In ARBITRATION PETITION (CIVIL) NO.38 OF 2020-SC- Apex Court refers matter to larger Bench to expound on intricacies of Group of Companies doctrine, says clear need exists to relook at doctrinal ingredients Justices N.V.Ramana, A.S.Bopanna & Surya Kant [06-05-2022]

Read Judgment: COX AND KINGS LIMITED v. SAP INDIA PRIVATE LIMITED & ANOTHER 

Tulip Kanth

New Delhi, May 09, 2022: The Supreme Court has held that there is a clear need for having a relook at the doctrinal ingredients concerning the group of companies doctrine and referred this matter to a larger Bench to expound on the intricacies of the doctrine. The Apex Court has opined that the scope of judicial reference at the stage of Sections 8 and 11 of the Arbitration and Conciliation Act, 1996 needs to be revisited considering the ambit of unamended Section 2(1)(h).

The Larger Bench of Justice N.V.Ramana, Justice A.S.Bopanna and Justice Surya Kant was examining the group of companies doctrine and whether the principles of party autonomy under arbitration law and corporate personality in company law have been adequately safeguarded in outlining the scope and applicability of the doctrine being followed at present in Indian jurisprudence.

The Top Court has referred two questions of law relating to the issue if phrase claiming through or under in Sections 8 and 11 could be interpreted to include Group of Companies doctrine and if such doctrine as expounded by its judgment in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and subsequent judgments are valid in law.

This Arbitration Petition had been preferred by the Petitioner-Applicant under Section 11(6) and Section l1(12)(a) of the Arbitration and Conciliation Act, 1996 , for appointment of an Arbitral Tribunal in terms of the provisions of the Arbitration Act, on the ground that there had been a failure with respect to the appointment of an Arbitral Tribunal in accordance with the agreements between the parties.

The facts necessary for the adjudication of the dispute were such that the Applicant and the first Respondent 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 the Respondents. In 2015, while the Applicant was developing its own e-commerce platform, the Respondents approached the Applicant and recommended their Hybris Solution. The aforesaid agreement was divided into 3 separate transactions: first, the Software License and Support Agreement whic was signed between the Applicant and first Respondent for the purchase of the SAP Hybris Software License. Second agreement was signed between the parties containing the terms and conditions governing the implementation of the SAP Hybris software which was called the Services General Terms and Conditions Agreement (GTC). Third agreement was entered into for the customization of the software on November 16,2015.

Later, when the contract could not be fulfilled the Applicant demanded a refund of Rs 45 crore that was paid towards the License Agreement, Annual Maintenance Charges, and implementation services. When the matter could not be settled amicably, then first respondent invoked arbitration for the alleged wrongful termination of the contract and demanded payment of Rs 17 crore and an Arbitral Tribunal was constituted. The first Respondent initiated proceedings under Clause 15.7 of the GTC and the second Respondent was not made a party in the aforesaid proceedings. During these proceedings, the Applicant herein filed an application under Section 16 of the Arbitration Act, before the Tribunal, contending that the four agreements entered between the parties are a part of a composite transaction and the same should be a part of a singular proceeding.

In the meanwhile, the NCLT directed the parties to adjourn the arbitration proceedings sine die in view of the moratorium imposed upon the claims against the Applicant due to the initiation of the Corporate Insolvency Resolution Process (CIRP).In 2019,  the Applicant sent a fresh notice invoking Arbitration arraying second Respondent in the Arbitration Proceedings. In the said Notice, the Applicant appointed its nominated arbitrator and called upon the Respondents to appoint their Arbitrator for the constitution of the Tribunal. However, there was no response from the Respondents. Hence, the Applicant preferred this Application under Section 11 of the Arbitration Act seeking appointment of the Arbitrator in an International Commercial Arbitration.

The Court extensively dealt with the ambit of the Group of Companies doctrine and stated that Doctrine of group of companies is one such area which is utilized to bind third parties to an arbitration agreement. Theoretically, the policy consideration of efficiency is argued to allow such joinders. However, until a legal basis for the same is provided, efficiency cannot itself be the sole ground to bind a party to arbitration.

The Larger Bench referred to the judgment in Chloro Control’s case (supra) wherein the Top Court had to invoke Section 45 of the Arbitration Act for appointment of an arbitrator and was of the firm opinion that there must be a legal relationship between the non-signatory and the party to the arbitration agreement. While expounding on the legal relationship, the Court also accepted therein the group of companies doctrine as a sufficient basis to establish this legal relationship.

The Bench said, “ The impact of the absence of such an amendment needs to be clearly examined by this Court. This has created an anomalous situation wherein potentially a party claiming through or under could be referred to an arbitration, but would not have the right to seek relief under Section 9 of the Arbitration Act. This is merely an illustrative example to indicate a potentially anomalous result.”

According to the Bench the ratio of the Chloro Control’s Case (supra) alludes to the subjective intention of parties to be bound by arbitration agreement when the parties have clearly not been signatory to the agreement. Reconciling the two is difficult and requires exposition by this Court.

Thus, the Bench said, “The areas which were left open by this Court in Chloro Control (supra) case has created certain broad-based understanding of this doctrine which may not be suitable and would clearly go against distinct legal identities of companies and party autonomy itself. The aforesaid exposition in the above case clearly indicates an understanding of the doctrine which cannot be sustainable in a jurisdiction which respects party autonomy. There is a clear need for having a re-look at the doctrinal ingredients concerning the group of companies doctrine.”

It was also mentioned by the Top Court that the group of companies doctrine must be applied with caution and mere fact that a non-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the non-signatory. 

Justice Surya Kant mentioned that he concurred that the contours of the Group of Companies Doctrine need to be settled by a larger bench, and his views were oriented in favour of the Doctrine as an integral part of Indian arbitral jurisprudence for various  reasons. Justice Kant opined that  the notion of how one may apply the Group of Companies Doctrine in situations where non- signatory parties are acting in a fraudulent or deceitful manner can be addressed by examining the impression that was conveyed to the contracting parties by the third party. This is in addition to the already well-established principles of piercing the veil and alter ego. He noted that this may also address the legitimate critique of Chloro Controls case (Supra) and Cheran Properties Case(Supra), that despite placing an emphasis on legal standards of intent, the Court eventually resorted to principles of equity and commercial/economic expediency to apply the Group of Companies Doctrine in those cases.

Thus, the matter was referred to the Larger Bench.