Group of Companies Doctrine Day #1: Mr. Advani Argues Against Reference to Constitution Bench
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
Today, the CJI D.Y. Chandrachud-led Constitution Bench began hearings to decide if the Group of Companies Doctrine applies to the arbitration proceedings under the Arbitration and Conciliation Act, 1996.
Advocate Hiroo Advani, representing Cox and Kings Ltd. (C&K), argued in favour of recognising the Doctrine in India. This includes cases where a non-signatory parent company has taken control of the operations of one of their subsidiaries in pursuance of an agreement signed by the subsidiary.
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.
Adv. Advani: Concerns Expressed In Reference Judgement Have No Basis
Advocate Hiroo Advani explained that SAP SE, by taking control over the project to implement the Hybris Solution software, was entirely responsible for the projects’ failure. Therefore, former CJI Ramana’s concerns that the Group of Companies Doctrine (the Doctrine) was being adopted solely to make arbitration was more efficient did not hold weight in this case. It can be clearly seen that SAP, through their actions, gave tacit consent to the arbitration clause in the agreement, despite being a non-signatory.
Further, even though Mr. Advani said efficiency wasn’t the sole reason to adopt the Doctrine he stressed that it was an important factor. Without adopting the Doctrine, separate agreements would have to be made with every possible party. This would give rise to multiple parallel arbitration proceedings taking place for a single transaction solely because multiple parties were involved.
Can a Company Become Party to an Arbitration Without a Written Agreement?
CJI Ramana had also expressed concerns on whether the jurisdiction of the arbitral tribunal could extend to non-signatories. In response, Mr. Advani referred to the language in Section 7 of the Arbitration Act which states that arbitration proceedings can arise out of disputes between parties bound by a legal relationship even without a contract. This implies that signing an arbitration agreement (a type of contract) is a secondary concern. The existence of a legal relationship is the main factor to consider.
Justice P.S. Narasimha pointed out that Section 7 of the Arbitration Act also specifies that an arbitration agreement must be in writing. In that case, can a third party give implied consent to the agreement without signing it? Is it even possible for the Court to assume such a thing? Mr. Advani said he would answer this question during his final arguments before the case concludes.
Mr. Advani also pointed out a factual error in the reference Judgement. It stated that only 2 countries have recognised the Doctrine when, according to research done by Mr. Advani, 20 countries have adopted the Doctrine.
The Bench will continue hearing the case tomorrow. Senior Advocate A.M. Singhvi will argue on behalf of one of the intervenors in the case.