Exploring Cox & Kings v SAP: Group of Companies Doctrine

The five judge Bench's decision of the Supreme Court of India in Cox & Kings v. SAP 2023 INSC 1051 on the group of companies doctrine has been in the news since the decision was anncounced on 06.12.2023. Numerous articles/ posts have been written on it and we are not going to add one more to the list of such writings. Those who are yet to read the decision but do not have time can go to the end of this post, which quotes Para 165 of the decision, which summarises it. We highlight certain interesting things about the decision and the doctrine in this post.

Non-Signatory Should Have Intended to be Bound by the Arbitration Agreement

The judgment takes specific note of the French position, as summarised in ICC award in case No. 11405 of 2001 that it it must be shown that not only the party which seeks to make a non-signatory a party to the arbitration (or extend the arbitration agreement to such non-signatory) intended to extend the agreement to non-signatory; the non-signatory (as well as the signatory) intended to be bound by the arbitration clause. The portion of the ICC award which states so has been quoted by the Supreme Court and the quotation is reproduced below:

“[t]here is no general rule, in French international arbitration law, that would provide that non-signatory parties members of a same group of companies would be bound by an arbitration clause, whether always or in determined circumstances. What is relevant is whether all parties intended non-signatory parties to be bound by the arbitration clause. Not only the signatory parties, but also the non signatory parties should have intended (or led the other parties to reasonably believe that they intended) to be bound by the arbitration clause.” (emphasis added)

The Swiss approach, analysed by the Supreme Court, also calls for "valid manifestation of consent of the non-signatory party to the arbitration agreement." (Para 47).

The Court's analysis of the English position is interesting because it appears that English law favours the Chloro Controls' approach of extending the Group of Companies doctrine owing to the definition of "party" which also includes "claiming through or under". This approach has been rejected by the Supreme Court in Cox & Kings. And so this is a clear departure from English law. At the same time, while discussing Dallah Real Estate, the SCI quoted the following phrase of that judgment:  “common intention of the parties means their subjective intention derived from the objective evidence.” How is this approach different from the French and the Swiss approach?  

How to Establish Extension to Non-Signatory?

After discussing the French arbitration jurisprudence on the issue, the Supreme Court summarised the position by stating: "The subjective intention of the parties is to be inferred on the basis of their objective conduct during the negotiation, performance, and termination of the underlying contract containing the arbitration agreement." (Para 45).

The subjective intention is that all parties, including the non-signatory, should have intended or led other parties to believe they intended to be bound by the arbitration agreement. This subjective aspect could be established through objective conduct of the parties during negotiation, performance and termination of the contract containing the arbitration clause. 

The Swiss approach as analysed by the Supreme Court seems somewhat similar: "the subjective element of willingness to be bound by an arbitration agreement ought to be expressed through an objective element in the form of negotiation or performance of the contract."

So, the application for extending the arbitration agreement to non-signatory, in whichever stage of proceedings as may be moved, should specifically deal with these aspects- what was the conduct of the non-signatory during the process of negotiation, performance and termination of the contract?

The Supreme Court ultimately favoured the criteria in the Discovery Enterprises judgment (Para 110), where it was stated:

“40. In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors:

i) The mutual intent of the parties; 

(ii) The relationship of a non-signatory to a party which is a signatory to the agreement; 

(iii) The commonality of the subject-matter; 

(iv) The composite nature of the transactions; and 

(v) The performance of the contract.”

Young practitioners and law students may note that your application should contain specific averments on each of these aspects. Although this criteria seems general, the Supreme Court gave further clarity: "In other words, the group of companies doctrine is a means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement." (Para 111). So, while drafting the application, there must be averments which point out that the mutual intention of the signatory and its non-signatory party was to be bound by the arbitration agreement. This is the baseline and the burden is on the applicant who seeks to make the non-signatory be bound by the arbitration agreement (Para 111).

Note that mere commercial relationship between a party and the non-signatory affiliate that is a part of its group is not sufficient (Para 113). Likewise, liability cannot be imposed on a group company merely because it is a part of the party's group (Para 113), tight or otherwise. 

Implied or tacit consent by the non-signatory group company will alone get the applicant to the finish line (Para 114). The SCI clarified while referring to the Canara Bank decision:

"In Canara Bank (supra), this Court did not apply the group of companies doctrine solely on the basis that the companies belonged to a single economic unit. Rather, it was held that there was an implied or tacit consent by the non-signatory party (CANFINA) to being impleaded in the arbitral proceedings." 

To Whom Should the Application be Made?

Para 165(l) of the judgment notes: "At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement;". This entails that a court hearing an application under Section 11 would, if the question is raised, let the tribunal decide it (provided other conditions for appointing the arbitrator are fulfilled). So, should the plea for including the non-signatory be raised at that time?

On the one hand, it would be a waste to raise it before the court u/s 11 because the court would, in any case, let the tribunal decide. But it is possible that the tribunal could (although it shouldn't) state that it was not raised in Section 11 proceedings and that the appointment was only in respect of the dispute and the parties, as appointed by the Supreme Court. Therefore, it would be a prudent to include the non-signatory and the relevant pleadings on extending the agreement to non-signatory at the Section 11 stage itself and state in the application referring to this judgment that the question should be decided by the arbitrator, if the respondents objected to it.    

Lack of Uniformity on Group of Companies Doctrine

The judgment highlights the difference in approaches in jurisdictions on the applicability of the Group of Companies doctrine. Singapore, it appears, does not recognise this doctrine (para 54). France and Switzerland recognise it through objective tests. English law recognises it because "party" includes those claiming under such party.  US employs non-consensual tests, such as alter ego, piercing the corporate veil, arbitral estoppel, etc. to extend the arbitration agreement to non-signatories. This, then is a ripe area for harmonisation. Shouldn't the UNCITRAL be working on this?   

Summary of the SC Decision in Cox & Kings: Para 165

"165. In view of the discussion above, we arrive at the following conclusions: 

a. The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties; 

b. Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement; 

c. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties; 

d. Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement; 

e. The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non signatory party to the arbitration agreement; 

f. The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine; 

g. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act; 

h. To apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine; i. The persons “claiming through or under” can only assert a right in a derivative capacity; 

j. The approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law; 

k. The group of companies doctrine should 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; 

l. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and 

m. In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement."

Should Nuclear Fusion Reactors be a part of Nuclear Fission Reactor Regulatory Regime?

Nuclear energy generators and suppliers using the plank of climate change to promote nuclear energy as the solution and economies okaying such an approach. It looks like nuclear energy is here to stay and possible contribute significantly to the energy share of many countries. Given this fillip to nuclear energy, there is also bound to be increasing technological solutions in the sector. Two of them are noteworthy: one is the small and modular reactors which allow nuclear energy generation through smaller nuclear plants. Thes operate in a relatively smaller scale than conventional nuclear plants.

The other technological development in nuclear energy sector is fusion reactors. The core idea is that unlike in nuclear fission, where atom is split, in fusion, atoms are fused together. Both these processes release considerable energy. But with fusion, there seems to be a distinct advantage: it does not produce nuclear wastes like fission does. This is extremely important becuase one of the signficant problems with fission reactors is harmful radioactive waste and its disposal. The advantage of fusion reactors vis-a-vis fission and coal energy, as noted by the International Atomic Energy Agency, is stated below: 

"Fusion could generate four times more energy per kilogram of fuel than fission (used in nuclear power plants) and nearly four million times more energy than burning oil or coal."

It appears that in fusion reactors, the chances of major industrial accidents are also minimal, as the IAEA notes. 

Given these considerations several jurisdictions are adopting regulatory measures that are more liberalised as compared to the regulation of fission reactors, as this Financial Times article notes. For instance, in USA, the Nuclear Regulatory Commission opted for a less onerous regime for regulating fusion reactors. Details of key consdierations for NRC to opt for the less burdensome regime can be accessed from here. 

However, it appears that it might take at a decade or two for fusion reactors to be used in an industrial scale like fission reactors.

The FT articles notes that developments in UK on this: it appears that UK might opt for regulation of fusion industry not by the nuclear energy regulator but by the Environment regulator! To provide clarity of the regulatory regime, the (UK) Energy Act, 2023 notes that the the Nuclear Installations Act 1965 would not apply to fusion reactors. Section 156 of the said law covers these aspects.

Earlier, in 2021, the European Union published a study on the regulation of fusion energy, which also proposed a separate regulatory regime for nuclear fusion.

It would be interesting to see how India plans to regulate nuclear fusion.

Commercial Reservation of New York Convention in India & Latest Developments in India's International Investment Treaty Practice

India was one of the founding signatories to the New York Convention, 1958, formally known as the Convention on Recognition & Enforcement of Foreign Arbitral Awards, 1958. The commercial reservation meant that the New York Convention insofar as applicable to India was only in respect of international commercial arbitration and not international investment arbitration.

This position was reiterated in Union of India vs. Vodafone Group Plc United Kingdom and Ors. (07.05.2018 - DELHC) : MANU/DE/1673/2018, where the Delhi High Court held:

"89. Also, though the BIPA constitutes an arbitration agreement between a private investor on the one side and the host State on the other, yet it is neither an International Commercial Arbitration governed by the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "Act, 1996") nor a domestic arbitration.

90. The Act, 1996 including Sections 5 and 45 thereof, do not apply proprio vigore to a BIPA..." 

BIPA referenced here was the UK Bilateral Investment Protection Agreement.

There have been numerous papers, etc. written on the lack of enforcement mechanisms of BIT awards in India. The Model BIT addresses this issue by holding:

"27.5 A claim that is submitted to arbitration under this Article shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention."

This provision has now found its place in various BITs signed since 2015-2016. For instance, the Belarus India BIT, 2018 states:

"27.5 A claim that is submitted to arbitration under this Chapter shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention."

Note that this BIT has been signed and is in force as well.

Similar provision exists in Article 27.5 of the India Kyrgyzstan BIT (2019) too, although it does not find any place in the Brazil India BIT, 2020 most likely because the Brazil India BIT does not provide for Investor-State Disputes. 

Thus, it appears that India has now sought to address the problem of enforceability of the BIT awards through recognition that BITs are "commercial" transactions for the purpose of the New York Convention, thereby retaining the Commercial Reservation but also by providing that BIT awards would be enforceable under Part II of the Arbitration and Conciliation Act, 1996, which deals with enforcement of foreign awards.

Climate Change, the Nuclear Turn & Legal Education in India

 In a surprising development post-Fukushima, the world has shunned its anti-nuclear energy image and has sought to encourage efforts at increase the share of nuclear power, in the background of mounting pressure to acheive Net Zero by 2050.

The COP (the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) (COP) saw significant calls for substantially increasing nuclear power, especially from nuclear energy generators and the International Atomic Energy Agency, which stated in COP28:

"Studies confirm that the goal of global net zero carbon emissions can only be reached by 2050 with swift, sustained and significant investment in nuclear energy. The International Atomic Energy Agency (IAEA) and the Intergovernmental Panel on Climate Change see nuclear as important part of the solution to climate change and energy insecurity."

While there are several countries such as Germany, Australia, Austria, Denmark, New Zealand, Norway, etc., that are markedly anti-nuclear, many other major countries such as India, China, USA, France, Russia, South Korea, Canada, etc. which produce nuclear power and many of them are establishing new nuclear plants. 

The idea of Small Modular Reactors has also emerged throughout the world. 

Considering these developments, it would be important for Indian legal education to undertake the following:

• Commence legal education in nuclear energy law, both domestic and international;
• Organise awareness programmes, conferences and credit courses on nuclear energy law;
• Devote specific journal issues on nuclear energy law.
• Devote signifcant resources for cutting edge research in nuclear energy law.

There are many areas of law that are required to be explored vis-a-vis nuclear energy. These include climate change law, environmental law, contract law, insurance law, taxation, etc. Law and other Universities need to take up this issue in a major way.