By: Bharat Manwani.
On December 6, 2023, a 5-Judge Bench of the Supreme Court of India, in the case of Cox and Kings Ltd. v. SAP India Pvt. Ltd. & Anr. upheld the validity of the group of companies doctrine. The Apex Court opined that the doctrine shall be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements. The Court vide this verdict, has however rebelled against principles that define the very essence of arbitration.
Justice D. Y. Chandrachud in fact, begins the verdict with a reference to James Joyce’s ‘Ulysses’, the modernist novel which challenged conventional literature. Drawing a parallel between the novel and the group of companies doctrine, he suggests that the latter builds upon its legacy by challenging the conventional notions of arbitration law. In addition to this parallel, it is pertinent to note that ‘Ulysses’ had also encountered myriad controversies and significant scrutiny at the time of its publication. A similar reception towards the group of companies doctrine, would be no surprise.
Origins and Foreign Jurisprudence
The legal position up until the last decade had always held a high regard for formal consent, thereby completely eliminating the scope for binding non-parties to an arbitration agreement. On 28th September 2012 however, a Single Judge Bench of the Supreme Court of India in the Chloro Controls Case maidenly recognised the group of companies doctrine, holding that such an approach is necessitated in view of the signatory’s legal relationship with the non-party, and the latter’s involvement in performance of contractual obligations. The Supreme Court has upheld this doctrine ever since, such as in the case of Cheran Properties, whilst relying upon ‘common intent’ within circumstances suggesting that the non-signatory intended to be bound.
The reception of this doctrine within the international context has not been consistently favourable to the ratio derived in Cox and Kings. While the French arbitration jurisprudence enthusiastically embraces this doctrine, the position in UK, Switzerland and Singapore has instead held otherwise. English arbitration law outrightly rejects the doctrine, as categorically held in Peterson Farms Inc. v. C & M Farming, whereby party autonomy took precedence over commercial considerations. Singapore and Swiss Jurisprudence in similar vein, have held that corporations even when part of the same group are distinct legal entities and thus, cannot reverse the core presumption i.e., only parties entering into agreements shall be bound by them.
Intent, Personality and Implications
Section 7 of the Arbitration and Conciliation Act, 1996 mandates agreements to be in writing, and hence implied consent of the non-signatory is not justiciable for establishing an agreement to arbitrate. Additionally, Article II of the New York Convention mandates parties to actually “sign” the arbitration agreements in order to be bound by them. The very factum that a party not being a signatory to such an agreement, is evidence of their intention to not be bound by the same. In Chloro Controls, the Court relied upon subsequent agreements to determine mutual intention of parties, overlooking the rule that such intention should be decided at the time of entering such agreement. Additionally, the Supreme Court fails to consider that commercial contracts arise out of negotiations whereby parties thoroughly contemplate upon the same. Attributing intentions to parties that run counter to the expressly stated terms of the agreement, thwart the intended purpose of parties memorializing their mutual understanding vide such contracts.
The group of companies doctrine departs from established legal norms in favour of mere simplified economic considerations. Scholars agree that this approach is nothing but “a shortcut to avoid legal reasoning”, and substantiating intent in this manner, holds no basis within principles of contract or commercial law. The separate legal persona of a company hasalways been a core tenet of corporate law since the past century, as recognized in the case of Salomon. Moreover, entities within a group possess distinct legal identities, a fundamental which shall not be overlooked, except in the rare circumstances of fraud. Such differentiation has always been necessitated, and cannot be easily diminished for the sake of economic expediency. The Cox and Kings ruling hence, rightfully struck down the justification of‘single economic unit’ to be the sole factor whilst applying this doctrine, thereby overruling the ratio in Chloro Controls.
The Supreme Court has clarified that the application of the doctrine shall be inherently grounded within factual considerations. The ‘fact-based doctrine’ intends to attain a nuanced understanding of the practical intricacies within modern commercial relationships, which in turn acts as a safeguard from its abuse. However, Justice Narasimha’s separate opinion to fortify the doctrine within the statutory framework raises concerns over a balanced and judicial application of this principle, leaving room for further ambiguities and unintended consequences.
Conclusion
Cox and Kings essentially prompts a critical examination of the group of companies doctrine. While vaguely acknowledging its utility, the verdict’s departure from core arbitration principles warrants careful reconsideration. The doctrine flagrantly disregards party autonomy while binding a non-signatory to the arbitration agreement. The underlying tenet of arbitration has always been mutual consent, falling well within the ambit of private law, as a matter of choice and intent of the parties. ‘Economic convenience’, and ‘commercial realities’ are not sufficient grounds, to enforce arbitration agreement upon non-signatories. Only the passage of time will unveil whether upholding such doctrine reflects positively upon the ADR framework. Yet presently, the Supreme Court’s ‘commercial reality’, is of one that blatantly deviates from the core fundamentals of arbitration law.
Author’s bio:
Bharat Manwani is a fourth year student at Gujarat National Law University, pursuing BBA LLB (Hons).
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