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Incorporation of ‘Group of Companies’ Doctrine: Decoding the consent aspect of the SC Ruling

Digvijay Khatai[1] and Jibisa Janvi Behera[2]

 

I. Introduction


On 6th December 2023, the Supreme Court bench comprising Chief Justice of India D.Y. Chandrachud, Justice Hrishikesh Roy, Justice J.B. Pardiwala, Justice Manoj Misra and the concurring judgment of Justice PS Narasimha, retained the ‘group of companies’ doctrine in the Indian Jurisprudence. The ruling was pronounced in the appellate decision of Cox and Kings Ltd v. SAP India Pvt Ltd and Anr. (“Cox and Kings II”).

 

Recognized internationally, the theory holds that a non-signatory may be bound by the terms of an arbitration agreement, if it is a member of the same corporate group as the signatory; and all parties to the agreement intend for the non-signatory to be bound by the agreement. Here, a non-signatory party is someone that has not submitted its ‘written signature’ to the agreement, signifying the absence of an ‘express consent’ to be bound by such agreement. Hence, the primary element, by the virtue of which a non-signatory party is bound by an arbitration agreement is the ‘implied consent’ of such party.

 

There have been several Apex Court rulings that have validly recognized and tried incorporating the said doctrine by upholding its various aspects like mutual intention, economic conveniences etc. However, the jurisprudence did not particularly lay down emphasis on the consensual nature of the doctrine. This gap was recently filled by the Cox and Kings (II) judgement. As such, in this article, the authors specifically analyze how a pragmatic approach towards consent played as the ‘x factor’ in the ruling that successfully retained the doctrine in the Arbitration and Conciliation Act, 1996 (“The Arbitration Act”).

 

II. Brief Facts


In 2010, Cox and Kings Ltd. entered into a Software License Agreement with SAP India Private Ltd. for the development of an e-commerce platform.  In 2015, SAP India recommended ‘the Hybris Solution’ to Cox and Kings as it included several benefits. The Agreement comprised three agreements (in particular, contracts), a Software License Agreement, a Support Agreement, and a Services General Terms of Contract Agreement. Further the Services General Terms of Contract Agreement consisted of an arbitration clause. However, due to failure in implementing the Solution, the Hybris Solution’s contractual framework was terminated in 2016, leading to a demand for a refund of Rs. 45 crores by Cox and Kings Ltd.

 

Failed attempts to resolve the matter led SAP India to invoke arbitration, and it further claimed a payment of Rs. 17 Crores, for wrongful termination of the Contract by the Petitioner. The disagreements remained unresolved. The establishment of an Arbitral Tribunal is noteworthy, particularly in light of the exclusion of the second respondent, “SAP SE GMBH” from the Arbitration Proceedings. In addition, Cox & Kings filed an application pursuant to Section 16 of the 1996 Arbitration & Conciliation Act (the "Act"), arguing that the four agreements together constituted a single, composite transaction.

 

Further, in response to an application filed against the Petitioner under Section 7 of the Insolvency and Bankruptcy Code, 2016, the National Company Law Tribunal appointed an Interim Resolution Professional on October 22, 2019. The Corporate Insolvency Resolution Process commenced on November 5, 2019, and NCLT ordered the parties to postpone the arbitration proceedings.

 

Cox & Kings Ltd., this time arraying SAP SE GMBH, sent a second notice of intent to invoke arbitration on November 7, 2019, but SAP India Private Ltd did not reply. Aggrieved, Cox & Kings Ltd. filed an application under Sections 11(6) and l1 (12) (a) of the Arbitration Act with the Hon’ble Supreme Court of India, requesting the setting up of an Arbitral Tribunal.

 

In Cox and Kings Limited v. SAP India Private Limited and Another, pronounced by Chief Justice N.V. Ramana on May 06, 2022 (“Cox and Kings (I)"), the former Chief Justice criticized the group of companies’ doctrine applicability in India, raising questions about its basis and emphasizing caution. In contrast, Justice Surya Kant supported the doctrine but referred critical legal questions to a larger bench that read as follows -


1.    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;

2.    Whether the group of companies doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’;

3.    Whether the group of companies doctrine should be construed as a means of interpreting implied consent intent to arbitrate between the parties;

4.    Whether the principle 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.

 

The blog limits its scope to the current Cox and Kings 2023 (II) judgment, and hence the issues recognised in the Cox & Kings (I) have only been provided as an advent to the same.

 

III. Issues


The principle of ‘privy/ privity of contract’, arising from the Indian Contract Act, 1872, mandates that parties to an agreement are the only entities against whom terms of the agreement can be enforced. This principle primarily stems from the assumption that – it is only the parties – that have consented to the agreement. Nonetheless, consent can be expressed in two forms i.e. implied and expressed. While it is easier to identify express consent that emanates from direct written or oral form, implied consent is inferred from the implicit behavior or conduct of the concerned party. In the case of written agreements, consent is expressed in the form of a signature and the party doing so is also known as the ‘signatory to the agreement’. Here it is also important to maintain the difference between ‘signatory’ and ‘party’ to the arbitration agreement.

 

Similarly, arbitration agreements are agreements between parties of a pre-existing agreement, to submit to arbitration in the event of a future dispute between them. Section 7 of the Arbitration Act governs arbitration agreements in India. Further, sub-section 7(3) of the Arbitration Act recognizes the same in the form of ‘written agreements’ only.

 

The group of companies’ doctrine seeks to bind a non-signatory party by the virtue of its membership in the same group of companies who constitute as a party to the agreement. With the absence of an ‘express consent’ in the form of a signature on behalf of the non-signatory party, the core element that binds such party to the agreement is its ‘implied consent’ to be bound by the arbitration agreement. The deduction of such implied consent is completely based on the facts and circumstance of the case. However, at the same time, “[s]ince consent forms the cornerstone of arbitration, a non-signatory cannot be forcibly made a “party” to an arbitration agreement, as doing so would violate the sacrosanct principles of privity of contract and party autonomy.” (Paragraph 65)

 

Where Section 7 of the Arbitration Act recognizes arbitration agreements in written forms only, a valid question arises as to whether written agreements accommodate recording implied consent under it. Therefore, the Constitution Bench recognized two critical questions under the consent part of the judgement.


1.    Is it necessary for a party to be a ‘signatory’ of the arbitration agreement to be bound by the same.

2.    Does implied consent come under the ambit of Section 7 of the Act that rigidly recognizes arbitration agreements in written forms only?

 

In the following sections, the authors have highlighted how adjudacting these questions led to the successful incorporation of the doctrine and where the judicial precedents have failed to do the same.

 

IV. Judicial Precedents


There are several precedents in the field of arbitration law that have laid down circumstantial grounds to bind non-signatories to arbitration agreements.

 

In Chloro Control (P) Ltd v. Severn Trent Water Purification Inc. (“Chloro Control”), the Supreme Court laid down several grounds on which a non-signatory could be bound by the arbitration agreement. As per the ruling, the non-signatory not only needed to share a direct legal relationship with the signatories to the agreement and but must also have a direct commonality to the subject-matter of such a transaction.

 

Relying on the Chloro Control (supra) judgment, the Supreme Court in Ameet Lalchand Shah v. Rishabh Enterprises held that in arbitral disputes where several interconnected agreements exist among parties (involving both signatories and non-signatories), all the parties can be referred to arbitration by the virtue of their participation in interconnected agreements.

 

Similarly, a two-judge bench of the Apex court in Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited held that for a non-signatory to be bound by an arbitration agreement, it needs to have a ‘causal relationship’ with negotiations preceding the agreement. The causal relationshop contextually refers to the ‘active involvement’ of the concerned non-signatory party in the negotiations of the concerned transaction before its execution.

The doctrine’s purport was also under question in Cheran Properties v. Kasturi Sons Pvt Ltd & Ors (2021),where the Apex Court observed that, the doctrine intends to facilitate the fulfilment of a mutually held intent between parties, where the circumstances indicated the intention to bind non-signatories as well. It binds a party who assumes obligations in layered business transactions without formally being a signatory to it.

 

Lastly, the Supreme Court in the ONGC v. Discovery Enterprises noted that a non-signatory may be bound by an arbitration agreement, where (a) there exists a group of companies; and (b) the parties have made statements or engaged in conduct indicating an intention to bind a non-signatory. It thus, established a dual requirement for the application of the doctrine. Further, it reiterated that the present law on the subject considers the following factors: (a) mutual intent of parties; (b) relationship of a non-signatory to a signatory; (c) commonality of the subject-matter; (d) composite nature of the transaction; and (e) performance of the contract.

 

The group of companies doctrine traces its origins from the French case Dow Chemical Vs. Isover Saint Gobain adjudicated by the International Chamber of Commerce Tribunal (“ICC”). Seeking to determine its jurisdiction over non-signatories, the ICC tribunal tried to discover the ‘common intention’ of the parties to be part of the negotiation and performance of the agreement. The tribunal concluded that if an ‘intention’ of the parties could be discovered from their actions, to be bound by the process of negotiation and performance of the agreement, then the parties can be said to be ‘parties to the agreement’. This additionally made the non-signatory parties to the arbitration. The case has also emphasized upon the inclusion of implied consent under the ambit of written agreements.

 

Now, it can be inferred from the domestic rulings that none of them precisely answer the questions and issues discussed in the previous section. The SC in its previous rulings, has not been cognizant of the issue of including implied consent under written arbitration agreements. Although the Discovery Enterprises tried laying down guidelines for including almost every aspect of the doctrine, it overlooked the ‘consent aspect’ of the doctrine. In the following section, the authors attempt to demonstrate how the Court has finally laid down to rest the issues raised in the previous section.

 

V. Parties Being Non-Signatories


Before scrutinizing the ambit of Section 7 of the Arbitration Act, the Court had to first look at the meaning of ‘parties’ in the context of arbitration agreements. The Court noted, that as per Section 2(h) of the Arbitration Act a ‘party’ refers to ‘any party to an arbitration agreement’. The Court also took note of how Section 7 of the Arbitration Act recognizes arbitration agreements in writing and in three different forms as per sub-section 7(4).

 

The Court observed that Section 7 has both aspects i.e. formal and substantive. The substantive aspect has been captured in sub-section 7(1) that forms a legal relationship between parties to submit to dispute to arbitration in the event of any dispute arising out of the contractual relationship. Legal relationships that are contractual in nature have to abide by the Indian Contract Act, 1872. The Court further emphasized that contracts can be both express and implied. In words of the bench, as per paragraph 74 of judgment, “[t]hus, it is not necessary for the persons or entities to be signatories to a contract to enter into a legal relationship – the only important aspect to be determined is whether they intended or consented to enter into the legal relationship by the dint of their action or conduct’.

 

Similarly in paragraph 75, examining sub-section 7(3) of the Arbitration Act, the Bench held that “[t]he mandatory requirement of a written arbitration agreement is merely to ensure that there is a clearly established record of the consent of the parties to refer their disputes to arbitration to the exclusion of the domestic courts”. To substantiate its stand, the Bench referred to Article 7 of the UNCITRAL Model Law. The Article states that an arbitration agreement may be entered into in any form, for example orally or tacitly, as long as the content of the agreement is recorded. It eliminates the requirement of the signature of parties or an exchange of messages between the parties.

 

When recorded in writing under Section 7 of the Arbitration Act, a ‘signature’ is an expressed or formalistic version of signifying consent to an agreement, which directs towards the idea of ‘express consent’. In regard to ‘implied consent’ under the ambit of written arbitration agreements, there is no explicit provision in the existing legal framework. However, it is important to note that Section 7 of the Arbitration Act does not explicitly speak on whether it requires consent to be similarly recorded in an expressed form, or it subsumes implied consent under it. This ambiguity proves to be a major impediment in the incorporation of the group of companies’ doctrine that binds non-signatories to an arbitration agreement by the virtue of their implied consent.

 

Before scrutinizing the ambit of Section 7 of the Arbitration Act, the Court had to first look at the meaning of ‘parties’ in the context of arbitration agreements. The Court noted in Paragraph 73 of the judgment, that as per Section 2(h) of the Arbitration Act a ‘party’ refers to any party to an arbitration agreement. The Court also took note of Section 7’s rigid requirement of arbitration agreement in written form only and the three different forms as per sub-section 7(4) namely –


a)    a document signed by the parties.

b)    an exchange of letters, telex, telegrams, or other means of telecommunication 1[including communication through electronic means] which provide a record of the agreement; or

c)    an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

 

The Court observed that Section 7 has both aspects i.e., formal and substantive in sub-sections 7(3) and 7(1) respectively. The substantive aspect has been captured in sub-section 7(1) that forms a legal relationship between parties to submit to dispute at the event of any dispute. The Court also noted that, as similar to contracts, consent to a legal relationship can be both implied or expressed and the same has to be inferred from the conduct of the parties.

 

As per paragraph 74 of judgment, “The legal relationships between and among parties could either be contractual or non-contractual. For legal relations to be contractual in nature, they ought to meet the requirements of the Indian contract law as contained in the Contract Act. It has been shown in the preceding paragraphs that a contract can either be express or implied, which is inferred on the basis of action or conduct of the parties. Thus, it is not necessary for the persons or entities to be signatories to a contract to enter into a legal relationship – the only important aspect to be determined is whether they intended or consented to enter into the legal relationship by the dint of their action or conduct”. Hence, the Bench prioritized the presence of consent of a party, over the manner in which the same is discovered i.e., expressed or implied, in order to bind such party to an agreement. 

 

Hence, the Court ruled in paragraph 76 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”.

 

Hence after reading Section 7, the Court held that it is not necessary for the persons or entities to be signatories to the arbitration agreement to be bound by it. 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.

 

VI. Consent- A Pragmatic Approach


The Constitutional Bench observed that there often arise situations where a company which has signed the contract containing the arbitration clause is not always the one to negotiate or perform the underlying contractual obligations. In such situations, emphasis on formal consent will lead to the exclusion of such non-signatories from the ambit of the arbitration agreement, leading to multiplicity of proceedings and fragmentation of disputes. Hence, the Court felt the need for a more pragmatic approach towards consent.

 

Paragraph 93 of the ruling took note of Professor Hanotiau who suggested that “it is more accurate to refer to a modern approach to consent; an approach that is more pragmatic, more focussed on an analysis of facts, which places an emphasis on commercial practice, economic reality, trade usages, and the complex and multifaceted dimensions of large projects involving group of companies and connected agreements in multiparty multi-contract scenarios; an approach that is no longer restricted to express consent but that takes into consideration all its various expressions and tends to give much more importance than before to the conduct of the individuals or companies concerned.

 

Evidently, the need for the recognition of implied consent is being talked about, in world of business and commercial agreements that restrict their understanding of consent in an express form i.e., signature only. Looking at the modern-day businesses involving complex multiparty contractual agreements, the Court understood the context how the group of companies’ doctrine was created to bind non-signatory parties who were implicated in subject matter of the dispute of arbitration.

 

Hence, the Court expressed its concluding opinion in paragraph 128 of the ruling which states “[w]e hold that all the cumulative factors laid down in Discovery Enterprises (supra) must be considered while determining the applicability of the group of companies doctrine. However, the application of the above factors has to be fact-specific, and this Court cannot tie the hands of the courts or tribunals by laying down how much weightage they ought to give to the above factors. This approach ensures that a dogmatic emphasis on express consent is eschewed in favour of a modern approach to consent which focuses on the factual analysis, complexity of commercial projects, and thereby increases the relevance of arbitration in multi-party disputes. Moreover, it is also keeping in line with the objectives of the Arbitration Act which aims to make the Indian arbitration law more responsive to the contemporary requirements’. 

 

The bench took note of the fact Indian arbitration law is both domestic and international in nature and needs to abide by principles of contracts and corporate law recognised internationally.

Finally, the court concluded the consent aspect of judgment in the following three points:-


a)    The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties.

b)    Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement.

c)    The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties.

 

With such an inclusive approach towards, the court held that requirement of written agreements Section 7 of the Arbitration act does not exclude a non-signatory party from being bound by an arbitration agreement solely due to the absence of a formal signature of such party. This pragmatic construal of consent coupled with the holistic application of guidelines laid down in Discovery Enterprises (Supra) leads to the successful integration of the group of companies doctrine into the existing legal framework.

 

VI. Conclusion


In this article, the authors have fairly pointed out the ‘x factor’ that segregates this landmark judgment of the Supreme Court from its previous ones i.e. a pragmatic approach towards consent. The authors also bring to the notice that the group of companies’ doctrine is consent based doctrine, and any effort to integrate the doctrine into the legal system also requires recognition of implied consent by the parties to be bound by an arbitration agreement. Further the Court has also set a pathbreaking precedent that emphasizes the importance of taking an inclusive approach towards implied consent while dealing with disputes pertaining to legal relationships. Hence, the ruling can be considered a welcome one in the field of not only arbitration law but corporate legal system in general.


 

[1] Digvijay Khatai is a second-year B.A. LL.B. Student at National Law University, Odisha. EMAIL: 22ba037@nluo.ac.in

[2] Jibisa Janvi Behera is a second-year B.A. LL.B. Student at National Law University, Odisha. EMAIL: 22ba044@nluo.ac.in

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