreement to enter into a legal relationship, if it can be determined that they intended or consented to enter into the legal relationship by their action or conduct.
c) Under the Act, the concept of a "party" is distinct and different from the concept of "persons claiming through or under" a party to the arbitration agreement; The Court found that a non-signatory entity is not 'claiming through or under' a signatory party. It has also been opined that the definition of a 'party' includes both signatory as well as non-signatory parties and that the concept of a 'party' is distinct and different from the concept of 'persons claiming through or under a party' to the arbitration agreement. It was thus observed that the persons claiming through or under can only assert a right in a derivative capacity.The Court held that the approach of this Court in Chloro Controls1 to the extent that it traced the 'group of companies' doctrine to the phrase "claiming through or under" is erroneous and against the well-established principles of contract law and corporate law; The persons "claiming through or under" can only assert a right in a derivative capacity.
- Basis of application of the 'group of companies' doctrine and determination of its contours.
a) The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non signatory party to the arbitration agreement; The Court emphasized that the 'group of companies' doctrine is fact-based and a means of identifying the common intention of the parties to bind a non-signatory to an arbitration agreement by emphasizing and analysing the corporate affiliation of distinct legal entities.
b)The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the 'group of companies' doctrine; The Court clarified that there is an important distinction between the 'group of companies' doctrine and the principle of piercing the corporate veil or alter ego citing the decision in Cheran Properties.2 The principle of alter ego disregards the corporate separateness and the intentions of the parties in view of the overriding considerations of equity and good faith. In contrast, the 'group of companies' doctrine facilitates identification of the intention of parties to determine the true parties to an arbitration agreement without disturbing the legal personality of the entity in question.
c) The 'group of companies' doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Act; to apply the 'group of companies' doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises3and that the principle of single economic unit cannot be the sole basis for invoking the 'group of companies doctrine.' The Court laid down: (a) mutual intent of the parties, (b) relationship of the non-signatory to the signatory, (c) commonality of subject-matter, (d) composite nature of transaction, and (e) performance of the contract as the factors to determine whether a non-signatory is a party.
d) The 'group of companies' doctrine should be retained in Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements; The acknowledgement of the 'group of companies' doctrine by the Hon'ble Supreme Court holds substantial significance, as it brings Indian arbitration jurisprudence in line with international practice.
- Upholding the tribunals right as per the principle of Competence-Competence.
The Court held that at the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; This observation by the Court is much appreciated as it exercises judicial restraint and does not encroach upon the arbitral tribunal's jurisdiction to determine the application of the doctrines and decide whether the non-signatories would be a party.
Finally, as the scope of the judgement was limited to the 'group of companies' doctrine the Court cautioned that, "during the course of this judgement, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement."
Footnotes
1. Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641
2. Cheran Properties Ltd v. Kasturi and Sons Ltd 2 (2018) 16 SCC 413.
3. ONGC v. Discovery Enterprises Pvt Ltd (2022) 8 SCC 42
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