Citation: ARBITRATION PETITION (CIVIL) NO. 38 OF 2020

Judgement Date: 06.05.2022

Facts of the case:

Applicant (Cox and Kings Limited) and Respondent no. 1(SAP India Pvt. Ltd.) had entered into a SAP Software End user license agreement and SAP Enterprise Support Schedule wherein the applicant was made a licensee of certain ERP software developed and owned by respondents. After a while, certain dispute arose between the two parties and Respondent no. 1 initiated proceedings basis the arbitration clause in the agreement entered into between the parties.

 Meanwhile, the NCLT (National Company Law Tribunal) admitted an insolvency application preferred against the Applicant. After appointing an Interim Resolution Professional, the Parties were directed to adjourn the Arbitration proceedings in view of the moratorium imposed upon the claims against the Applicant.

After which the Applicant sent a fresh notice to Respondent no. 2 who was not made a Party in any of the  previous proceedings and while doing the same, the Petitioner relied heavily on the doctrine of ‘Group of Companies’ in its arguments, citing the Supreme Court’s decision in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. & Anr. [(2013) 1 SCC 641] (Chloro Control).

The doctrine of ‘Group of Companies’ allows a non-signatory to an arbitration agreement to be included as a party to the arbitration agreement because this non-signatory belongs to the same group of companies as one of the signatories to the arbitration agreement. Furthermore, when applying this doctrine, the question of whether this non-signatory was intended to be bound by the agreement will be considered.

Issues:

Whether the doctrine of ‘Group of Companies’ apply to Respondent No. 1 and Respondent No.2 under the current circumstances?

Held:

The Supreme Court highlighted numerous inconsistencies in the ratio of the Chloro Control pronouncement. To begin with, it was argued that the decision in Chloro Control refers to the subjective intention of the parties to be bound by the arbitration agreement, stating that it was based on economic convenience rather than the application of law despite the fact that they were not parties to the agreement. It was decided that inferring the intent of a party who is not a signatory to an agreement is complicated and the sheer fact that a non-signatory is a member of a group of related companies will not be enough to rationalise an extension of the arbitration agreement. It was also noted that under section 7 of Arbitration Act, it is essential to have consent of the parties and same need to be expressed in a written form. Therefore, it requires the Supreme Court’s explanation. Furthermore, the Supreme Court stated that the inclusion of non-signatories has the effect of erasing commercial reality and the benefits of having unique corporate entities in the form of subsidiaries.

The bench consisting of Chief Justice of India, N.V. Ramana, Justices Surya Kant and A.S. Bopanna observed that there is a need to have a relook at components of the Group of Companies’ doctrine.

The 3-Judge bench expressed concern about the correctness of Chloro Controls on this issue and referred certain issues on the subject to the larger bench. The bench decided to refer the following questions to a larger bench:

• Whether phrase ‘claiming through or under’ in Sections 8 and 11 could be interpreted to include ‘Group of Companies’ doctrine?
• Whether the ‘Group of companies’ doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law?
• 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?

This decision, as well as the questions referred to the larger bench by the Supreme Court regarding the doctrine of ‘Group of Companies,’ is essential to the practice of arbitration in India, and are likely to have a major impact on both procedures and jurisprudence of Arbitration law.

K S&CO Comments:

This is a very important judgment of Supreme Court regarding an important question of law i.e, whether a non-signatory party can be made a party in arbitration proceedings merely because it belongs to the same Group of Companies or is going to benefit out of the transaction. The fundamental principle of arbitration is that it is an agreement between the parties to settle all and any dispute via arbitration and hence ousting the jurisdiction of the court.  Therefore, it becomes difficult to refer a matter to arbitration if there is no agreement between the parties to refer the matter to arbitration.  We are hopeful that the larger bench of the Supreme Court will be able to effectively answer on this controversial issue of the validity of the Doctrine of Group of Companies after taking into consideration its far reaching implications.