The Supreme Court, vide its judgment dated December 6, 2023, in the case of Cox and Kings Limited v. SAP India Private Limited [Arbitration Petition (Civil) No. 38 of 2020], held that non-signatories to an arbitration agreement can be bound by the arbitration agreement based on mutual intention. Consequently, the Supreme Court upheld the ‘group of companies’ doctrine

Facts

A SAP Software End User License Agreement and SAP Enterprise Support Schedule (“Software License Agreement”) was executed between Cox and Kings Limited (“Petitioner”) and SAP India Private Limited (“Respondent No. 1”). As per the terms of the Software License Agreement, certain ERP software was owned and developed by the Respondents and the licensee of the software was the Petitioner. Respondents recommended their Hybris Solution to the Petitioner, for the execution of which the arrangement was divided into three transactions: (a) Software License and Support Agreement – Software Order Form 3 dated October 30, 2015 (“License Agreement”) (for the purchase of the SAP Hybris Software License); (b) Services General Terms and Conditions Agreement (“GTC”) dated October 30, 2015 (containing the terms and conditions for the implementation of the SAP Hybris software), and (c) agreement for customisation of the SAP Hybris software dated November 16, 2015. The GTC contained an arbitration clause in accordance with the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and the seat was Mumbai. The Petitioner faced some hindrances till 2016 in the effective implementation of the Hybris Solution and accordingly, SAP-SE, the German parent company of Respondent No. 1 (“Respondent No. 2”) assisted the Petitioner.

Further, Respondent No. 2 took over the project with the aid of global experts. Respondent No. 2 rendered assistance in spite of not being a party to the GTC. Ample issues arose, such as non-fulfilment of the contracts even with the extended timelines and additional manpower, in respect of the implementation of software, which in turn led to the rescinding of the contractual obligations. The Petitioner sought refund of INR 45 crores from the Respondents that was paid towards the License Agreement as the Respondents had withdrawn their resources in respect of the implementation of the said project. Disputes arose between the parties which was followed by the commencement of the arbitration proceedings under the GTC by the Respondent No. 1 seeking a sum of INR 17 crores from the Petitioner for the wrongful termination of the GTC. The Petitioner simultaneously filed an application under Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act on the grounds that each of the agreement forms a part of a composite transaction and the same should be a part of a singular proceeding.

An application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 was filed against the Petitioner by Yes Bank Limited, which was followed by appointment of an interim resolution professional by the National Company Law Tribunal (“NCLT”), on October 22, 2019.

Further, since corporate insolvency resolution process was initiated against the Petitioner, NCLT adjourned the arbitration proceeding between the parties on November 5, 2019. However, another notice for initiating a fresh arbitration proceeding was sent by the Petitioner on November 7, 2019 to Respondent No. 2 which made Respondent No. 2 a party to the arbitration proceedings, which was not a signatory to the agreements. However, as there was no response from the Respondents and no arbitrator was appointed by the Respondents, an application was filed by the Petitioner under Section 11 (Appointment of arbitrators) of the Arbitration Act before the Supreme Court, wherein the Petitioner sought the constitution of an arbitration tribunal and appointment of an arbitrator.

The said application was taken into consideration by a three-judge bench of the Supreme Court which considered the group of companies doctrine (“Doctrine”) under Indian arbitration law in the backdrop of the principles of privity of contract as well as the principle of autonomy of party. Further, the three-judge bench of the Supreme Court referred the matter to a Constitutional Bench of the Supreme Court to decide on the matter. In this case, there were four interveners, namely, Kirloskar Brothers Limited, Jindal Drilling Industries, ECom Express Limited, and Dost Hospitality Services Private Limited (collectively referred to as “Interveners”).

Issues

• Whether joinder of non-signatories as a ‘party’ is permissible under the Arbitration Act.
• Whether the ‘group of companies’ doctrine is valid and applicable in Indian arbitration law and, if so, under what circumstances and conditions.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that the basis for application of the Doctrine is the tacit/ implied consent by the non-signatory to be bound by an arbitration agreement. The Petitioner also submitted that the definition of ‘party’ under Section 2(1)(h) (Definitions) of the Arbitration Act should be given a wider interpretation as it cannot be restricted merely to the signatories to an arbitration agreement but should also include within its ambit non-signatories depending upon the facts and circumstances of the case.

It was contended by the Petitioner that as per Section 7 (Arbitration agreement) of the Arbitration Act, the legal relationship between the parties may be non-contractual as well. Additionally, Section 7(4)(b) of the Arbitration Act states that a non-signatory to an arbitration agreement could be bound by an arbitration agreement if the said party has demonstrated his intention to be bound by the agreement by the virtue of a written communication.

The Petitioner also contended that the Doctrine should ideally be applied by the arbitral tribunal. Further, at the referral stage, the court should only restrict itself to taking a prima facie view and let the arbitral tribunal determine the requirement of joining the non-signatories to the arbitration agreement.

Contentions of the Respondents:

As per the Respondents, the applicability of the Doctrine must be examined in the context that whether a non-signatory could be made a party to the arbitration agreement and the expression ‘claiming through or under’ as mentioned under Sections 8 (Power to refer parties to arbitration where there is an arbitration agreement) and 45 (Power of judicial authority to refer parties to arbitration) of the Arbitration Act cannot be the premise to apply the Doctrine. The concept of ‘person claiming through or under’ a party depicts the notion of a derivative cause of action where the non-signatory steps into the shoes of a party rather than claiming an independent right under the arbitration agreement.

It was contended by the Respondents that the Doctrine is a consensual theory which is based on the existence of a dispute which arises from a defined legal relationship and mutual intention of the parties to be bound by the arbitration agreement. Additionally, the intention of the non-signatory to an arbitration agreement has to be ascertained from the cumulative factors which have been laid down by the Supreme Court in the case of Chloro Controls India (P) Limited v. Severn Trent Water Purification Incorporated [(2013) 1 SCC 641] (“Chloro Controls Case”).

The Respondents have put forth certain factors which must be met for the application of the Doctrine to bind the non-signatory as a ‘veritable’ party to the arbitration agreement. Firstly, the mutual intention of all the parties should be to remain bound by the arbitration agreement. Secondly, the absolute and unqualified acceptance by the non-signatory party to the arbitration agreement. Thirdly, the said acceptance must either be expressed or implied. However, for a non-signatory, the said acceptance would be implied and manifested in the negotiation, performance, or termination of the contract.

It was contended by the Respondents that mutual consent of the parties to refer disputes arising out of their defined legal relationship to arbitration forms an essential ingredient of an arbitration agreement. Further, binding the non-signatory to an arbitration agreement without ascertaining their consent would go against the concept of party autonomy.

It was contended by the Respondents that the Doctrine is a purely economic concept without any basis in either contract law or company law. Hence, it cannot be applied for the determination of the intention of non-signatories to be bound by an arbitration agreement and the decision of a party to not sign the arbitration agreement may form the basis to demonstrate an intent not to be bound by it.

The determination of mutual intention of the parties by considering the consequential or subsequent agreements as laid down in the Chloro Controls Case is incorrect as it did not consider whether an implied consent derived from the conduct of a non-signatory satisfied the requirement of a clear intention to arbitrate. The Respondents also contended that there exists a requirement that the arbitration agreement should be in writing under Section 7 of the Arbitration Act. Hence, an arbitration agreement cannot be created on the basis of implied consent of the non-signatory to the arbitration agreement.

Contentions of the Interveners:

It was contended by the Interveners that the Doctrine constitutes a true and genuine effectuation of the real intent of the signatory and non-signatory to the arbitration agreement. The Interveners also submitted that the Doctrine is a reasonable and natural extension of the principle of piercing the corporate veil. Additionally, the application of the Doctrine is also justified in affixing responsibility when the requisite and sufficient degree of common ownership and control exists.

The Interveners submitted that the intention of the parties to an arbitration agreement cannot be the only basis to join a non-signatory party to an arbitration agreement and the court may also consider the non-consensual doctrines such as piercing the corporate veil, alter ego, or tight group structure.

As per the Interveners, the adoption of the Doctrine in Indian arbitration jurisprudence is not prohibited or inhibited in Indian arbitration jurisprudence under the Arbitration Act. The Interveners submitted that the expression “any person claiming through or under” was inserted vide an amendment to the Section 8 of the Arbitration Act, which recognizes and codifies the reality of non-signatories acting through or under the signatory parties. It was contended by the Interveners that the onus to prove the intention of the non-signatory to be bound by the arbitration agreement lies on the party seeking to implead the non-signatory.

The Interveners also contended that an arbitration agreement has to be in writing and there cannot be an oral agreement to arbitrate according to Section 7 of the Arbitration Act. Regardless, the intention of the non-signatory to be bound by the arbitration agreement can be gathered from its conduct. The Interveners also submitted that factors such as economic convenience, justice or equity cannot be grounds for binding non-signatories to an arbitration agreement as arbitration is in the realm of private law, and a matter of choice and intent of the parties.

Observations of the Supreme Court

The Supreme Court focused on the principle of party autonomy as well as mutual consent. It was observed by the Supreme Court that the signature of a party on the agreement is the most profound expression of the consent of a person or entity to submit to the jurisdiction of an arbitral tribunal. However, the corollary that persons or entities who have not signed the agreement are not bound by it may not always be correct.

The Supreme Court opined that the consent of the parties to be bound by the terms of the contract can be determined by the acts or conduct of the parties. As per the Indian Contract Act, 1872, consent of a party to be bound by the terms of the contract can be determined by the actions or conduct of the parties to a contract which is also applicable to an arbitration agreement, which is essentially a creature of contract.

Therefore, the Supreme Court, in respect of the issue pertaining to the non-signatories being bound by an agreement, made certain conclusions: (i) an arbitration agreement arises out of a legal relationship existing between or among persons/entities which may be contractual or otherwise; (ii) it is not necessary for the persons or entities to be signatories to the arbitration agreement to be bound by it and in case of non-signatory parties, the important determination for the courts is whether the persons or entities intended or consented to be bound by the arbitration agreement or the underlying contract containing the arbitration agreement through their acts or conduct; (iii) the requirement of a written arbitration agreement does not exclude the possibility of binding effect on the non-signatory parties in those situations where there is a defined legal relationship between the signatory and non-signatory parties; and (iv) once the validity of an arbitration agreement is established, the court or tribunal can determine the issue of which parties are bound by such agreement.

It was held by the Supreme Court that a non-signatory party could be considered as a party to the arbitration agreement on the basis of their role in the negotiation, performance, or termination of the underlying contract containing the arbitration agreement.

In respect of the second issue pertaining to the validity and applicability of the Doctrine, the Supreme Court analysed the Doctrine vis-à-vis its applicability under the context of Indian arbitration law. The Companies Act, 2013 has statutorily recognized a subsidiary company as a separate legal entity. However, the courts consider it appropriate to pierce the corporate veil when maintaining the separateness of corporate personality is found opposed to justice, convenience and public interests.

The Supreme Court held that the arbitration law has witnessed several evolutions and development and has also adopted the Doctrine according to which it can allow or compel a non-signatory party to be bound by an arbitration agreement. The Doctrine is used in the context of companies which are related to each other by being a part of the same corporate group and for the identification of the common intention of the parties in binding a non-signatory to the arbitration agreement by emphasizing the corporate affiliation of the distinct legal entities.

The Supreme Court noted that the underlying basis of the Doctrine rests on maintaining the separate legal personality of the group companies while determining the common intention of the parties for the purpose of binding the non-signatory party to the arbitration agreement.

In order to analyse the Doctrine, the Supreme Court emphasised on the Chloro Controls Case and observed that a non-signatory could be subjected to arbitration when the underlying transactions were with a group of companies and a clear intention existed between the parties to bind the signatory as well as non-signatory parties to the arbitration agreement. It was also held in the case of Cheran Properties Ltd v. Kasturi and Sons Limited [3 (2018) 16 SCC 413] that the Doctrine is an aid to decoding the layered structure involved in commercial arrangements for the purpose of unravelling the true intention of the parties to bind someone who is not formally a signatory to the contract, but has ‘assumed’ the obligation to be bound by the actions of a signatory.

The Supreme Court, for the purpose of determining the mutual intention, held that in case of multi-party agreements, the courts/tribunals will have to examine the corporate structure for determining whether both the signatory and non-signatory parties belong to the same group which is followed by the court/tribunal to consider the commercial circumstances as well as the conduct of the parties in order to determine the common intention of the parties to arbitrate and the party which seeks joinder of a non-signatory has to proof the satisfaction of the said factors to the satisfaction of the court/tribunal.

It was noted by the Supreme Court that if a non-signatory party is involved actively in the performance of a contract and its conduct is in harmony with the other members of the group, it creates an appearance that such a non-signatory party is a ‘veritable party’ to the contract containing the arbitration agreement. Based on such an appearance created by the non-signatory, the other party can legitimately rely on the said appearance and believe that non-signatory was a veritable party to the contract and therefore the other party can bind the non-signatory to the arbitration agreement.

It was held that the approach of the Supreme Court in the Chloro Controls Case, which was pronounced earlier in point of time, to the extent that the phrase ‘claiming through or under’ under Section 8 of the Arbitration Act is inclusive of the Doctrine is erroneous as it has given a wider perspective to the Doctrine which is against the principles of commercial as well as contract law. The Supreme Court also held that the principle of single economic unit cannot form the sole basis for applying the Doctrine and the courts/tribunals must take into consideration every cumulative factor as laid down in the case of Oil and Natural Gas Corporation Limited v. Discovery Enterprises Private Limited [5 (2022) 8 SCC 42]which factors have been reproduced herein: “…. (i) The mutual intent of the parties; (ii) The relationship of a non-signatory to a party which is a signatory to the agreement; (iii) The commonality of the subject-matter; (iv) The composite nature of the transactions; and (v) The performance of the contract.”

It was also held by the Supreme Court that any authoritative determination given in relation to the Doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

Decision of the Supreme Court

The Supreme Court held that the definition of “parties” is inclusive of both the signatory as well as non-signatory parties according to the Section 2(1)(h) read with Section 7 of the Arbitration Act and the consent of the parties can be the basis for determination of their consent to be bound by the arbitration agreement. Additionally, the requirement of a written arbitration agreement under Section 7 of the Arbitration Act does not exclude the possibility of binding non-signatory parties.

The Supreme Court held that the underlying basis for the application of the Doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement and the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the Doctrine as the said Doctrine has an independent existence as a principle of law which originated from the harmonious construction of the Section 2(1)(h) read along with the Section 7 of the Arbitration Act.

The Supreme Court held that the utility of Doctrine in determination of the intention of the parties in case of complex transactions which involves multiple parties and multiple agreements should be considered and thus the Doctrine should be retained in the Indian arbitration jurisprudence. It was also held by the Supreme Court that at the referral stage, the referral court should leave it for the arbitral tribunal to decide on the issue whether the non-signatory is bound by the arbitration agreement.

VA View:

The act of binding non-signatories to an arbitration agreement has been heavily debated and subjected to scrutiny by various courts/tribunals, from time to time, both nationally as well as internationally. The Supreme Court has rightly emphasised on the judgments which are contrary to each other in respect of binding the non-signatories to an arbitration agreement.

The present case is a milestone announcement in the Indian arbitration jurisprudence as it has settled the long lasting issue pertaining to validity of the Doctrine in the context of Indian legal framework. The Doctrine means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement. The Supreme Court has rightly taken into its consideration the various international aspects of the said doctrine such as its applicability and validity under various global jurisdictions and thus clarified the right approach and stand of the Doctrine in the context of India.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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