The complexities of Indian arbitration law- A Case Study

Court - The Supreme Court of India

Case type - Civil Original / Appellate Jurisdiction

Case Number - Arbitration Petition (Civil) no. 38 of 2020

Citation - 2023 INSC 1051

Coram- Chief Justice DY Chandrachud, Justice Hrishikesh Roy, PS Narasimha, JB Pardiwala, And Manoj Misra

Date of Judgement - 6^th December 2023  

Doctrine - The group of companies Doctrine  

Introduction

This case looks into the complexities of Indian arbitration law, where the constitutional bench of Supreme court to rule on the applicability of the "Group of Companies" doctrine. In a world where companies frequently function through complex corporate structures, basic legal concepts such as distinct legal identity, useful interpretations of agreement consent in arbitration, and cautious application of the group of companies doctrine are at the centre of legal discourse. The court's deliberations encompass a range of legal domains, including understanding mutual intentions in multiparty agreements, establishing guidelines for implementing the doctrine, and validating the doctrine's independent status within Indian arbitration law.

Facts of the case  

Cox and Kings Ltd. (C&K), a tourism company, and SAP India Pvt. Ltd. signed the software licensing agreement on December 14, 2010. SAP is a company that is skilled in developing and marketing software for assisting businesses with finance, marketing, human resources, and other areas that big businesses find interesting.  

When C&K started creating its own e-commerce platform in October 2015, SAP India contacted them and offered to install new software. The two businesses signed three new contracts to use SAP's "Hybris Solution" software. SAP India claimed that only ten more months would be required to customize the remaining 10% of the new software, which was already 90% appropriate with C&K's existing software.  

An arbitration clause was included in the General Terms and Conditions Agreement (GTC), one of the agreements. The two businesses decided to use arbitration to settle any potential disputes in the future. They also agreed that any upcoming arbitrations would take place in Mumbai and that they would be bound by the Arbitration and Conciliation Act, 1996 (the Arbitration Act). Nevertheless, there were challenges with the project to put the Hybris software into use. The leading SAP branch located in Germany, SAP SE, was then contacted by C&K to request support.  

SAP SE assembled a group of international specialists and took over the project. Nevertheless, despite several extensions, the project was never able to take off. In November 2016, C&K called off the agreement and sought repayment of ₹45 crores to cover the money they had already paid to SAP.

Issues of the case:  

• Is it possible for non-signatories to be parties to an arbitration agreement? If that's the case, how can non-signatories be parties to an arbitration agreement?
• Whether the phrase "claiming through or under" in Sections 8 and 116 could be interpreted to include the "Group of Companies" doctrine;
• Whether the Group of Companies Doctrine is to be interpreted as a means of analyzing implied consent or intent to arbitrate between the parties;  
• Whether the "Group of Companies" doctrine, as defined by the Chloro Controls Case and subsequent rulings, is legally valid.  

Holding (the applied rule of law)

• Interpretation of "Claiming Through or Under": According to Sections 8 and 116 of the Arbitration Act, a non-signatory cannot join the arbitration agreement as a party. This phrase was used to trace the 'Group of Companies' theory in the Chloro Controls ruling, which is now seen as incorrect.
• Reliability and Application of the Group of Companies Doctrine: Indian arbitration jurisprudence regards the "Group of Companies" theory as valid. In order to ascertain the parties' intentions in intricate transactions, it ought to be upheld as a legal principle.
• Basis and Scope: The Group of Companies Doctrine relies on upholding corporate separateness while ascertaining a common intent to obligate non-signatory entities. The theory cannot be used solely on the grounds of alter ego or piercing the corporate veil. The idea of a single economic unit should not be the exclusive foundation of the theory. Whether the non-signatory is bound by the arbitration agreement should be left up to the arbitral tribunal's determination at the referral stage by the court.

Case laws on the Group of Companies Doctrine  

The necessity of the group of companies doctrine is a topic of academic debate. One point of view challenges its adoption, claiming that conventional theories of contract and commercial law can be used to determine consent in multi-party arbitration. According to a different perspective, it is essential, with particular corporate structures serving as helpful markers of the parties' shared goals.

According to the group of companies doctrine, a group's existence is a necessary but not sufficient requirement. In order to bind a non-signatory, courts must ascertain the group's existence as well as the behavior demonstrating that intention. It bears similarities to other doctrines of consent, such as assumption, guarantee, assignment, and agency.

In the Dow Chemicals case, the ICC Tribunal stressed that non-signatory members are only obligated by the arbitration agreement if all parties intended and understood them to be "veritable parties" due to their participation in the contract's formation, performance, or termination. In complex transactions, the consent determination process is further complicated by the group of companies doctrine,

This Court upheld the ability of a non-signatory to face arbitration within a group of companies with a clear intention in the Chloro Control case. This idea was supported by later rulings such as Canara Bank and Discovery Enterprises. When a legal personality is ascribed to a business arrangement, the group of companies doctrine aids in identifying the true party in interest.

The group of companies doctrine—which emphasizes the interpretation of the arbitration agreement and the circumstances surrounding the contract—was explained in Cheran Properties as a means of piercing the corporate veil and identifying the "true" party in interest. The Cox and Kings case provided clarification on the difference between the group of companies doctrine and piercing the corporate veil. It was highlighted that the former allows for the identification of parties' intentions while maintaining legal personality, while the latter does not.

Party’s Submissions

Petitioner’s Submissions:

• The implied consent of non-signatories to be bound by the arbitration agreement is the foundation of the group of companies doctrine.
• The Arbitration Act's definition of "party" ought to encompass non-signatories, contingent upon the specific facts and circumstances.
• Non-contractual agreements are permitted by Section 7 of the Arbitration Act, and a non-signatory may be bound by written communication expressing an intention. It is ideal for the arbitral tribunal to apply the group of companies doctrine rather than the court.
• Through the use of "party," rather than "signatory," Section 2(1)(h) permits circumstances in which a non-signatory succeeds a signatory.
• By holding non-parties liable, the group of companies doctrine infringes corporate law.
• A non-signatory is not bound by participation in negotiations or contract performance absent their express consent.

Respondent’s Submissions:  

• It is necessary to investigate the group of companies doctrine in order to determine whether or not a non-signatory can be made a party with mutual intention. According to the doctrine, there must be a mutual intention and unqualified acceptance; this acceptance may be inferred through contract negotiation, performance, or termination.
• An arbitration agreement requires the consent of both parties, and it is against party autonomy to bind a non-signatory without first obtaining their consent.
• The doctrine cannot be applied solely by concepts such as "single economic unit" or "tight group structure." The doctrines of groups of companies and single economic entities are economic ideas rather than legal frameworks for businesses or contracts.
• Refusing to sign an arbitration agreement may be interpreted as a declaration of non-binding intention.
• A non-signatory is not bound by a contract by mere participation in negotiations.  
• Section 7 requires a written arbitration agreement; implied consent from a non-signatory is insufficient. - The group of companies doctrine cannot be based on the phrase "claiming through or under" under Sections 8 and 45.
• Complex contracts are the result of thorough negotiations; it is counterproductive to impute intentions that differ from those expressed in the contract.
• The expression "claiming through or under" is not the source of the group of companies doctrine. Chloro Controls made the mistake of failing to take into account implied consent based on a non-signatory's actions.
• The group of companies doctrine may be applied by courts to issue temporary injunctions against non-signatories.

Union of India Submissions:  

• The Arbitration Act must be interpreted with the "commercial element" and "business prudence" taken into account.
• The Act incorporates the group of companies doctrine, and non-conventional agreements are covered by a broad phrase in Section 7.
• Section 8's addition of "claiming through or under" complies with the intentions of the legislature.
• The arbitral tribunal may be consulted if the referral court is unable to determine joinder using the group of companies doctrine.

Judgement  

• Although the parties need not sign the arbitration agreement, it must be in writing. The court or arbitral tribunal may ascertain a non-signatory's status under Section 7(4)(b) by interpreting the express language utilized in the agreement and taking into account the circumstances surrounding the formation, performance, and termination of the contract. One well-known guideline that helps with contract construction and interpretation is the Group of Companies doctrine.
• The basis of the Group of Companies doctrine is determining whether or not the non-signatory is to participate in the arbitration agreement. Applicability of this concept depends on a number of factors, including fulfilment of the contract, similarity of subject matter, composite characteristics of the transaction, and direct interaction with signature parties.
• Since the Group of Companies doctrine and the aim of the inquiry under Section 7(4)(b) coincide, the latter can be included under Section 7(4)(b). This integration adds to the clarity and methodical evolution of the law by enabling a court or arbitral tribunal to ascertain the genuine intention and consent of non-signatory parties to arbitration.
• Sections 8 and 45's interpretation of "claiming through or under" as granting a derivative right stops a non-signatory from joining the arbitration agreement as a direct party. It is believed that the Chloro Controls ruling, which linked the Group of Companies theory with this particular phrase, was incorrect. In Sections 2(1)(h) and 7, the term "party" is used differently from "persons claiming through or under them."

Conclusion

In conclusion the primary findings emphasize that both signatory and non-signatory parties are encompassed in the Arbitration Act's definition of "parties". Even in cases where arbitration agreements are not expressly signed, non-signatory parties' actions may nevertheless suggest that they agree to be bound by them. In the Arbitration Act, the group of companies doctrine—which maintains corporate separateness while demonstrating a shared intent to bind non-signatory parties—has its own separate existence. Specifically, the court's methodology in Chloro Controls, which linked the group of companies doctrine to "claiming through or under," is regarded as incorrect. Cumulative factors must be taken into account when applying the doctrine, and its continued use is supported due to its usefulness in complex transactions.  

Crucially, in deciding whether a non-signatory is obligated by the arbitration agreement, the court ought to defer to the arbitral tribunal during the referral phase. The application of other pertinent doctrines and principles for binding non-signatories should not be hindered by the judgement's authoritative rulings on the group of companies doctrine.