Group of Companies Doctrine Day #4: Does the Doctrine Violate Party Consent?Group 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
Senior Advocate Darius Khambata cautioned the Constitution Bench against applying the Group of Companies doctrine (GOCD) in arbitration proceedings. He suggested that the Court should use the Indian Contract Act, 1872 (ICA) to examine the GOCD before applying it in any situation.
Sr. Adv. Ritin Rai, representing SAP India, took a firm stance against adopting the Doctrine in India. He argued that it amounted to reading an ‘implied term’ for arbitration into an agreement which is unacceptable under the Arbitration and Conciliation Act, 1996 (ACA).
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.
Supreme Court Must Analyse GOCD Through the Lens of the Indian Contract Act
Mr. Khambata stated that he wasn’t against the GOCD. However, he argued that the Court must place some ‘cardinal limitations’ on it’s application. He drew the Bench’s attention to the language in Section 28 of the ICA. The provision states that a contract which restrains a persons ability to initiate legal proceedings is void. However, the Section comes with an exception—it does not apply when a dispute is referred to arbitration. Mr. Khambata highlighted that this exception implies that an arbitration agreement is a contract, as it would fall foul of Section 28 otherwise.
Consequently, the ICA’s standard for accepting a contract must apply whenever the Court considers including a non-signatory as a party to an arbitration.
Mr. Khambata then addressed the ‘Single Economic Entity’ doctrine, which is used when deciding if two companies are a part of the same group of companies. He explained that such groups are entitled to manage the affairs of their member companies. This arrangement, however, must be bonafide and without a view to circumvent the law.
GOCD is Inapplicable to Arbitration Act and Unnecessary to Bind Non-Signatories
Sr. Adv. Ritin Rai argued that the correct approach was to contrast the application of the GOCD with Section 8 of the ACA. This provision allows Courts to refer non-signatories to arbitration if they participated in the arbitration agreement ‘through or under’ one of the parties to the original agreement. He added that these parties may have made separate agreements as a part of the same transaction. These agreements must also be respected and cannot be set aside in favor of an arbitration agreement to which they are not signatories.
Mr. Rai argued that the sole pretext for applying the GOCD in the present case was a single email from SAP Germany to Cox & Kings stating that they would look into the issues plaguing the agreement with SAP India. This cannot be seen as binding on SAP Germany. This also effectively adds an implied term into the agreement, without the consent of the non-signatory.
He added that non-signatories do not have to be a part of the same group of companies as long as there is evidence of an intent to arbitrate. Arbitration agreements are based on the consent of the parties to arbitrate and to reduce interference by Courts. Applying the GOCD would defeat this purpose.
The Bench will continue hearing the case on April 12th, 2023.