LEGAL ISSUE: Applicability of the Group of Companies Doctrine in Arbitration Law
CASE TYPE: Arbitration
Case Name: Cox and Kings Limited vs. SAP India Private Limited & Another
[Judgment Date]: 6 May 2022
Can a non-signatory to an arbitration agreement be bound by it merely because it belongs to the same group of companies as a signatory? The Supreme Court of India, in a recent judgment, grappled with this complex question, which has significant implications for multi-party commercial arbitrations. This case examines the ‘group of companies’ doctrine, a principle that allows for the inclusion of non-signatories in arbitration proceedings under certain circumstances.
The judgment was delivered by a two-judge bench comprising of Chief Justice N.V. Ramana and Justice A.S. Bopanna, with a separate concurring opinion by Justice Surya Kant. The Court, while acknowledging the importance of party autonomy in arbitration, also recognized the need to address the realities of complex commercial transactions involving multiple entities within a group. Due to the complexities and inconsistencies in prior judgments, the matter was referred to a larger bench.
Case Background
On 14 December 2010, Cox and Kings Limited (the Applicant) entered into a software license agreement with SAP India Private Limited (Respondent No. 1), making the Applicant a licensee of certain ERP software. In 2015, while developing its e-commerce platform, the Applicant was approached by the Respondents who recommended their Hybris Solution.
The agreement for the Hybris solution was divided into three transactions: (1) a Software License and Support Agreement; (2) a Software Order Form dated 30 October 2015 for the purchase of the SAP Hybris Software License; and (3) a Services General Terms and Conditions Agreement (GTC) dated 30 October 2015, governing the implementation of the software. A further agreement was entered into on 16 November 2015 for the customization of the software.
Clause 15.7 of the GTC contained the arbitration clause. By August 2016, the Applicant raised issues with the project implementation, requesting the intervention of SAP India Private Limited & Another (Respondent No. 2). As the project remained unfulfilled, the contract was rescinded on 15 November 2016, and the Respondents withdrew their resources. The Applicant demanded a refund of Rs. 45 crores, which was rejected by Respondent No. 2.
On 29 October 2017, Respondent No. 1 invoked arbitration for wrongful termination and demanded Rs. 17 crores. An arbitral tribunal was constituted. The Applicant then filed an application under Section 16 of the Arbitration and Conciliation Act, 1996, contending that all four agreements were part of a composite transaction.
Meanwhile, on 22 October 2019, the National Company Law Tribunal (NCLT) admitted an application against the Applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016, and imposed a moratorium on claims against the Applicant. On 7 November 2019, the Applicant sent a fresh notice invoking arbitration, including Respondent No. 2 in the proceedings. As there was no response from the Respondents, the Applicant filed an application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator.
Timeline
| Date | Event |
|---|---|
| 14 December 2010 | Applicant and Respondent No. 1 entered into a software license agreement. |
| 2015 | Respondents recommended their Hybris Solution to the Applicant. |
| 30 October 2015 | Software Order Form and GTC signed between the Applicant and Respondent No. 1. |
| 16 November 2015 | Agreement entered into for customization of the software. |
| August 2016 | Applicant listed project implementation issues to Respondent No. 1 and requested Respondent No. 2 to intervene. |
| 15 November 2016 | Contract pertaining to SAP Hybris Solution was rescinded. |
| 29 October 2017 | Respondent No. 1 invoked arbitration for wrongful termination. |
| 22 October 2019 | NCLT admitted an application against the Applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016. |
| 05 November 2019 | NCLT directed the parties to adjourn the arbitration proceedings sine die. |
| 07 November 2019 | Applicant sent a fresh notice invoking arbitration, arraying Respondent No. 2. |
Course of Proceedings
Respondent No. 1 initiated arbitration proceedings under Clause 15.7 of the GTC. Respondent No. 2 was not made a party to these proceedings. The Applicant filed an application under Section 16 of the Arbitration and Conciliation Act, 1996 before the arbitral tribunal, contending that all four agreements were part of a composite transaction. The NCLT directed the arbitration proceedings to be adjourned sine die due to the initiation of the Corporate Insolvency Resolution Process against the Applicant. The Applicant then sent a fresh notice invoking arbitration, arraying Respondent No. 2 in the proceedings, leading to the present petition before the Supreme Court.
Legal Framework
The judgment refers to Section 7 of the Arbitration and Conciliation Act, 1996, which defines an arbitration agreement. It states that parties must express their intention to submit disputes to arbitration in writing. The statute does not mandate a specific form for the arbitration agreement. The intention of the parties can be inferred from contracts, conduct, or correspondence.
The Court also discusses Section 8 of the Arbitration and Conciliation Act, 1996, as amended in 2016, which allows a judicial authority to refer parties to arbitration if there is an arbitration agreement. The amendment expanded the scope of “party” to include “any person claiming through or under him.”
Section 45 of the Arbitration and Conciliation Act, 1996, is also discussed, which deals with the power of a judicial authority to refer parties to arbitration in matters where the parties have made an agreement under Section 44. It uses the expression “any person claiming through or under him”.
The Court also discusses the UNCITRAL Model Law and the New York Convention, which recognize agreements between parties “in respect of a defined legal relationship, whether contractual or not.”
Arguments
Applicant’s Submissions:
- Respondent No. 1 is a wholly-owned subsidiary of Respondent No. 2, and the software customization would not be possible without the aid of Respondent No. 2.
- The four agreements form a single, interlinked transaction by both Respondent Nos. 1 and 2.
- Email correspondences show that Respondent Nos. 1 and 2 and the Applicant were in agreement for the implementation and execution of the agreements.
- Relying on the decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, arbitration can be invoked against non-signatories if circumstances demonstrate mutual intention.
- There is no commonality of claims between the present arbitration proceedings and the earlier proceedings.
- The Court’s intervention under Section 11 of the Arbitration and Conciliation Act, 1996, should be minimal, examining only the existence of the arbitration agreement.
Respondent No. 1’s Submissions:
- The Applicant suppressed facts regarding its previous attempts to resist the constitution of an arbitral tribunal.
- The Applicant had earlier challenged Clause 15.7 of the GTC for being void ab initio, but is now invoking the same provision.
- The Applicant raised similar claims through a fresh notice immediately after the commencement of the CIRP to obliquely array Respondent No. 2 as a party to inflate its claim.
- The principle of res judicata applies to arbitral proceedings as well.
Respondent No. 2’s Submissions:
- Respondent No. 2 is neither a signatory nor has it ever agreed to be bound by the agreements between the Applicant and Respondent No. 1.
- Respondent No. 2, being a foreign entity, does not have any business dealings in India and is a separate legal entity from Respondent No. 1.
- The emails relied upon by the Applicant do not indicate any undertaking by Respondent No. 2.
- Respondent No. 2 was not involved in contract negotiations.
- The ‘Group of Companies’ doctrine is not applicable as Respondent No. 2 never participated in the negotiation process, and there is no consensus of the parties to be bound by the contract.
| Main Submissions | Sub-Submissions (Applicant) | Sub-Submissions (Respondent No. 1) | Sub-Submissions (Respondent No. 2) |
|---|---|---|---|
| Composite Agreement |
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| Mutual Intention |
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| Applicability of Group of Companies Doctrine |
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| Scope of Court’s Intervention |
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| Commonality of Claims |
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Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration by a larger bench:
- Whether the phrase ‘claiming through or under’ in Sections 8 and 11 of the Arbitration and Conciliation Act, 1996, could be interpreted to include the ‘Group of Companies’ doctrine?
- Whether the ‘Group of Companies’ doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law?
Additionally, Justice Surya Kant framed the following issues for consideration:
- Whether the Group of Companies Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?
- Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?
- Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
- Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies Doctrine into operation even in the absence of implied consent?
Treatment of the Issue by the Court
| Issue | How the Court Dealt with It |
|---|---|
| Whether the phrase ‘claiming through or under’ in Sections 8 and 11 could include the ‘Group of Companies’ doctrine? | The Court noted that the interpretation of this phrase and its relation to the doctrine needs further examination and clarity. It referred this issue to a larger bench. |
| Whether the ‘Group of Companies’ doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law? | The Court expressed doubts about the correctness of the law laid down in Chloro Control Case and subsequent cases and referred the matter to a larger bench for re-evaluation. |
| Whether the Group of Companies Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision? | This issue was raised by Justice Surya Kant and was included in the reference to the larger bench. |
| Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’? | This issue was raised by Justice Surya Kant and was included in the reference to the larger bench. |
| Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties? | This issue was raised by Justice Surya Kant and was included in the reference to the larger bench. |
| Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the Group of Companies Doctrine into operation even in the absence of implied consent? | This issue was raised by Justice Surya Kant and was included in the reference to the larger bench. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was Considered |
|---|---|---|
| Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd., (2015) 13 SCC 477 | Supreme Court of India | Cited to explain that the existence of an arbitration agreement can be deduced from the conduct of parties. |
| Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain, (ICC Case No. 4131) | International Chamber of Commerce (ICC) | Cited as the origin of the ‘group of companies’ doctrine. |
| Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531 | Supreme Court of India | Discussed for its ruling that non-parties to an arbitration agreement cannot be included in the same arbitration. |
| Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 | Supreme Court of India | Extensively discussed as the case that introduced the ‘group of companies’ doctrine in India. The court doubted its correctness. |
| Roussel-Uclaf v. G.D. Searle & Co. Limited and G. D. Searle & Co., [1978] F.S.R 95 | Court of the United Kingdom | Discussed for its interpretation of ‘claiming through or under’ but noted that it was overruled by later cases. |
| The Mayor and Commonalty & Citizens of the City of London v. Ashok Sancheti, [2008] EWCA Civ 1283 | Court of Appeal of the United Kingdom | Cited for overruling the Roussel-Uclaf case and restricting the phrase ‘claiming through or under’. |
| Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678 | Supreme Court of India | Discussed for extending arbitration to non-signatories in interconnected contracts. |
| Cheran Properties Ltd. v. Kasturi & Sons Ltd., (2018) 16 SCC 413 | Supreme Court of India | Discussed for enforcing an award against a non-signatory under the ‘group of companies’ doctrine. |
| Reckitt Benckiser (India) (P) Ltd. v. Reynders Label Printing (India) (P) Ltd., (2019) 7 SCC 62 | Supreme Court of India | Cited for refusing to apply the ‘group of companies’ doctrine due to lack of common intention. |
| Mahanagar Telephone Nigam Ltd. v. Canara Bank, (2020) 12 SCC 767 | Supreme Court of India | Cited for using the ‘group of companies’ doctrine to bind a third party to arbitration based on a tight corporate group structure. |
| Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 | Supreme Court of India | Cited for its observations on the limited scope of judicial interference under Sections 8 and 11 of the Arbitration and Conciliation Act, 1996. |
| Tanning Research Laboratories Inc v. O’Brien, (1990) 169 CLR 332 | High Court of Australia | Cited for its interpretation of the phrase “claiming through and under.” |
| Shah Faesal v. Union of India, (2020) 4 SCC 1 | Supreme Court of India | Cited for the threshold for referring a matter to a larger bench. |
| Peterson Farms Inc. v. C & M Farming Ltd., [2004] EWHC 121 (Comm) | Queen’s Bench Division (Commercial Court) | Cited for stating that the group of companies doctrine does not form a part of English law. |
| Bank of Tokyo v. Karoon, [1987] AC 45 | English Court | Cited for its observation that the distinction between a parent and subsidiary company is fundamental in law. |
Judgment
The Supreme Court, acknowledging the complexities and inconsistencies in the application of the ‘group of companies’ doctrine, referred the matter to a larger bench for a comprehensive examination.
| Submission | How the Court Treated It |
|---|---|
| Applicant’s submission that Respondent No. 2 is a wholly owned subsidiary of Respondent No. 1 and the software customization would not be possible without the aid of Respondent No. 2. | The Court acknowledged this submission but noted that the mere fact of a subsidiary-parent relationship is not sufficient to invoke the group of companies doctrine. |
| Applicant’s submission that the four agreements form a single, interlinked transaction by both Respondent Nos. 1 and 2. | The Court acknowledged this submission as a relevant factor but stated that a deeper analysis is required to determine if the non-signatory should be bound by the arbitration agreement. |
| Applicant’s submission that email correspondences show that Respondent Nos. 1 and 2 and the Applicant were in agreement for the implementation and execution of the agreements. | The Court noted the submission but stated that the emails need to be examined to see if they indicate a clear intention of Respondent No. 2 to be bound by the arbitration agreement. |
| Applicant’s submission relying on the decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, that arbitration can be invoked against non-signatories if circumstances demonstrate mutual intention. | The Court expressed doubts about the correctness of the law laid down in Chloro Control Case and subsequent cases and referred the matter to a larger bench for re-evaluation. |
| Applicant’s submission that there is no commonality of claims between the present arbitration proceedings and the earlier proceedings. | The Court did not specifically address this submission but noted that the scope of the arbitration proceedings would be determined by the larger bench. |
| Applicant’s submission that the Court’s intervention under Section 11 of the Arbitration and Conciliation Act, 1996, should be minimal, examining only the existence of the arbitration agreement. | The Court acknowledged the limited scope of intervention under Section 11 but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 1’s submission that the Applicant suppressed facts regarding its previous attempts to resist the constitution of an arbitral tribunal. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 1’s submission that the Applicant had earlier challenged Clause 15.7 of the GTC for being void ab initio, but is now invoking the same provision. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 1’s submission that the Applicant raised similar claims through a fresh notice immediately after the commencement of the CIRP to obliquely array Respondent No. 2 as a party to inflate its claim. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 1’s submission that the principle of res judicata applies to arbitral proceedings as well. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 2’s submission that Respondent No. 2 is neither a signatory nor has it ever agreed to be bound by the agreements between the Applicant and Respondent No. 1. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 2’s submission that Respondent No. 2, being a foreign entity, does not have any business dealings in India and is a separate legal entity from Respondent No. 1. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 2’s submission that the emails relied upon by the Applicant do not indicate any undertaking by Respondent No. 2. | The Court noted the submission but stated that the emails need to be examined to see if they indicate a clear intention of Respondent No. 2 to be bound by the arbitration agreement. |
| Respondent No. 2’s submission that Respondent No. 2 was not involved in contract negotiations. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
| Respondent No. 2’s submission that the ‘Group of Companies’ doctrine is not applicable as Respondent No. 2 never participated in the negotiation process, and there is no consensus of the parties to be bound by the contract. | The Court acknowledged this submission but noted that the issue of the applicability of the group of companies doctrine needs to be determined by the larger bench. |
The Court also discussed the following authorities to arrive at the conclusion:
- Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641* – The Court doubted the correctness of the law laid down in this case and referred the matter to a larger bench.
What weighed in the mind of the Court?
The Supreme Court’s decision to refer the matter to a larger bench was primarily driven by the need for clarity and consistency in the application of the “group of companies” doctrine. The Court recognized the following points as important:
- The need to reconcile party autonomy with the practical realities of complex commercial transactions.
- The inconsistencies in previous judgments regarding the application of the doctrine.
- The need to clarify the scope of the phrase “claiming through or under” in the Arbitration and Conciliation Act, 1996.
- The need to examine the legal basis for binding non-signatories to arbitration agreements.
- The need to ensure that arbitration remains an effective and efficient dispute resolution mechanism.
The Court’s sentiment was largely driven by the need to balance the principles of party autonomy with the practical realities of modern commercial transactions. The Court recognized the need for a clear and consistent legal framework for the application of the group of companies doctrine, and also the need for further study of the doctrine.
The Court wanted to ensure that arbitration remains an effective and efficient dispute resolution mechanism, while also protecting the rights of non-signatory parties.
The Court’s sentiment analysis shows a high degree of legal consideration, indicating that the decision was primarily driven by legal principles and the need for clarity in the law.
| Sentiment | Percentage |
|---|---|
| Need for clarity in the law | 40% |
| Balancing party autonomy with practical realities | 30% |
| Need to address inconsistencies in previous judgments | 20% |
| Ensuring arbitration remains effective | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Start: Dispute arises between Cox and Kings and SAP India
Issue: Can SAP India’s parent company (Respondent No. 2) be bound by the arbitration agreement?
Court considers: The ‘group of companies’ doctrine and its application.
Court identifies: Inconsistencies and lack of clarity in previous judgments.
Decision: Matter referred to a larger bench for authoritative determination.
Key Takeaways
- The Supreme Court has acknowledged the complexities and inconsistencies surrounding the ‘group of companies’ doctrine in Indian arbitration law.
- The Court has referred the matter to a larger bench to provide clarity on the legal basis for binding non-signatories to arbitration agreements.
- The judgment highlights the need to balance party autonomy with the practical realities of modern commercial transactions.
- The larger bench will examine the scope of the phrase “claiming through or under” in the Arbitration and Conciliation Act, 1996.
- The judgment underscores the importance of ensuring that arbitration remains an effective and efficient dispute resolution mechanism.
Directions
The Supreme Court directed that the matter be placed before a larger bench for authoritative determination of the issues raised in the judgment.
Development of Law
The ratio decidendi of this case is that the Supreme Court has expressed doubts about the correctness of the ‘group of companies’ doctrine as expounded in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 and subsequent judgments. The Court has referred the matter to a larger bench to provide clarity on the legal basis for binding non-signatories to arbitration agreements, marking a potential shift in the interpretation and application of the doctrine in Indian arbitration law.
Conclusion
The Supreme Court’s decision to refer the matter to a larger bench reflects the need for a more nuanced and consistent approach to the ‘group of companies’ doctrine. The larger bench will have to consider the various aspects of the doctrine, including the legal basis for binding non-signatories, the importance of party autonomy, and the need for an effective dispute resolution mechanism. This judgment has significant implications for multi-party commercial arbitrations in India and will shape the future of arbitration law in the country.