Supreme Court of India: Invocation of Second Arbitration Against a Non-Signatory
In Cox & Kings Ltd. v SAP India Pvt. Ltd.2024 INSC 670, the Supreme Court reiterated the position of law on the scope of court interference while deciding an application seeking appointment of arbitrator especially when the arbitration is sought to be invoked against a non-signatory. However, this case is peculiar because in this case, an arbitration was already into existence between the parties which was halted by NCLT due to admission of one of the parties to insolvency and later, the party which went to insolvency invoked second arbitration against the opposite party while adding its parent foreign entity into it. Thus, this case was peculiar as the Court was to inter alia take into account as to whether the first arbitration the first arbitration would serve as res judicata on the second proposed arbitration and who will decide the issue of impleadment of new foreign parent entity into the second arbitration.
Factual Matrix
Cox & Kings Ltd. (‘Cox’) is into a business of providing hospitality and tourism services whereas SAP India Pvt. Ltd. (‘SAP India’) is into providing business software solutions. SAP India is a wholly owned subsidiary of SAP SE GMBH (Germany) (‘SAP Germany’). Cox and SAP India entered into a License Agreement whereby Cox licensed from SAP India certain software developed and owned by SAP India. The Agreement had three phases namely, first the Software Order Form, second the Services General Terms and Conditions containing implementation of software and Service & Support Agreement. It is pertinent to mention that before signing of this Software License Agreement, the parties had entered into another License Agreement and according to Cox the three phases of the present License Agreement were ancillary to the earlier License Agreement.
Clause 15.7 of the Services General Terms & Conditions Agreement contained a dispute resolution clause wherein any disputes between the parties were agreed to be resolved by an ad hoc arbitration seated in Mumbai by a three-member tribunal. Disputes arose between the parties arising out of Software License Agreement. However, when the issues were not addressed by SAP India, Cox approached SAP Germany who in turn assured Cox that the issues related with the Service Agreement will be resolved shortly.
Despite such assurances, the issues never resolved and Cox terminated the License Service Agreement. Later, SAP India invoked arbitration under Clause 15.7 of the Services General Terms & Conditions Agreement for alleged wrongful termination of the License Service Agreement. Cox didn’t appoint its arbitrator and therefore SAP India filed an application under Section 11(6) of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’) seeking appointment of arbitrator by the Court. Ultimately, the Tribunal was constituted by the Court and both parties filed their claims / counterclaims before it.
However, subsequently, an insolvency petition against Cox was admitted before the National Company Law Tribunal Mumbai (‘NCLT’) under the Insolvency & Bankruptcy Code, 2016 (‘IBC’). This led to imposition of moratorium against institution and continuation of any court proceedings against Cox including arbitration. Resultantly, the NCLT adjourned this arbitration sine die due to initiation of Cox’s insolvency. Meanwhile, Cox took a u-turn and served a fresh notice of arbitration to SAP India for their disputes under the License Service Agreement. This time, Cox arrayed SAP Germany as a party to this arbitration. This was based on the belief of Cox that all phases of the Service License Agreement were collectively part of a composite transaction wherein both parent and subsidiary entities of SAP were involved and therefore, applying Group of Companies doctrine, SAP Germany can be made party to this arbitration. As obvious, SAP entities didn’t nominate their arbitrator which led to Cox filing an application under Section 11(6) of Arbitration Act before the Supreme Court of India which is decided in the present case.
Parties Contentions
In addition to its argument of composite transaction, Cox also submitted that execution of the License Service Agreement was not possible without the aid and support of SAP Germany and therefore, there existed a direct relationship between Cox and SAP Germany. It further justified adding SAP Germany into the proceedings, by citing that SAP Germany itself had given assurance about the implementation of License Service Agreement by SAP India. Further, as per Cox, SAP Germany has undertaken liabilities and obligations for the acts and omissions of SAP India under the License Service Agreement and therefore, SAP Germany can be validly made party to its arbitration. In any case, Cox contended that at the stage of appointment of arbitrator, the Court is only required to see whether there exists a valid arbitration agreement between the parties, nothing more, nothing less which threshold according to Cox is duly met in the present case. The question of whether SAP Germany being non-signatory can be dragged to this arbitration is question that can be dealt with by the arbitral tribunal.
In response, SAP entities argued that the disputes between the parties are already pending before another arbitral tribunal which was duly constituted by court but was adjourned by the NCLT due to initiation of insolvency of Cox. As per SAP entities, if the application of Cox for appointment of another arbitrator is allowed, it may lead to parallel proceedings and conflicting judgments. It was also the case of Cox, that the principles of res sub-judice and res judicata would be attracted to the second arbitration proceedings. On the issue of whether arbitration can be invoked against SAP Germany, SAP entities contended that SAP Germany has neither impliedly nor explicitly consented to the arbitration agreement and therefore, it cannot be made party to this second arbitration. Lastly, SAP entities argued that the disputes between the parties are beyond Clause 15.7 of the Services General Terms & Conditions Agreement since as per SAP entities, each agreement was a separate contract and the disputes between the parties is not covered by Clause 15.7 of the Services General Terms & Conditions Agreement.
The UNCITRAL National Coordination Committee for India had also intervened in these proceedings and made two submissions. Firstly, as per the Committee, the formal requirements of a valid arbitration agreement as per the amendment brought in the UNCITRAL Model law provides two options to the member states – first where the writing requirements of an arbitration agreement is a must and second where the validity of an arbitration agreement is not purely dependent on it being in writing and it can deemed to be existence if it is a valid contract as per the applicable contract law of the jurisdiction. As per the Committee, Section 7 of the Indian Arbitration Act is closer to first option.
Secondly, as per Committee, at the referral stage (when the Court is to decide whether the dispute should be referred to arbitration or not), the Court is not bound to go into the merits of the case to decide if the non-signatory is bound by the arbitration agreement. On the contrary, the referral court should leave it to the arbitral tribunal to decide such an issue.
Position of Law
The position of law as to the jurisdiction of a Court at the referral stage is authoritatively settled by the Supreme Court of India in catena of cases as under:-
• The jurisdiction of the Court under Section 11(6) of the Arbitration Act is limited to examining whether an arbitration agreement exists between the parties — “nothing more, nothing less. (Duro Felguera, S.A. v. Gangavaram Port Ltd. [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729, Lombardi Engg. Ltd. v. Uttarakhand Jal Vidyut Nigam Ltd. 2023 INSC 976 )
• Although Sections 8 and 11 of the Arbitration Act allow Courts to refer parties to arbitration or appoint arbitrators, Section 5 limits the Courts from dealing with substantive objections pertaining to the existence and validity of arbitration agreements at the referral or appointment stage. A Referral Court at Section 8 or Section 11 stage can only enter into a prima facie determination. The legislative mandate of prima facie determination ensures that the Referral Courts do not trammel the Arbitral Tribunal’s authority to rule on its own jurisdiction. (In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899 2023 INSC 1066)
• The arbitral tribunal is the preferred first authority to look into the questions of arbitrability and jurisdiction, and the courts at the referral stage should not venture into contested questions involving complex facts. (SBI General Insurance Co. Ltd. v. Krish Spinning 2024 INSC 532)
• In case of joinder of non-signatory parties to an arbitration agreement, the following two scenarios will prominently emerge:
• First, where a signatory party to an arbitration agreement seeks joinder of a non-signatory party to the arbitration agreement; and
• Second, where a non-signatory party itself seeks invocation of an arbitration agreement.
• In both the scenarios, the referral court will be required to prima facie rule on the existence of the arbitration agreement and whether the non-signatory is a veritable party to the arbitration agreement. In view of the complexity of such a determination, the referral court should leave it for the Arbitral Tribunal to decide whether the non-signatory party is indeed a party to the arbitration agreement on the basis of the factual evidence and application of legal doctrine. The Tribunal can delve into the factual, circumstantial, and legal aspects of the matter to decide whether its jurisdiction extends to the non-signatory party.(In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Stamp Act, 1899 2023 INSC 1066)
Held
After applying the above position of law on the facts of the case, the Supreme Court held as under:-
• SAP entities albeit raised number of objections against invocation of arbitration, they have not denied the existence of the arbitration agreement under which the arbitration has been invoked by Cox. Therefore, the requirement of prima facie existence of an arbitration agreement is satisfied.
• Once the arbitral tribunal is constituted, it shall be open for SAP entities to raise all the available objections in law, and it is only after (and if) the preliminary objections are considered and rejected by the tribunal that it shall proceed to adjudicate the claims of Cox.
• On the issue of impleadment of SAP Germany, a non-signatory in the present arbitration, in view of the complexity involved in the determination of the question, it would be appropriate for the arbitral tribunal to take a call on the question after taking into consideration the evidence adduced before it by the parties and the application of the legal doctrine as elaborated in the decision in Cox and Kings (supra).
In view thereof, the Court allowed Cox’s application and appointed the arbitrator.
Comment
This case reiterates that even though the requirement to invoke arbitration under Section 7 of the Indian Arbitration Act is existence of a valid arbitration agreement, the Court will only consider the ‘existence’ of arbitration agreement at the referral stage while leaving the determination of validity of arbitration agreement to the arbitrator to decide as it will involve appreciation of detailed arguments and evidence.
However, a closer reading of this case may reflect that this may lead to conflicts of forums. In the facts of this case, the first arbitration invoked by SAP India was adjourned sine die by the NCLT due to admission of Cox into insolvency. However, later, Cox took the permission from NCLT to start a fresh arbitration against SAP entities and this time made SAP Germany a party to the second arbitration. The question thus arises that can a corporate debtor which is admitted to insolvency take shield of moratorium under IBC in an arbitration against it while in the similar breath invoke a fresh arbitration as a claimant against the same entity (with of course an additional entity). In such a scenario, can a corporate debtor be allowed to better its case.
Next question that attains relevance is what will happen to the first arbitration. The only difference which appears to be there in the two arbitrations was the impleadment of SAP Germany in the second arbitration. Surprisingly, the first arbitration was also referred by court (which was even upheld by the Supreme Court). Then, the question that merits consideration is why can’t the issue of impleadment of SAP Germany be decided in the firstly invoked arbitration. In a way this may multiply litigation because SAP India may now apply to NCLT to withdraw the adjournment of its first arbitration and in case it is not allowed may appeal it again till the Supreme Court.
This could have been resolved if the Court may have addressed the issue of whether or not the invocation of second arbitration was hit by res judicata because as per settled position of law, the court at referral stage is also required “to protect parties from being forced to arbitrate when the matter is demonstrably “non- arbitrable” and to cut off the deadwood.” (Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1). The second tribunal may get prejudiced while deciding the question of whether or not the second arbitration was hit by res judicata considering the fact that the Supreme Court has in a way upheld the invocation of second arbitration.
Lastly, in case the impleadment of Pan Germany is allowed by the arbitrator, the present arbitration will then become an ‘international commercial arbitration’ or will it continue to be treated as ‘domestic arbitration’. This is so because Pan Germany is a foreign entity and addition to the arbitration may make it an international commercial arbitration which in turn may complicate the issues since certain provisions of the Indian Arbitration Act apply differently to an international commercial arbitration.