Group of Companies Doctrine must be Applied with Caution and Mere Fact that a Non signatory is a Member of a Group of Affiliated Companies will not be Sufficient to Claim Extension of the Arbitration Agreement to the Non signatory: Supreme Court 

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The Supreme Court ruled that the Group of Companies Doctrine must be applied with caution and the mere fact that a non-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the Non signatory. 

Background 

On 14.12.2010, the Applicant and Respondent entered into an SAP Software End User License Agreement and SAP Enterprise Support Schedule under which the Applicant was made a licensee of certain ERP software developed and owned by the Respondents. This is an overall licensing agreement that all customers of the Respondents have to enter into compulsorily in advance in order to utilize any software of the Respondents. In 2015, while the Applicant was developing its own e­commerce platform, the Respondents approached the Applicant and recommended their Hybris Solution as it would be 90% compatible with the Applicant’s software. The Respondents indicated that the remaining 10% customisation would take only 10 months, a much shorter solution than the Applicant developing the software itself. 

Arguments 

Senior Advocate Kailash Vasdev, appearing on behalf of the Applicant, contended that since the software is licensed by Respondent to another Respondent, the customisation would not be possible without the aid of the another Respondent. Therefore, all the four agreements together form a composite agreement and are a part of a single, interlinked transaction by both Respondents. Considering the limited scope under Section 11 of the Arbitration Act, the intervention of the Court should be as minimal as the Court is only required to examine the existence of the arbitration agreement.

Senior Advocate Ritin Rai, appearing on behalf of the Respondent contended that the Applicant has suppressed material facts regarding its previous attempts to resist the constitution of an Arbitral Tribunal. It ought to be noted that when Respondent had earlier invoked Clause 15.7 of the GTC, it was the Applicant who had challenged the same for being void ab initio. Now, the Applicant himself is invoking the same provision seeking the appointment of an Arbitrator. 

Decision 

The division bench of the Chief Justice of India N. V. Ramana and Justice A.S. Bopanna said that the Court did not have an occasion to explore the jurisprudential basis of group of companies doctrine and required ingredients to refer a “Non signatory” to arbitration. Especially, the scope of judicial reference at the stage of Sections 8 and 11 of the Arbitration Act, needs to be relooked considering the ambit of unamended Section 2(1)(h) of the Arbitration Act.

The court stated that an arbitration agreement may be binding on parties, whether signatories or nonsignatories, provided there is sufficient legal basis to bind them. Most legal bases for binding nonsignatories to an arbitration agreement are of contractual origin, like agency, etc. Jurisprudence has shown that arbitration being a creature of contract, does not sit very well in binding nonsignatories.

The court further stated that the group of companies doctrine must be applied with caution and the mere fact that a nonsignatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the nonsignatory.

The court felt it appropriate to refer the aspect of interpretation of ‘claiming through or under’ as occurring in amended Section 8 of the Arbitration Act qua the doctrine of group of companies to a larger Bench to provide clarity on this aspect.

The Bench doubted the correctness of the law laid down in Chloro Control and cases following it.

Case title: Cox and Kings Limited v/s SAP India Private Limited & Another

Citation: Arbitration Petition (civil) no. 38 of 2020

Click here to  read the Order/Judgment 

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