Group of Companies Doctrine Constitution Bench Day #5: Impact on International Arbitration?
Group of Companies Doctrine in Arbitration ProceedingsJudges: D.Y. Chandrachud CJI, Hrishikesh Roy J, P.S. Narasimha J, J.B. Pardiwala J, Manoj Misra J
In today’s hearings, Sr. Adv.s Nakul Dewan and A.M. Singhvi urged the Bench to consider limiting the Group of Companies doctrine (GOCD) so as to ensure compatibility with internationally accepted norms of arbitration. In the previous hearing, Sr. Adv. Ritin Rai argued that the GOCD is not applicable to arbitration laws in India and that it is unnecessary to bind non-signatories to arbitration.
Background
In October 2015, C&K entered into three agreements with SAP India Pvt. Ltd. to develop an e-commerce platform using SAP’s ‘Hybris Solution’ software. However, the project to implement the software faced a number of difficulties despite assurances that it was compatible with C&K’s current software. C&K reached out to SAP SE, the parent company of SAP India which is based in Germany. SAP SE created a team of experts and took over the project, but they too failed to implement the software.
In November 2016, C&K terminated their contract with SAP India and demanded ₹45 crores to recoup the payments made so far. SAP India refused and in turn claimed that C&K wrongfully terminated the contract and demanded ₹17 crores themselves. The parties went to arbitration as per one of their agreements. However, the arbitration was adjourned in November 2019 by the National Company Law Tribunal as C&K was facing bankruptcy.
C&K took the opportunity to initiate fresh arbitration proceedings and sent notices to SAP India and SAP SE, despite the latter not being a signatory to any of the agreements. When SAP refused to appoint an arbitrator, C&K approached the Supreme Court and requested the Bench to appoint an arbitrator instead, as per Section 11 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act). C&K claimed that SAP SE gave implied consent to the agreement and, as the parent company of SAP India, they should be included as a party.
On May 6th, 2022, a Bench led by former CJI Ramana expressed concerns about adopting the Doctrine and referred the case to a 5-Judge Constitution Bench. The Bench held that an authoritative decision was necessary to clearly define the contours of the Doctrine.
Sr. Adv. Nakul Dewan: Consent of Parties is the Basis for Arbitration
Sr. Adv. Nakul Dewan commenced his arguments by pointing out that implied consent cannot do away with the formal requirements of an arbitration agreement. He explained that whenever a term or a clause is implied in a written agreement, it is deemed to be part of that agreement. In the present instance, if a non-signatory is implied to be a party to an arbitration agreement, it would fall squarely under Section 7 of the Arbitration and Conciliation Act, 1996 (ACA), which governs arbitration agreements. Such an interpretation would be based on the written agreement itself and not on other extraneous factors.
International Implications of Accepting the Group of Companies Doctrine in India
Highlighting India’s desire to be a hub of arbitration, Mr. Dewan argued that it is critical for arbitral awards passed in India to be enforceable outside India. Arbitration proceedings are often between large companies operating across national borders, and an arbitral award may be passed by an arbitral tribunal. However, for the award to be enforceable within domestic borders in which parties to the arbitration operate, the award will have to comply with domestically accepted principles of arbitration. These domestic principles may or may not recognise the group of companies doctrine.
Mr. Dewan buttressed his argument with an illustration. Supposing a dispute arising in India is referred to arbitration, the procedural law governing the proceedings will be based on the local laws of the ‘seat of the arbitration’ (the jurisdiction chosen by the parties). Here, the foreign tribunal may refuse to arbitrate against a non-signatory due to non-compliance with their domestic arbitration laws. Similarly, if the seat of the arbitration is India, any award passed by the tribunal against a non-signatory may be rejected by foreign courts if their domestic laws do not recognise the group of companies doctrine.
Sr. Adv. Nakul Dewan: There Can Be No Valid Arbitration Without the Mutual Consent of the Parties
Justice Hrishikesh Roy pointed out that the GOCD would not necessarily imply all non-signatories to an arbitration agreement would be included in arbitration proceedings merely because of their association with signatories. Courts must also consider the intent and conduct of the parties before making non-signatories part of an arbitration proceeding. Mr. Dewan agreed. However, the Constitution Bench must clarify the limits of the doctrine before it can be applied. He elaborated that the very foundation of arbitration is the mutual consent of the parties to arbitrate. Without mutual consent by the parties, there can be no valid arbitration, he added.
Mr. Dewan argued that since the GOCD and the ‘single economic entity’ doctrine (which states that a closely related group of companies can be considered to be a single entity) have no legal form, they cannot be the basis for ascertaining the consent of the parties. However, Mr. Dewan pointed out that in certain instances, the intent of non-signatories to be a party to an arbitration may be determined based on intrinsically linked composite agreements between the parties. For example, when an arbitration agreement is a follow-up to other prior agreements, and the performance of such an arbitration agreement is intrinsically tied with such other agreements, then the intent of the non-signatories to be part of arbitration proceedings may be determined.
Sr. Adv. Meenakshi Arora: Intention of Parties is Key to Applying GOCD
Sr. Adv. Meenakshi Arora claimed that the entire ‘Group of Companies’ concept is based on the protection of holding companies and subsidiaries within the group. She pointed out that in such situations, it is often the case that all assets are owned either by only the holding company or only the subsidiary companies. This limits the overall liability of the group should one of them commit an infraction. The test here would be whether a party intended to limit the exposure of their assets to a liability, or if it represented itself in a manner that another member of its group would face the liabilities in its stead. GOCD can only be applied here if there is a clear intention of the parties to bind the entire group to the arbitration agreement.
Sr. Adv. A.M. Singhvi: GOCD Must be Thrown Out or Applied With Safeguards
In his rejoinder arguments, Sr. Adv. A.M. Singhvi raised two possible ways forward. If the SC decides to proceed strictly based on signatories, then the GOCD must be thrown out in its entirety. If not, the SC must safeguard the use of the doctrine to prevent its abuse. The Court must clearly lay down in what circumstances the doctrine may be applied, else the doctrine will be easily circumvented.
Dr. Singvhi argued that while intent may be one of the factors to determine the application of the GOCD, the test for intent can be subjective and objective. He pointed out that the Court does not deal in black and white. Should the GOCD be applied based on intent, then the right tests to determine common intent within the group of companies must apply. One such test is to examine if there is a tight group structure with strong organisation and financial links. However, the Court must keep in mind the subjective nature of disputes before applying a test to determine the intent of the parties.
Upon concluding arguments, the Bench reserved Judgement.