Group of Companies Doctrine Day #3Group of Companies Doctrine in Arbitration Proceedings
Judges: D.Y. Chandrachud CJI, Hrishikesh Roy J, P.S. Narasimha J, J.B. Pardiwala J, Manoj Misra J
The CJI D.Y. Chandrachud-led Constitution Bench continued to hear the case to decide if third parties can be included in arbitration proceedings even if they did not sign an arbitration agreement. This is known as the ‘Group of Companies Doctrine’. Solicitor General Tushar Mehta, representing the Union government, argued that the Arbitration and Conciliation Act, 1996 already recognises the doctrine. Senior Advocate Darius Khambata argued that the Court should place strict boundaries if it chooses to recognise the doctrine.
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.
SG Mehta: Group of Companies Doctrine is an Inbuilt Part of the Arbitration Act
Mr. Mehta claimed that one of the core principles of the Arbitration Act is to ensure that disputes are handled efficiently. In order to do so, a single dispute with multiple parties cannot be fragmented into multiple smaller disputes. The Group of Companies Doctrine perfectly secures these aims.
Further, Section 7 of the Arbitration Act specifically states that parties can enter into arbitration even the if the dispute does not arise from a contract. Therefore, when the Court is examining an arbitration agreement, it must consider all the legal relationships that are a part of the dispute. This includes relationships where one of the parties has not signed the arbitration agreement.
The Solicitor General also made brief submissions on the limits of the Doctrine. Referring to other jurisdictions (such as the United States of America), he argued that the Court typically examines if a non-signatory party is acting as an agent or is the ‘apparent authority’ in the circumstances of the case. However, he stressed that the SC would have to create its own test to decide if the Doctrine can be applied on a case-by-case basis.
Sr. Adv. Khambata: Group of Companies Doctrine Must Be Governed By Contract Law
Mr. Khambata fully accepted that the Group of Companies Doctrine can be introduced in the Arbitration Act. However, he argued that if the Court chooses to recognise the Doctrine, then the Indian Contract Act, 1872 must govern its application. The autonomy of the parties must be respected. Hence, the Court must determine that a non-signatory, whether through words or conduct, intended to be a part of the arbitration agreement.
Mr. Khambata agreed with Mr. Mehta in that the Court could not introduce complete guidelines at this moment, and that it would develop on a case-by-case basis. However, some clear guidance had to be given. He suggested that the Court should recognise the importance of consent in their decision. The non-signatory must be a part of the same group of companies as one of the parties. Further, they must have played a pivotal role in the negotiation, performance and termination of the agreement that forms the heart of the dispute.
The Bench will continue hearing the case on April 11th, 2023.