Abstract
The principle of privity of contract states that a third party, not initially part of the contract, cannot receive the benefits or assume the liabilities arising from that contract.. In this context, it can also be said that the non-signatories. Another corporate law doctrine, which is known as the doctrine of alter ego, states that if the manager, directors, shareholders or any other person does an act for a wrongful gain for their interest, then the court may then pierce the corporate veil to hold the individual personally liable. In the case Cox and Kings v. SAP India Pvt. Ltd and Anr, the Supreme Court is determining the validity of the Group of Companies doctrine, which would bind a non-signatory to an arbitration agreement and not hamper the legal entities of the company, which is thereby going against the previously mentioned doctrines. Chloro Controls India Pvt Ltd v. Severn Trent Water Purification Inc., which held the group of companies doctrine invalid which was overturned in this case. In this case, the judges analyse the doctrine and whether it can be inculcated within the Arbitration and Conciliation Act 1996. The judgment also analysed the importance of consent and mutual intention for the doctrine to be applied and its validity across the world. The bench, also by analysing the jurisprudence behind an arbitration agreement, proves the validity of the doctrine. This paper further analyses the doctrine through the case and its implications and the effect of the judgment.
Keyword: Group of companies doctrine, Cox and Kings v. SAP India Pvt. Ltd and Anr, Arbitration and Conciliation Act 1996.
INTRODUCTION
The Group of Companies' doctrine in the case of arbitration has always been contended. This principle states that an arbitration agreement entered into by a company within a group may extend its binding effect to non-signatory entities. The establishment of this doctrine can be traced back to the decisions rendered by International Chambers of Commerce arbitration tribunals, notably in the case of Dow Controls v. Isover Saint Gobain, and also finds recognition in the jurisprudence of French courts. It departs from the traditional understanding of contract law based on the doctrine of privity, wherein enforcement of contractual obligations is limited to parties explicitly involved in the agreement.
Contrary to the traditional view, the validity of this doctrine has been scrutinized in a series of cases. The seminal case challenging this doctrine was Chloro Controls India Pvt Ltd v. Severn Trent Water Purification Inc, which held that the group of companies doctrine is inherently invalid.
ANALYSIS
The facts of the case were that the petitioner, Cox and Kings, agreed with respondent no. 1, SAP India Pvt Ltd, for the provision of ERP software. Subsequently, respondent no. 1 recommended the Hybris Solution, involving respondent no. 2, for the petitioner's e-commerce platform. This arrangement encompassed three distinct agreements: the license agreement, the General Terms and Conditions agreement (GTC), and the customization agreement. Issues arose during the implementation of these agreements, prompting the petitioner to seek contract revocation and compensation. Respondent no. 1, however, invoked the arbitration agreement, excluding respondent no. 2.
In response, the petitioner sought to include respondent no. 2 in the arbitration proceedings, contending that the agreements formed a composite transaction. However, the arbitration proceedings were adjourned because of the Corporate Insolvency Resolution Process. Subsequently, the petitioner initiated another arbitration proceeding, this time including respondent no. 2 as a party. Simultaneously, an application was filed before the Supreme Court seeking the establishment of an arbitral tribunal. The 3-judge bench, while looking into the application, also aimed at analysing the group of companies' doctrine and was later referred to the five judges.
The judgment initially delves into the legal standing of the doctrine across various jurisdictions. The presiding judges, in their scrutiny of the evolution of the doctrine in India, demarcate its progression into pre and post the Chloro Controls case.
THE CHLORO CONTROLS CASE
Preceding the Chloro Controls case, the court construed the involvement of parties strictly within the confines of signatories, establishing the following precepts:
Arbitration could be invoked solely when a signatory harbors a dispute against another signatory.
The court adopted a stringent interpretation of the provisions laid out in the Arbitration Act.
The inclusion of a non-signatory in the proceedings necessitated explicit consent.
The pivotal Chloro Controls case marked a paradigm shift, as the court affirmed the applicability of the group of companies. This application, however, was contingent upon the existence of an intention at the time of agreeing, to bind non-signatories. The court expounded on section 45 of the Act, asserting that the term "any parties" within its purview reflected legislative intent to encompass entities beyond the signatories. Notably, non-signatories could partake in the proceedings only in the capacity of being "through or under the party." Furthermore, the court acknowledged that, in exceptional circumstances, some non-signatories could be included in the proceedings without prior consent.
After the Chloro Controls case, the law commission recommended amendments to the Arbitration Act. It recommended that the words 'claiming through or under' in sec 45 be absent in sec 8. Thus, the words were added to the definition of 'party.' Later, sec 8 was amended to make it in line with section 45. Post Chloro Controls era noted the landmark judgment of Cheran properties v. Kasturi and Sons Ltd, which, though it did not talk about the doctrine, did hold that an arbitration award can be binding on the non-signatory. Further, the court cited judgments where the Chloro Controls case was used as a precedent to hold the doctrine valid.
One of the important judgments analysed through the judgment was the Dow Controls v. Isover Saint-Gobaincase, where the doctrine was introduced by the French courts not solely on the basis of being a single unit but also on the basis of participation in the agreement.
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