COX  AND  KINGS LTD VS SAP INDIA PVT. LTD. : CASE SUMMARY

The Constitution Bench  in Cox and Kings Ltd vs SAP India  (Arbitration Petition (Civil) 38/2020) determined  the validity of “Group of Companies” doctrine in arbitration cases as expounded by Chloro Controls Case and subsequent judgments.

RELEVANT PROVISIONS

Section 2 (1) (h) of the Arbitration and Conciliation Act, 1996 defines “party” as “party to an arbitration agreement”.

Section 7 defines arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined relationship, whether contractual or not. The provision also mandates that an arbitration agreement shall be in writing. Section 7 (5) further stipulates that the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if two conditions are satisfied. These conditions are first that the contract is in writing and second that the reference is such as to make the arbitration clause part of the contract.

THE PRECEDENTS

The Supreme Court in Sukanya Holding (P) Ltd Vs Jayesh H Pandya (2003)5SCC531  held that non-signatory cannot be bound by the arbitration agreement. The Supreme Court again in IndoWind Energy Ltd Vs. Wescare (India) Ltd (2010)5SCC306  held that non-signatory cannot be bound by arbitration agreement.

Change in approach of Supreme Court can be discerned in Chloro Controls India (P) Ltd Vs. Severn Trent Water Purification Inc  2 (2013) 1 SCC 641. In this case, several agreements had been executed between the parties but all the parties were not parties to the arbitration agreement. The Supreme Court relying on  Section 45 held that the expression “any person” reflects a legislative intent of enlarging the scope beyond “parties” who are signatories to the arbitration agreement to include non-signatories. However, the court noted that such non-signatory parties are required to claim “through or under the signatory party”. Thus Supreme Court accepted the arbitration is possible between a signatory to an arbitration agreement and a third party or non-signatory claiming through a party.  The Supreme Court also held that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties. The Supreme Court held that a non-signatory could be subjected to arbitration “without their prior consent” in exceptional cases on basis of four determinative factors – (i) a direct relationship to the party which is a signatory to the arbitration agreement  (ii) a direct commonality of the subject-matter and the agreement between the parties being a composite transactions (iii) the transaction being of a composite nature where performance of the mother agreement may not be feasible without the aid , execution and performance of the mother agreement may not be feasible without the aid, execution and performance of supplementary or ancillary agreements for achieving.

Vide 2015 amendment Section 8 was amended and amended Section 8 (1) provided that “ a party to an arbitration agreement or any person claiming through or under him could seek a reference to arbitration.

The Supreme Court in Cheran Properties Ltd. Vs. Kasturi and Sons Ltd (2018) 16 SCC 413   held that non-signatory being a nominee of one of the signatory parties, was bound by the arbitral award as it was claiming under the signatory.

The Supreme Court again in Ameet Lalchand Shah Vs Rishabh Enterprises (2018) 15 SCC 678 observed that in view of the composite nature of the transaction, the disputes between the parties to various agreements could be resolved effectively by referring all of them to arbitration.

The Supreme Court in Reckitt Benckiser (India) Pvt. Ltd. Vs Reynders Label Printing India Pvt. Ltd 8 (2019) 7 SCC held that the participation of the non-signatory party in the negotiation and performance of the underlying contract was held to be the key determinant of the intention of the parties to be bound by an arbitration agreement.

The Supreme Court in MTNL Vs Canara Bank (2020) 12 SCC 767  held that in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality.

FINDINGS OF THE SUPREME COURT

The Supreme Court observed that Section 2 (h) read with Section 7 does not expressly require the “party” to be a signatory to an arbitration agreement or the underlying contract containing the arbitration agreement.

The Supreme Court observed that entities within a corporate group have separate legal personality, which cannot be ignored save in exceptional circumstances such as fraud. The distinction between a parent company and its subsidiary is fundamental and cannot be easily abridged by taking recourse to economic convenience. Legally, the rights and liabilities of a parent company cannot be transferred to the subsidiary company and vice versa unless there is a strong legal basis for doing so.

The Supreme Court took notice of evolution of group of companies doctrine and noted that the principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of  companies doctrine.

The Supreme Court observed that in multi-party agreements, the courts or tribunals will have to examine the corporate structure to determine whether both the signatory and non-signatory parties belong to the same group. This evaluation is fact specific and must be carried out in accordance with the appropriate principles of company law. Once the existence of the corporate group is established, the next step is the determination of whether there was a mutual intention of all the parties to bind the non-signatory to the arbitration agreement.

The group of companies doctrine requires the courts and tribunals to consider the commercial circumstances and the conduct of the parties to evince the common intention to the parties to arbitrate.

The Supreme Court observed that in case of a composite transaction involving multiple agreements, it would be incumbent for the courts and tribunals to assess whether the agreements are consequential or in the nature of a follow up to the principal agreement.

The Supreme Court observed that the general position of law is that parties will be referred to arbitration under the principal agreement if there is a situation where there are disputes and differences “in connection with” the main agreement and also disputes “connected with” the subject matter of the principal agreement.

The Supreme Court observed that evaluating the involvement of the non-signatory party in the negotiation, performance or termination of a contract is an important factor for a number of reasons. First, by being actively involved in the performance of a contract, a non-signatory may create an appearance that it is a veritable party to the contract containing the arbitration agreement, second the conduct of the non-signatory may be in harmony with the conduct of the other members of the group, leading the other party to legitimately believe that the non-signatory was a veritable party to the contract and third the other party has legitimate reasons to rely on the appearance created by the non-signatory party so as to bind it the arbitration agreement.

The Supreme Court observed that the approach of this Court in Chloro Controls to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract and commercial law. As observed above, the existence of the group of companies doctrine is intrinsically found on the principle of the mutual intent of parties to a commercial bargain.

The Supreme Court observed in case of joinder of non-signatory parties to an arbitration agreement, the following two scenarios will prominently emerge, where a signatory party to an arbitration agreement seeks rejoinder of a non-signatory party to the arbitration agreement; and second, where a non-signatory party itself seeks invocation of an arbitration agreement. In both the scenarios, the referral court will be required to prima facie rule on the existence of the arbitration agreement and whether the non-signatory is a veritable party to the arbitration agreement. In view of the complexity of such a determination, the referral court should leave it for the arbitral to decide whether the non-signatory party is indeed a party to the arbitration agreement on the basis of the factual evidence and application of legal doctrine. The tribunal can delve into the factual, circumstantial and legal aspects of the matter to decide its jurisdiction extends to the non-signatory party. In the process, the tribunal should comply with the requirements of principles of natural justice such as giving opportunity to the non-signatory to raise objections with regard to the jurisdiction of the arbitral tribunal. This interpretation also gives true effect to the doctrine of the competence-competence by leaving the issue of determination of true parties to an arbitration agreement to be decided by arbitral tribunal under Section 16.

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