The not-so-long arm of the law The Supreme Court of India recommends a reconsideration

Synopsis

The Supreme Court of India in Cox and Kings Limited v. SAP India Private Limited & SAP SE GmBH has called into question the validity of the ‘Group of Companies’ doctrine which is invoked to seek joinder of non-signatories to arbitration proceedings.

Analyzing its precedents, the Court enumerated various anomalies that have emerged in the Indian context and has referred the matter to a larger bench of the Court to examine whether the Group of Companies doctrine falls foul of the principles of party autonomy under arbitration law and corporate personality in company law.

The anticipated judgement of the larger bench of the Supreme Court on the scope and validity of the Doctrine will have implications for corporate groups in multi-party multi-contract scenarios governed by Indian law where one entity signs the contract but another entity assumes legal or factual responsibility for executing it and investors utilizing foreign parent companies and operating through local Indian subsidiaries who may find themselves embroiled in arbitration proceedings that they are not a signatory to on account of being part of the same group as the Indian signatory company.

Article

The Supreme Court of India in Cox and Kings Limited v. SAP India Private Limited & SAP SE GmBH¹ has referred to a larger bench the validity of the ‘Group of Companies’ doctrine (the Doctrine) which is invoked as a basis to seek the joinder of non-signatories to the arbitration agreement, to the arbitration proceedings.

Relying on the Doctrine, the Petitioner, a company incorporated in India, sought joinder of the Second Respondent, the foreign parent of the First Respondent and a non-signatory to the arbitration agreement, to arbitration proceedings initiated by the Petitioner. The Second Respondent resisted its joinder on grounds of being a non-signatory to the arbitration agreement and having a separate legal personality from the First Respondent.

Analyzing its precedents, the Court enumerated various anomalies that have emerged in the Indian context regarding the underlying basis for the Doctrine:

• the joinder of non-signatories premised upon the subjective intention of the parties to be bound by an arbitration agreement when the parties have clearly not been signatories to the agreement runs counter to the principle of party autonomy in arbitration law;
• the joinder of non-signatories based on the notion of the companies forming a ‘single economic unit’ seems to be premised on economic efficiency and convenience and ignores the principle of separate legal entity in company law; and
•  the statutory phrase, “claiming through or under” as provided in Section 8, Section 35 and Section 45 of the Arbitration and Conciliation Act 1996 may also not be a legitimate basis for reading the Doctrine into Indian law as it runs counter to the rationale of joining non-signatories as ‘parties in their own right’.

The Court also observed that beyond French Courts and ICC jurisprudence, the Doctrine has received a mixed international reception as courts in England² and Singapore³ have expressly rejected the Doctrine.

In the circumstances, the Court concluded that the Doctrine must be reconsidered by a larger bench of the Supreme Court.

Comment

The anticipated judgement of the larger bench of the Supreme Court on the scope and validity of the Doctrine will have implications for:

• corporate groups in multi-party multi-contract scenarios governed by Indian law where one entity signs the contract but another entity assumes legal or factual responsibility for executing it; and
• investors utilizing foreign parent companies and operating through local Indian subsidiaries who may find themselves embroiled in arbitration proceedings that they are not a signatory to on account of being part of the same group as the Indian signatory company.

Pending clarification of the issue, parties can mitigate any unintended consequences of the Doctrine by tailoring the contractual language to clarify the parties’ intent regarding the signatories and beneficiaries under the contract.

Watch this space for further updates.