Cox And Kings Limited Vs Sap India Private Limited (Supreme Court of India)
Supreme Court referred following aspects of application of doctrine of ‘Group of Companies’, which is mostly utilised to bind non-signatories to an Arbitration Agreement, to a larger Bench for relook-
A. 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?
B. Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?
C. Whether the Group of Companies Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
D. 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?
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. This petition calls on us to examine the ‘group of companies doctrine’. In particular, it requires us to examine 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.
2. The present Arbitration Petition has been preferred by the Petitioner Applicant under Section 11(6) and Section l1(12)(a) of the Arbitration and Conciliation Act, 1996 (hereinafter the “Arbitration Act”), for appointment of an Arbitral Tribunal in terms of the provisions of the Arbitration Act, on the ground that there has been a failure with respect to the appointment of an Arbitral Tribunal in accordance with the agreements between the parties.
3. The facts necessary for the adjudication of the dispute are as follows: on 14.12.2010, the Applicant and Respondent No. l 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. This is an overall licensing agreement that all customers of the Respondents have to enter into compulsorily in advance in order to utilize any software of the Respondents. In 2015, while the Applicant was developing its own ecommerce platform, the Respondents approached the Applicant and recommended their Hybris Solution as it would be 90% compatible with the Applicant’s software. The Respondents indicated that the remaining 10% customisation would take only 10 months, a much shorter solution than the Applicant developing the software itself.
4. The aforesaid agreement was divided into 3 separate transactions: first, the Software License and Support Agreement Software Order Form 3, dated 30.10.2015, was signed between the Applicant and Respondent No. 1 for the purchase of the SAP Hybris Software License. Second, an agreement dated 30.10.2015 was signed between the parties containing the terms and conditions governing the implementation of the SAP Hybris software. This agreement is called the Services General Terms and Conditions Agreement (“GTC”). Third, on 16.11.2015, an agreement was entered into for the customization of the software.
5. Clause 15.7 of the GTC contains the arbitration clause which we are concerned with in the present matter. The clause reads as follows:
“15.7 Dispute Resolution: In the event of any dispute or difference arising out of the subject matter of this Agreement, the Parties shall undertake to resolve such disputes amicably. If disputes and differences cannot be settled amicably then such disputes shall be referred to bench of three arbitrators, where each party will nominate one arbitrator and the two arbitrators shall appoint a third arbitrator. Arbitration award shall be binding on both parties. The arbitration shall be held in Mumbai and each party will bear the expenses of their appointed arbitrator. The expense of the third arbitrator shall be shared by the parties.
The arbitration process will be governed by the Arbitration & Conciliation Act, 1996.”
6. Till August 2016, the Applicant listed out various issues in project implementation to Respondent No. 1 and requested Respondent no. 2 to intervene. Respondent No. 2, in turn, gave certain assurances to the Applicant. As the contract could not be fulfilled even with the extended timelines and additional manpower, the contractual framework pertaining to SAP Hybris Solution was rescinded on 15.11.2016 after which the Respondents immediately withdrew their resources from the said project. Pursuant to the same, the Applicant demanded a refund of Rs. 45 crores that was paid towards the License Agreement, Annual Maintenance Charges, and implementation services. Respondent No. 2 in response to the said demand proposed a solution which was rejected by the Applicant.
7. Finally, after several correspondences and meetings, the matter could not be settled amicably. On 29.10.2017, Respondent No. 1 issued a notice invoking arbitration for the alleged wrongful termination of the contract and demanded payment of Rs. 17 crores. An Arbitral Tribunal comprising of Hon’ble Mr. Justice Madan B. Lokur (Retd.), Hon’ble Mr. Justice Dilip Bhosale (Retd.), and Hon’ble Mr. Justice V. C. Daga (Retd.) was constituted to adjudicate the disputes between the parties.
8. Respondent No. l initiated proceedings under Clause 15.7 of the GTC entered between the parties on 30.10.2015. It may be noted here that Respondent No. 2 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 Hon’ble 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.
9. Meanwhile, on 22.10.2019, NCLT, admitted an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 preferred against the Applicant and appointed an Interim Resolution Professional. On 05.11.2019, 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).
10. On 07.11.2019, the Applicant sent a fresh notice invoking Arbitration arraying Respondent No. 2 in the Arbitration Proceedings. In the said Notice, the Applicant appointed Hon’ble Dr. Justice Arijit Pasayat as 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 has preferred this Application under Section 11 of the Arbitration Act seeking appointment of the Arbitrator in an International Commercial Arbitration.
11. Kailash Vasdev, learned Senior Advocate appearing on behalf of the Applicant made the following submissions:
i. Respondent No. 1 is a wholly owned subsidiary and proprietary concern of Respondent No. 2. Since the software is licensed by Respondent No. 2 to Respondent No. 1, the customisation would not be possible without the aid of Respondent No. 2. Therefore, all the four agreements together form a composite agreement and are a part of a single, interlinked transaction by both Respondent Nos. 1 and 2.
ii. The agreements and email correspondences clearly show that Respondent Nos. 1 and 2 and the Applicant were in ad idem for the implementation and the execution of the agreements. Especially, when Respondent No. 1 failed to execute the agreement, Respondent No. 2 took the responsibility to resolve the grievances of the applicant.
iii. Considering the holding in the three Judge Bench decision of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, arbitration can be invoked even against the nonsignatories, if the circumstances demonstrate that it was the mutual intention of the parties.
iv. There is no commonality of claims between the present arbitration proceedings and the earlier proceedings.
v. Considering, the limited scope under Section 11 of the Arbitration Act, the intervention of the Court should be as minimal as the Court is only required to examine the existence of the arbitration agreement.
12. Mr. Ritin Rai, learned Senior Advocate appearing on behalf of the Respondent No. 1 made the following submissions:
i. The Applicant has suppressed material facts regarding its previous attempts to resist constitution of an Arbitral Tribunal. It ought to be noted that when Respondent No. 1 had earlier invoked Clause 15.7 of the GTC, it was the Applicant who had challenged the same for being void ab initio. Now, the Applicant himself is invoking the same provision seeking the appointment of an Arbitrator.
ii. Immediately one day after the commencement of the CIRP and the consequent imposition of the moratorium, the Applicant has chosen to raise similar claims through a fresh notice and has obliquely arrayed Respondent No. 2 as a party to inflate its claim. It is a settled principle of law that the principle of resjudicata applies to arbitral proceedings as well.
13. Mr. Neeraj Kishan Kaul, learned Senior Advocate appearing on behalf of Respondent No. 2 made the following submissions:
i. Respondent No. 2 is neither a signatory, nor has it ever agreed (expressly or impliedly) to be bound by the agreements between the Applicant and the Respondent No. 1. Respondent No. 2, being a foreign entity does not have any business dealings in India and is a separate and independent legal entity from Respondent No. 1.
ii. The emails relied upon by the Applicant do not indicate any undertaking by Respondent No. 2. Especially, when the Applicant himself approached Respondent No. 2 seeking assistance much after the execution of the License Agreement and Service Agreement. Admittedly, Respondent No. 2 was not involved in the contract negotiation process.
iii. The “Group of Companies” doctrine is not applicable in the present case. Respondent No. 2 is not only a nonsignatory but also never participated in the negotiation process during the drafting of the contract. Moreover, there is no consensus of the parties to be bound by the contract.
14. After hearing the counsel appearing on both sides and considering the ramifications it may have by the adjudication of the subject matter, this Court must examine the ambit of the “Group of Companies” doctrine. Ever since this doctrine was expounded in the Chloro Control (supra) case, it has been utilised in a varied manner. It is in this context we felt that there is a further need to examine the rationality behind the doctrinal approach taken by this Court in the Chloro Control (supra) case.
15. Arbitration is a creature of contract which has been provided statutory backing under the Arbitration Act, to usher in party autonomy, quick disposal, and an efficacious alternative remedy. Arbitration has been a great boon for Indian jurisprudence, wherein numerous cases have been methodically dealt with in an effective manner without taking the meandering course of litigation before Courts.
16. One of the most challenging areas of Arbitration practice, both theoretical and practical, relates to multiparty and multiclaim proceedings. Usually, arbitration involves parties who have explicitly entered into an arbitration agreement, or parties with successor interests, claiming under them. In some cases, it happens that third parties are bound by an arbitration clause by tacit consent, etc.
17. 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.
18. Section 7 of the Arbitration Act defines an arbitration agreement. Being a creature of contract, the realm of arbitration is one of consent. The bare reading of the aforesaid provision indicates that parties must reduce their intention to submit their existing or future disputes to arbitration, in writing. The statute does not mandate a particular form for an arbitration agreement. The intention of the parties can be inferred from an exchange of letters, telex, telegram, and even electronic means. The existence of the arbitration agreement can be deduced once it is ascertained that the parties were at ad idem either through a contract, conduct or correspondences. (See Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd., (2015) 13 SCC 477). Therefore, the question of the extension of an arbitration agreement to nonsignatories necessarily also involves the question of the extension of the scope and the effects of the jurisdiction of the arbitration tribunal over such companies.1
19. This doctrine can be clearly stated to have originated in the Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain, (ICC Case No. 4131). In the case of Dow Chemicals (supra), it was the subsidiaries of Dow Chemicals which initiated Arbitration proceedings against Is over. In that case, Is over objected to the basis on which the subsidiaries of Dow Chemicals chose to arbitrate, without some of them having entered a valid arbitration agreement with Is over. The Tribunal, while disregarding the contention of Is over, held that Dow Chemicals Group operated as a single economic reality and thus the non signatories were also bound by the arbitration agreement. We may note that the Dow Chemicals (supra) case related to a situation where a non signatory did not resist arbitration. Rather they wished to join an arbitration already initiated by its affiliates. The effect of this position has not been evaluated in any precedents of this Court and needs to be examined.
20. The first case which dealt with group of companies doctrine for domestic arbitrations was Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531. In that case, disputes had arisen between multiple parties over the same transaction. Some of the parties in the dispute were not a part of the arbitration agreement. The appellant was claiming relief against some of these parties who were not party to the agreement. The Court held, under Section 8 of the Arbitration Act, that causes of action cannot be bifurcated in an arbitration, and nonparties to an arbitration agreement cannot be included in the same arbitration.
21. The next important case which dealt with the group of companies doctrine was the Chloro Control (supra) case. The Court at the outset acknowledged that there were various school of thoughts when it came to the doctrine in arbitration jurisprudence. It was in this context that the Court had to formulate an opinion to provide a best fit for the doctrine for Indian jurisdiction under part II of the Arbitration Act. As many foreign parties were involved, the Court had to invoke Section 45 of the Arbitration Act for appointment of an arbitrator. Section 45 of the Arbitration Act stood as under:
“45. Power of judicial authority to refer parties to arbitration.—Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (V of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”
22. The Court compared Section 45 of the Arbitration Act to Article 2 of UNCITRAL Model Law and formulated the following ingredients for a Judicial Authority to examine at a referral stage:
“1. Does the arbitration agreement fall under the scope of the Convention?
2. Is the arbitration agreement evidenced in writing?
3. Does the arbitration agreement exist and is it substantively valid?
4. Is there a dispute, does it arise out of a defined legal relationship, whether contractual or not, and did the parties intend to have this particular dispute settled by arbitration?
5. Is the arbitration agreement binding on the parties to the dispute that is before the court?
6. Is this dispute arbitrable?”
23. The Court noticed distinction in the language under Section 45 and Section 8 of the Arbitration Act in the following manner:
“69. We have already noticed that the language of Section 45 is at a substantial variance to the language of Section 8 in this regard. In Section 45, the expression “any person” clearly refers to the legislative intent of enlarging the scope of the words beyond “the parties” who are signatory to the arbitration agreement. Of course, such applicant should claim through or under the signatory party. Once this link is established, then the court shall refer them to arbitration. The use of the word “shall” would have to be given its proper meaning and cannot be equated with the word “may”, as liberally understood in its common parlance. The expression “shall” in the language of Section 45 is intended to require the court to necessarily make a reference to arbitration, if the conditions of this provision are satisfied. To that extent, we find merit in the submission that there is a greater obligation upon the judicial authority to make such reference, than it was in comparison to the 1940 Act. However, the right to reference cannot be construed strictly as an indefeasible right. One can claim the reference only upon satisfaction of the prerequisites stated under Sections 44 and 45 read with Schedule I of the 1996 Act. Thus, it is a legal right which has its own contours and is not an absolute right, free of any obligations/limitations.
70. Normally, arbitration takes place between the persons who have, from the outset, been parties to both the arbitration agreement as well as the substantive contract underlining (sic underlying) that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy onus lies on that party to show that, in fact and in law, it is claiming “through” or “under” the signatory party as contemplated under Section 45 of the 1996 Act. Just to deal with such situations illustratively, reference can be made to the following examples in Law and Practice of Commercial Arbitration in England (2nd Edn.) by Sir Michael J. Mustill:
“1. The claimant was in reality always a party to the contract, although not named in it.
2. The claimant has succeeded by operation of law to the rights of the named party.
3. The claimant has become a party to the contract in substitution for the named party by virtue of a statutory or consensual novation.
4. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence.”
(emphasis supplied)
From the above it is clear that the Court was of the firm opinion that there must be a legal relationship between the nonsignatory and the party to the arbitration agreement.
24. While expounding on the legal relationship, the Court accepted the group of companies doctrine as a sufficient basis to establish this legal relationship. However, while expounding on the ingredients of doctrine itself, the Court brought in the intention of the parties as to whether they were adidem to treat a nonsignatory as being a party to the arbitration agreement. This postulation conflates a contractual understanding of the group of companies doctrine, which has evolved within the framework of arbitration, without alluding to contractual principles.
25. On one hand, this Court reduced the threshold of arbitration being a consensual affair. On the other, the doctrine of group of companies is transposed on requirements under contract law to bind a party to an arbitration.
26. An attempt was made by the Court to find a basis for reading the group of companies doctrine within the language of Section 45 of the Arbitration Act in the following manner:
“99. Having examined both the above stated views, we are of the considered opinion that it will be the facts of a given case that would act as precept to the jurisdictional forum as to whether any of the stated principles should be adopted or not. If in the facts of a given case, it is not possible to construe that the person approaching the forum is a party to the arbitration agreement or a person claiming through or under such party, then the case would not fall within the ambit and scope of the provisions of the section and it may not be possible for the court to permit reference to arbitration at the behest of or against such party.
100. We have already referred to the judgments of various courts that state that arbitration could be possible between a signatory to an agreement and a third party. Of course, heavy onus lies on that party to show that in fact and in law, it is claiming under or through a signatory party, as contemplated under Section 45 of the 1996 Act.”
(emphasis supplied)
27. It is interesting to note that this Court discusses some judgments from the United Kingdom in this regard. In Roussel Uclaf v. G.D. Searle & Co. Limited and G. D. Searle & Co., [1978] F.S.R 95, the Court interpreted the term ‘claiming through or under’ while staying a case against a company that was neither party nor privy to an arbitration agreement. Here, the nonsignatory was a fully owned subsidiary, and its parent company was a signatory to an arbitration agreement. The subsidiary had claimed that it had the right to sell patented articles which it had obtained from the parent company because the parent company had ordered the sale of the patented articles. A stay on the litigation was granted, but the Court concluded that the subsidiary was ‘claiming through or under’ the parent company. This meant that if the parent company was entitled under the license agreement to sell the articles, then the same right flowed to the subsidiary company as well. Although this case did not explicitly indicate the acceptance of group of companies doctrine under the English Law, the wordings can only be said to have left the door open to possibility of such inclusion.
28. In any case, the Court of Appeal in the case of The Mayor and Commonalty & Citizens of the City of London v. Ashok Sancheti, [2008] EWCA Civ 1283 overruled the Uclaf Case (supra). The Court pronounced that a ‘mere legal or commercial connection is insufficient’. In essence, this restricted the phrase ‘claiming through or under’ to only those third persons who assert their right on the basis of the rights of a signatory to an arbitration agreement. It is noticed that this Court in Chloro Control (supra), while observing both cases as persuasive, however, does not provide reasoning to favour one interpretation over the other, in the following manner:
“98. In RousselUclaf v. G.D. Searle & Co. Ltd. [(1978) 1 Lloyd’s Rep 225] the Court held:
“The argument does not admit of much elaboration, but I see no reason why these words in the Act should be construed so narrowly as to exclude a wholly owned subsidiary company claiming, as here, a right to sell patented articles which it has obtained from and been ordered to sell by its parent. Of course if the arbitration
proceedings so decide, it may eventually turn out that the parent company is at fault and not entitled to sell the articles in question at all; and, if so, the subsidiary will be equally at fault. But, if the parent is blameless, it seems only common sense that the subsidiary should be equally blameless. The two parties and their actions are, in my judgment, so closely related on the facts in this case that it would be right to hold that the subsidiary can establish that it is within the purview of the arbitration clause, on the basis that it is ‘claiming through or
under’ the parent to do what it is in fact doing whether ultimately held to be wrongful or not.”
However, the view expressed by the Court in RousselUclaf case [(1978) 1 Lloyd’s Rep 225] does not find approval in the decision of the Court of Appeal in City of London v. Sancheti [2008 EWCA Civ 1283 : (2009) 1 Lloyd’s Rep 117 (CA)] . In para 34, it was held that the view in RousselUclaf [(1978) 1 Lloyd’s Rep 225] need not be followed and stay could not be obtained against a party to an arbitration agreement or a person claiming through or under such a party, as mere local or commercial connection is not sufficient. But the Court of Appeal hastened to add that, in cases such as the one of Mr Sancheti, Corporation of London was not party to the arbitration agreement, but the relevant party is the United Kingdom Government. The fact that in certain circumstances, the State may be responsible under international law for the acts of one of its local authorities, or may have to take steps to redress wrongs committed by one of the local authorities, does not make the local authority a party to the arbitration agreement.”
29. This Court ultimately concluded that Sukanya Holdings (supra) was not applicable for interpreting Section 45 of the Arbitration Act. The ratio of the Sukanya Holdings (supra) was restricted to arbitrations under Part I of the Arbitration Act as such.
30. It may be noted that following the ratio in Chloro Control (supra), the 246th Law Commission Report recommended an amendment to Section 2(1)(h) and 8 of the Arbitration Act to modify the definition of ‘party’ under Part I of the Arbitration Act, to “a party to an arbitration agreement or any person claiming or through or under such party” to cure the anomaly pointed out by this Court in the Chloro Control (supra) case. The relevant observations by the 246th Law Commission Report are extracted below:
“61… It would thus be incongruous and incompatible with this “consensual” and “agreement based” status of arbitration as a method of dispute resolution, to hold persons who are not “parties” to the arbitration agreement to be bound by the same.
62. However, a party does not necessarily mean only the “signatory” to the arbitration agreement. In appropriate contexts, a “party” means not just a signatory, but also persons “claiming through or under” such signatory – for instance, successorsofinterest of such parties, alterego’s of such parties etc. This is particularly true in the case of unincorporated entities, where the issue of “personality” is usually a difficult legal question and raises a host of other issues. This principle is recognized by the New York Convention, 1985 which in article II (1) recognizes an agreement between parties “in respect of a defined legal relationship, whether contractual or not.”
63.The Arbitration and Conciliation Act, 1996 under section 7 borrows the definition of the “arbitration agreement” from the corresponding provision at article 7 of the UNCITRAL Model Law which in turn borrows this from article II of the New York Convention. However, the definition of the word “party” in section 2(1)(h) refers to a “party” to mean “a party to an arbitration agreement.” This cannot be read restrictively to imply a mere “signatory” to an arbitration agreement, since there are many situations and contexts where even a “nonsignatory” can be said to be a “party” to an arbitration agreement. This was recognized by the Hon’ble Supreme Court in Chloro Controls v. Severn Trent Water Purification, (2013) 1 SCC 641, where the Hon’ble Supreme Court was dealing with the scope and interpretation of section 45 of the Act and, in that context, discussed the scope of the relevant doctrines on the basis of which “nonsignatories” could be said to be bound by the arbitration agreement, including in cases of interrelated contracts, group of companies doctrine etc.
64. This interpretation given by the Hon’ble Supreme Court follows from the wording of section 45 of the Act which recognizes the right of a “person claiming through or under [a party]” to apply to a judicial authority to refer the parties to arbitration. The same language is also to be found in section 54 of the Act. This language is however, absent in the corresponding provision of section 8 of the Act. It is similarly absent in the other relevant provisions, where the context would demand that a party includes also a “person claiming through or under such party”. To cure this anomaly, the Commission proposes an amendment to the definition of “party” under section 2 (h) of the Act.”
(emphasis supplied)
We must here also state that the Law Commission did not examine the interpretation of ‘claiming through or under’. Rather, it simply recognized that there may be a need to extend the same to arbitrations under Part I of the Arbitration Act.
31. Pursuant to the aforesaid recommendation, the legislature made the following amendment to Section 8(1) of the Arbitration Act.
