Supreme Court Holding: The Supreme Court held that companies outside of an arbitration agreement can be made parties to arbitration proceedings as per the Group of Companies doctrine.
Citation: 2023 INSC 1051
Bench: 5 Judge Constitution Bench
Judges: D.Y. Chandrachud CJI, Hrishikesh Roy J, P.S. Narasimha J, J.B. Pardiwala J, Manoj Misra J
Judgment date: 06.12.2023
Keywords: Arbitration, Company Law, Group of Companies (GoC) Doctrine, Composite Contract
Introduction:
The supreme court of India in its landmark judgment on Cox and Kings Ltd. Vs SAP India Pvt. Ltd unanimously upheld the Group of Companies (GoC) Doctrine after a long debate in the recent years on the doctrine. This decision marks a significant development in the interpretation of the GoC Doctrine. The 5 judge constitution bench scrutinized the validity of previous judgments and examined the scope and validity of the applicability of GoC doctrine and also highlighted the importance of a case-specific analysis.
The GoC doctrine postulates that an arbitration agreement which is entered into by a company within a group of companies may bind non-signatory affiliates of the group of companies if the circumstances demonstrate the mutual intention of the parties to bind both signatories and non-signatories. This doctrine is called into question purportedly on the ground that it interferes with the established legal principles such as party autonomy, privity of contract, and separate legal personality.
Facts:
The petitioner Cox and Kings Ltd. is a travel company whereas the Respondent SAP India Pvt. Ltd. creates and sells software to aid companies in marketing, finance human resource and other areas of interest for large Businesses. The two companies entered into a ‘Software Licensing Agreement’ in 2010. The software was developed and owned by SAP India Private Limited (Respondent No. 1)
In 2015 the petitioner C&K was developing its own e-commerce platform, the respondent SAP India recommended installation of a new software “Hybris Solution” as it was already 90% compatible with C&K’s current software. SAP India claimed the remaining 10% compatibility will be customized in 10 months.
To execute the Hybris solution, both the parties entered into three new agreements: License Agreement, General Terms and Conditions Agreement (GTC), Customization agreement. The GTC agreement had an Arbitration clause and both the companies agreed to resolve future disputes through arbitration clause.
During the implementation of the Hybris Software, several issues were faced. Petitioner C&K reached out to SAP SE (Respondent No 2), which is the main branch of SAP based in Germany to assist with the implementation. SAP SE, the parent company of SAP India Pvt. Ltd. took over the project. Despite assurances from SAP SE the contractual obligations remained unfulfilled. C&K terminated the contract in November 2016, following which all the resources were withdrawn by the respondents. Aggrieved by the actions of the respondents C&K demanded a refund of ₹45 crores.
As the disputes could not get resolved even after several meetings, Respondent No. 1 invoked Arbitration Clause under GTC agreement in 2017, and demanded payment of ₹17 crores on the ground of wrongful termination of contract by the petitioner.
Arbitral tribunal was constituted and the Respondent No.2 was not made part of the Arbitration Proceedings. In 2019 NCLT adjourned the arbitration proceedings, as C&K were facing Insolvency Proceedings.
Subsequently Petitioner filed an Application under Section 16 of the Arbitration & Conciliation Act, 1996 contenting that all four agreements were a composite transaction. Petitioner also sent a second notice to SAP invoking arbitration and a notice was also sent to SAP SE even though it was a non-signatory party to any of the agreements.
SAP did not respond and failed to appoint an arbitrator, aggrieved C&K approached the SC under Section 11(6) of Arbitration & Conciliation Act, 1996 and requested to appoint an Arbitrator. In the application the petitioners claimed that SAP SE even if a non-signatory to any of the agreements could be included as a party to arbitration as SAP SE took full responsibility of the project and therefore gave an Implied Consent to be bound by the agreement.
Issues Raised:
- Can non-signatories be included as parties to an arbitration agreement?
- Under what circumstances can non-signatories be included as parties to an arbitration agreement?
Contention:
Arguments by Petitioner in regards to the case:
Respondent No. 1 was a wholly owned subsidiary of Respondent No. 2, and by taking control over the project to implement the Hybris Solution was entirely responsible for the projects failure, therefore all 3 agreements between Petitioner and Respondent No 1 and the Implied agreement between the petitioner and Respondent No. 2 constitutes a Composite Agreement and therefore will become part of the same transaction, therefore arguing in favor of GoC doctrine.
The agreements and email correspondences clearly show that Respondent No 1 and 2 and the Petitioner were in ad idem for the implementation and the execution of the agreements, and the respondent no 2 showed that by taking responsibility to resolve the petitioners grievances.
In the case of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc, it was stated that arbitration can be invoked even against the non-signatories, if the mutual intention of the parties can be shown and proved by the petitioner.
That as Section 11 of the Arbitration & Conciliation Act, 1996 has limited scope, the intervention by the Supreme Court should be minimal and thus the Court at this stage should only examine the existence of a valid arbitration agreement.
Arguments by Respondents in regards to the case:
Respondent No.1 argued that, when arbitration clause of GTC Agreement was invoked earlier, the petitioner itself had challenged it on the ground of the GTC being void ab initio, therefore reliance on the same provision cannot be invoked by the petitioner in order to appoint an arbitrator.
Respondent No. 2 argued that they were a separate and independent legal entity and does not have any business dealings in India.
Respondent No. 2 further claimed that they were not signatory to the arbitration agreement nor have they expressly or impliedly agreed to be bound by the terms of the agreement.
In addition there was no consensus among the parties to be bound by the agreement, thus the doctrine of GoC will not be applicable in the case.
Submissions were also given by the counsel of petitioners, respondents and interveners to settle the broader legal issues that have been raised.
Rationale:
Legal Principle Applied: Group of Companies Doctrine
Function of GoC doctrine is to identify the common intention of parties to bind a non-signatory by analyzing the corporate affiliation of the entities.
Supreme Court in Discovery Enterprises case laid down the test that courts and tribunals should consider for deciding whether a company within a group of companies which is not a signatory to arbitration agreement would be bound by the agreement under certain circumstances.
The following factors shall be considered while deciding:
- The mutual intent of the parties
The Court held that a non-signatory’s involvement in the performance of the contract containing the arbitration agreement is “the most important factor to be considered by the courts and tribunals
- The relationship of a non-signatory to a party which is a signatory to the agreement.
The Court noted that the presence of strong organizational and financial links between the non-signatory and the signatory company could indicate a mutual intention for the non-signatory to be bound by the agreement
- The commonality of the subject-matter
The Court noted that commonality between the subject matter of the contract containing the arbitration agreement and the conduct of the non-signatory is relevant. If the non-signatory’s actions are connected to the signatory’s contractual obligations, it would weigh in favor of applying the group of companies doctrine
- The composite nature of the transactions
The Court noted that, in cases involving multiple agreements, a court or tribunal must assess the degree to which the various agreements are linked. If the principal agreement (containing the arbitration agreement) cannot be performed in isolation, requiring the performance of a connected agreement to which the non-signatory is a party, that could indicate that the non-signatory intended to be bound by the arbitration agreement contained in the principal agreement
- The performance of the contract
Therefore the GoC doctrine is a means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement
Defects of Law:
Incorrect Approach in Chloro Controls
The Supreme Court noted that the approach adopted in Chloro Controls case to the extent that it traced the Doctrine to the phrase “claiming through or under” in Section 45 of the Arbitration Act was erroneous and against the well-established principles of contract and commercial law. SC clarified that GoC doctrine is based on mutual intent of parties and not their derivative capacity. Court explained that the entities “claiming through or under” refers to “successors-in-interest” and not corporations with Independent legal personalities from the same group of companies.
Inference:
The Cox and Kings Ltd. Vs SAP India Pvt. Ltd Judgment holds that a signature is irrelevant when there is an implied consent, which makes a party “party to an agreement”. Implied consent shall be inferred from the conduct of the non-signatory parties for them to be bound by the arbitration agreement. Mere commercial relationship between party and non-signatory is not sufficient. Mere liability of the group company (non-signatory) which is part of the party’s company group is not sufficient.
Therefore SC observed that although section 7 of Arbitration & Conciliation Act, 1996 mandated a written agreement, there was no stipulation that it must be signed by all parties; an arbitration agreement could be discerned through an exchange of communications.
Traditionally for a party to be bound by an arbitration agreement there has to be express consent based on principles of party autonomy and privity of contract. However SC in its Judgment has applied the Group of Companies Doctrine in determining if non-signatories can be included in the arbitration agreement and if so under what conditions. Doctrine of Group of Companies (GoC) is to be applied so as to maintain the corporate separateness of the group of companies while determining common intention of parties.
GoC doctrine is important in determining the intention of parties in complex and multi party transactions and agreements. Requirement of written arbitration agreement does not exclude the possibility of non-signatory parties to be bound by the arbitral proceedings
While drafting the application, there must be averments which point out that the mutual intention of the signatory and its non-signatory party was to be bound by the arbitration agreement. Burden of proof is on the party seeking to make the non-signatory to be bound by the arbitration agreement and the party has to invoke the GoC doctrine by identifying, pleading and establishing the factors laid down by the Supreme Court in Discovery Enterprises Judgment. The court or tribunal needs to analyze the presence of consent which helps in determining the non-signatory to be part of the arbitration agreement.
In essence, the Cox and Kings decision provides a nuanced and contemporary understanding of the “Group of Companies” Doctrine, clarifying its application and promoting a more efficient and streamlined arbitration process with minimal judicial interference.