Cox & Kings Ltd. V. SAP India (P) Ltd., 2023 SCC OnLine SC 1634

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INTRODUCTION:

This case of Cox and Kings Ltd. V. SAP India is a significant judgment which revolves around the Group of Companies Doctrine. The case arose from the series of agreements between Cox and Kings Ltd. and SAP India Pvt. Ltd. The petition was first brought before the Supreme Court’s Three Judge Bench, but because of the Court’s uneven application of the Group of Companies doctrine in India, the matter was subsequently referred to the Five Judge Bench. In this case the Apex Court dealt with the validity of the Group of Companies Doctrine in the Indian context and held that Non Signatories can become party to the arbitration agreement if it can be proven that both signatories and non-signatories intended to be bound by the arbitration agreement.

FACTS OF THE CASE:

• Cox and Kings Ltd. , a travel company, and SAP India Pvt. Ltd. (the respondent) signed a software licensing deal on December 14, 2010. SAP is a company that specializes in developing and marketing software to help businesses with finance, marketing, human resources, and other areas.
• When Cox and Kings Ltd. started creating its own e-commerce platform in October 2015, SAP India contacted them and offered to install new software. The two companies signed three new contracts to make use of SAP’s “Hybris Solution” software. SAP India said that only ten more months would be required to customize the remaining 10% of the new software, which was already 90% compatible with C&K’s existing software.
• Three agreements executed between the companies among which one of them had an arbitration clause according to which companies agreed to resolve disputes through arbitration.
• When faced with obstacles in the implementation of the project, the applicant turned to SAP SE, SAP India Pvt. Ltd.’s parent company, for technical support. Despite numerous extensions, the project was never completed, and as a result, Cox and Kings Ltd. rescinded the agreement and demanded a refund.
• In response to this the SAP India started arbitration proceedings against Cox and Kings Ltd. alleging wrongful termination of the Agreement. But due to Cox and Kings Ltd. impending bankruptcy, the National Company Law Tribunal adjourned the arbitration hearings in November 2019.
• In spite of impending insolvency, Cox and Kings Ltd. started a new arbitration by sending a notice to SAP India. This time Cox and Kings Ltd.  also issued a notice to SAP SE and asked them to appoint the arbitrator even though they were not the signatory or party to the agreement.
• The Applicant applied to the Supreme Court under Section 11 of the Act to request the appointment of an arbitrator after the Respondents failed to do so.
• The matter was referred by a three-judge Bench led by former CJI N.V. Ramana on May 6, 2022 to the five-Judge Constitution Bench considering the facts of the application. The Bench held that a larger Bench was necessary to adjudicate the matter related to Group of Companies Doctrine.
• So on March 22, 2023 the Five Judge Bench initiated hearing of the matter.

ISSUES RAISED:

1. Whether parties which have not signed the agreement can be included as Parties in the Agreement?
2. 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?
3. Whether the ‘Group of Companies’ doctrine as expounded by Chloro Controls India Private Limited v. Severn Trent Water Purification, (2013) 1 SCC 641  and subsequent judgments is valid in law?
4. Whether the Group of Companies Doctrine should be construed as a means of interpreting implied consent or intent to arbitrate between the parties?
5. Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?

CONTENTIONS OF THE PETITIONER:

1. The definition of “party” under Section 2(1)(h) of the Arbitration Act cannot be restricted to the signatories to an arbitration agreement. The definition should be read expansively to also include non-signatories depending upon the facts and circumstances.
2. It was contended that an arbitration agreement entered into by a company within a group of companies can bind its non-signatory affiliates under the “Group of Companies” Doctrine if the circumstances show that the mutual intention of parties was to bind signatory as well as the non-signatory parties.
3.  Section 7 of the Arbitration Act provides that the defined legal relationship between the parties may be non-contractual as well. Moreover, section 7(4)(b) indicates that a non-signatory could be bound by an arbitration agreement if in the course of a written communication, it has demonstrated an intention to be bound by the agreement.
4. The group of companies doctrine should ideally be applied by the Arbitral Tribunal. At the stage of referral, the court should merely take a prima facie view and leave it for the arbitral tribunal to determine the necessity of joining the non-signatories to the arbitration agreement.

CONTENTIONS OF THE RESPONDENT:

1. The applicability of the group of companies doctrine must be examined from the touchstone of whether a non-signatory could be made a party to the arbitration agreement. The expression “claiming through or under” a party cannot be the basis to apply the doctrine.
2. The group of companies doctrine and single economic entity doctrine are purely economic concepts without any basis in either contract law or company law. Therefore, they cannot be applied to determine the intention of non-signatories to be bound by an arbitration agreement.
3. Section 7 of the Arbitration Act requires the arbitration agreement to be in writing. Therefore, an arbitration agreement cannot be created on the basis of implied consent of the non-signatory.
4. An arbitration agreement which sets out the executing parties and the arbitral procedure agreed among them cannot be read to expand its reach to third parties.

JUDGMENT:

The Supreme Court held that:

• In a group of companies, a non-signatory company may be bound by an arbitration agreement formed by its associated companies if it can be proven that both signatories and non-signatories intended to be bound by the arbitration agreement.
• Signatory and non-signatory parties are included in the definition of parties under Section 2(1)(h) read with Section 7 of the Arbitration Act.
• The conduct of the non signatory parties may indicate that they agree to be bound by the arbitration agreement.
• The Doctrine cannot be applied only on the basis of the single economic unit principle.
• The decision in Chloro Controls India Pvt. Limited Severn Trent Water Purification Inc. to the extent it traced the Doctrine to the phrase ‘claiming through or under’ is erroneous and against the well-established principles of contract law and corporate law.
• The Arbitration Act’s Section 7 and Section 2(1)(h) when read harmoniously give rise to the group of companies concept, which exists independently as a principle of law.
• Given its usefulness in ascertaining the parties’ intentions in the setting of complicated transactions involving numerous parties and multiple agreements, the group of companies concept ought to be preserved in Indian arbitration jurisprudence.
• If there is a clearly defined legal relationship between the signatory and non-signatory parties, then the requirement of a written arbitration agreement does not exclude the possibility of binding non-signatory parties.

ANALYSIS:

The Apex Court by giving the decision in the matter had clarified the situation that arises when a party signs a composite contract that is closely related to the primary parties’ agreement and that party actively participates in the contract’s negotiation and performance but refuses to be bound by the arbitration clause in the principal contract. The Supreme Court ruled that such a party can be deemed to be bound by the arbitration agreement after taking into account the surrounding circumstances. The Apex Court said that the Court or Arbitral Tribunal needs to analyse the presence of consent for making a non signatory bound by the agreement. It states that even if a party is not a signatory to the agreement, it can still be “a party to an agreement” if this consent is impliedly given. 

When applying the Doctrine, the existence of a group of companies would be the first factor considered, and then the conduct of the signatory and non-signatory parties—which would suggest a common interest to include the non-signatory as a party to the arbitration agreement—would be the second factor considered. In order to bind a non-signatory party to the arbitration agreement, the parties should take into account cumulative considerations such as the shared characteristics of the subject matter, composite character of the transactions, and the performance of the contract.

CONCLUSION:

A thorough framework for comprehending the group of companies doctrine in the context of Indian arbitration is provided by Cox and Kings Ltd. V. SAP India. The Court strikes a balance between party autonomy and the realities of modern commercial transactions, contributing to the progress of arbitration law by its thorough research and clarification of many elements. The Court acknowledged that an excessive focus on formal consent could bar non-signatories and result in unwanted repetition of legal actions.

REFERENCES:

1. SCC Online
2. https://indiankanoon.org 
3. https://www.scobserver.in 

This Article is written by Sargam Bansal student of G.H.G Institute of Law, Sidhwan Khurd; Intern at Legal Vidhiya

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