38.6c New Delhi, India, Wednesday, September 28, 2022
Top Stories
Interviews Know The Law Book Reviews Videos
About Us Contact Us
Judiciary

A Non-Signatory Can Be Bound By Arbitration Agreement On The Basis Of “Group Of Companies” Doctrine: SC [Read Judgment]

By Lawstreet News Network      Aug 09, 2019      0 Comments      1,946 Views
A Non-Signatory Can Be Bound By Arbitration Agreement On The Basis Of “Group Of Companies” Doctrine: SC [Read Judgment]

The Supreme Court on August 8, 2019, in the case of Mahanagar Telephone Nigam Ltd. v. Canara Bank & Ors., held that a non-signatory can be bound by an arbitration agreement on the basis of the “Group of Companies” doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties.

The judgment was passed by a Bench comprising of JusticesA.M. Sapre and Indu Malhotra.

Facts

In 1992, MTNL floated 17% Non-Cumulative Secured Redeemable Bonds described as the VI Series (Private Placement) worth Rs. 425 crores. MTNL placed bonds worth Rs. 200 crores with Can Bank Financial Services Ltd. (CANFINA) under an MOU agreement. CANFINA was a wholly-owned subsidiary of Canara Bank.

Soon after the bonds were subscribed, there was an outbreak of a security scam which led to a collapse of the secondary market in shares, security, and bonds. There were very few buyers in the secondary market. Even such buyers were offering very low prices for these bonds. In these circumstances, CANFINA was faced with a severe liquidity crunch. In these circumstances, Respondent No. 1, Canara Bank purchased the Bonds issued by MTNL, of the face value of Rs. 80 crores, from Respondent No. 2, CANFINA.

Canara Bank requested for registration of these Bonds with MTNL, and lodged letters of allotment for purchase of the bonds from CANFINA.

MTNL refused to transfer the Bonds, on the various grounds and informed Canara Bank that it had registered a part of the face value of Rs. 40 crores, in favour of CANFINA. The bond instruments were however retained on the ground that CANFINA had failed to pay the deposit money of Rs. 150 crores, which was payable to MTNL with an accrued interest of 12% p.a.

On October 20, 1993, MTNL cancelled all the Bonds inter alia on the ground that letters of consideration remained with CANFINA.

Canara Bank filed a writ petition before the Delhi High Court to challenge the cancellation of the Bonds, and a direction to pay the interest accrued. It is relevant to note that CANFINA was joined as a proforma party in the Writ Petition filed by Canara Bank.

After some rounds of litigation before the Delhi High Court and the Company Law Board, the Canara Bank made a representation to the Cabinet Secretary. On March 27, 2001, a meeting was convened by the Cabinet Secretariat, Litigation Cell which was presided by the Cabinet Secretary, and attended by the representatives of MTNL, Canara Bank, and CANFINA.

This Committee directed Canara Bank, CANFINA and MTNL to settle the disputes through arbitration. Subsequently, the Committee of Disputes held a meeting on December 16, 2008, in which it expressed the view that all the three parties should take recourse to arbitration in view of the different inter-linked transactions between them.

The Committee observed that to expedite arbitration, the parties should expeditiously enter into an arbitration agreement under the Arbitration and Conciliation Act, 1996.

Meanwhile, during the course of the proceedings before Delhi High Court on September 16, 2011, the parties agreed that the issues may be referred to arbitration. The parties were requested to suggest the name of a sole arbitrator to be appointed on the next date of hearing.

On October 21, 2011, the name of Justice A.P. Shah (Retd.) was suggested by the Counsel for Canara Bank, which was accepted by the Counsel for MTNL. Accordingly, Justice A.P. Shah (Retd.) came to be appointed as the Sole Arbitrator.

On January 5, 2012, the Sole Arbitrator issued notice to all the three parties i.e. MTNL, Canara Bank, and CANFINA.

Canara Bank raised an objection to the joining of CANFINA as a party to the arbitration. The Arbitrator heard the parties on March 27, 2012, on the issue of whether CANFINA should be joined as a party to the proceedings. The Arbitrator passed an interim award holding that CANFINA had not appeared on September 16 before the High Court, when the disputes were referred to arbitration. Therefore, CANFINA was not a party to the arbitration agreement, and cannot be joined as a party to proceedings. A challenge to the same was dismissed by the Delhi High Court on July 5, 2013.

This dispute eventually reached the Delhi High Court as a writ petition filed by MTNL challenging the orders passed by Delhi High Court on the appointment of arbitrator and non-impleadment of CAFINA as a party to arbitration proceedings.

Submissions

MTNL submitted before the court that in the absence of a written agreement for arbitration between the parties, as stipulated by Section 2(b) read with section 2(h) and 7(3) of the Arbitration and Conciliation Act, 1996, the arbitration cannot proceed.

It also submitted that disputes which were referred to arbitration pertaining to transactions between the Appellant MTNL on the one hand, and Respondent No. 1 and 2 – Canara Bank and CANFINA on the other hand. Hence, the arbitration proceeding cannot proceed in the absence of CANFINA as the Bonds in question were subscribed by CANFINA.

In the absence of CANFINA being made a party to the arbitration, the arbitral proceedings may be rendered infructuous, MTNL contended.

Existence of a valid Arbitration Agreement

The Court held that the arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The essential elements or attributes of an arbitration agreement is the agreement to refer their disputes or differences to arbitration, which is expressly or impliedly spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the parties, the Court said.

Section 7(4)(b) of the 1996 Act, states that an arbitration agreement can be derived from the exchange of letters, telex, telegram or other means of communication, including through electronic means. The 2015 Amendment Act inserted the words “including communication through electronic means” in Section 7(4)(b). Thus, if it can prima facie be shown that parties are ad idem, even though the other party may not have signed a formal contract, it cannot absolve him from the liability under the agreement.

In the instant case, the agreement between MTNL and Canara Bank to refer the disputes to arbitration was evidenced from the following documents exchanged between the parties, and the proceedings:-

  • The Minutes of the Meeting dated March 27, 2001, convened by the Cabinet Secretariat, wherein all three parties were present and participated in the proceedings. The Committee on Disputes, in the Meeting dated December 16, 2008, expressed the view that all the three parties should take recourse to arbitration. Canara Bank suggested that to expedite the arbitration, it should be conducted under the Arbitration & Conciliation Act, 1996. This was accepted by MTNL, and no objection was raised.
  • In the Writ Petition filed by Canara Bank, the Delhi High Court by an order dated September 16, 2011, recorded the consent of MTNL and Canara Bank to be referred to arbitration by a Sole Arbitrator under the 1996 Act.

Pursuant thereto, MTNL participated in the proceedings conducted by the sole arbitrator, and filed its Claim, and Counter-Claim. No objection was raised before the Sole Arbitrator that there was no arbitration agreement in writing between the parties. The only objection raised was that CANFINA should be joined as a necessary party in the proceedings.

Thus, the Court rejected the submission of MTNL that there was no valid arbitration agreement.

Joinder of CAFINA in the Arbitral Proceedings

As per the principles of contract law, an agreement entered into by one of the companies in a group, cannot be binding on the other members of the same group, as each company is a separate legal entity which has separate legal rights and liabilities, the Court noted.

The parent, or the subsidiary company, entering into an agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group, to be bound by that agreement. Similarly, an arbitration agreement is also governed by the same principles, and normally, the company entering into the agreement would alone be bound by it.

However, a non-signatory can be bound by an arbitration agreement on the basis of the “Group of Companies” doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties.

Courts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract, the Supreme Court observed.

“The doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.”

Coming to the facts of the present case, CANFINA was set up as a wholly-owned subsidiary of Canara Bank.

The disputes between the parties emanated out of the transaction whereby CANFINA had subscribed to the bonds floated by MTNL. CANFINA subsequently transferred the Bonds to its holding Company – Canara Bank. It is the contention of MTNL, that since CANFINA did not pay the entire sale consideration for the Bonds, MTNL eventually was constrained to cancel the allotment of the Bonds. The Court, therefore, held that it will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds.

The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration was not paid. There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, the Court concluded that CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings.

The Court also noted that CANFINA had participated in the proceedings before the High Court, and the Committee on Disputes. CANFINA was also represented by its separate Counsel before the Sole Arbitrator.

Therefore, the Court invoked the Group of Companies doctrine, to join CANFINA in the arbitration proceedings pending before the Sole Arbitrator and remitted the matter to the Sole Arbitrator to continue with the arbitral proceedings.

[Read Judgment]



Tags:
Supreme Court of India
Share this article:


Lawstreet News Network
Editor
     



Leave a feedback about this




Related Posts
View All

TRENDING NEWS


TOP STORIES


ADVERTISEMENT


Lawstreet Advertisement

Signup for Our Newsletter

Get Exclusive access to members only content by email