Non-signatories of a group are bound to arbitrate

By Karthik Somasundram and Shreya Gupta, Bharucha & Partners
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The courts have previously applied the doctrine of group companies when they referred non-signatories to an arbitration agreement to arbitrate. The Supreme Court invoked this doctrine again in the case of MTNL v Canara Bank when referring Canfina, a wholly-owned subsidiary of Canara Bank to arbitration.

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Karthik Somasundram
Partner
Bharucha & Partners

Disputes arose between MTNL and Canfina when Canfina did not pay the entire consideration for bonds issued by MTNL. MTNL therefore cancelled the allotment to Canfina. Prior to cancellation Canara had purchased the bonds from Canfina. MTNL applied a portion of the proceeds of cancellation towards dues and refunded the excess to Canara. Canara challenged the cancellation in Delhi High Court and sought reinstatement of the allotment, together with accrued interest. Canfina was a formal respondent in the petition against MTNL. The court referred the parties to a government committee set up to advise public sector undertakings on dispute resolution. The committee recommended that the three parties agree to arbitrate the disputes.

A draft arbitration agreement was prepared, with the bank and Canfina jointly contesting the dispute against MTNL. The bank then circulated the agreement. Thereafter, the parties agreed to refer disputes to arbitration. The court appointed a sole arbitrator and referred the disputes for determination. In the arbitration, the bank successfully objected to joining Canfina as a party to the arbitration. MTNL could not obtain clarification from the court regarding Canfina’s participation as set out in the earlier order referring the disputes to arbitration. MTNL therefore appealed to the Supreme Court.

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Shreya Gupta
Senior associate
Bharucha & Partners

In court, MTNL unsuccessfully argued that there was no valid written arbitration agreement between the parties. Referring to section 7(4)(b) of the Arbitration and Conciliation Act, 1996, the court ruled that intent to arbitrate was essential in an arbitration agreement and a formal contract was not necessary. The intention of the parties could be inferred from their conduct and communications, and these constituted elements of a binding contract. A common sense approach would have to be adopted to construe intent to arbitrate disputes, and a purely legalistic mindset would not assist in this regard. Filing of pleadings in the arbitration by MTNL and the bank was demonstrative of the intention to arbitrate, as stipulated by section 7(4)(c) of the act. Correspondence exchanged and minutes circulated of various meetings, before the arbitrator and otherwise, demonstrated an intention to arbitrate. Crucially, the order of Delhi High Court recording consent to arbitrate, estopped MTNL from claiming that there was no written agreement to arbitrate.

Invoking the group companies doctrine, the Supreme Court rejected the bank’s objection to the joinder of Canfina to the arbitration. A non-signatory to an arbitration stipulation can be bound with a signatory to the stipulation if the conduct of the parties evidences such an intention. The court traced the origins of the doctrine and ruled that the non-signatory entity of a group may be bound with the parent or holding entity in respect of an arbitration stipulation, where the entities had negotiated or performed the contract together. The doctrine could be invoked to bind a non-signatory affiliate to an arbitration if a direct relationship exists between the entities, if there is a commonality of subject matter, and if the transaction between the parties is composite. The doctrine applies where, by virtue of the group structure, there exist sufficiently strong financial links between the entities to constitute a single economic unit or entity.

In the present case, the disputes arose from transactions that did not at first involve the bank. They arose because of cancellation of the bonds and Canfina’s non-payment of the consideration. By virtue of the bank’s present claim to these bonds, there exists a direct connection between the parties.

Further, Canfina had participated through separate counsel in all the proceedings before the high court, the committee set up by the government and the arbitrator. The draft arbitration agreement sent to MTNL also contemplated that Canfina was a party. The joinder objection in the arbitration proceedings was lodged by the bank and not Canfina. There was tacit or implied consent by Canfina to participate in the proceedings. Canfina was therefore a proper and necessary party to the arbitration proceedings, and a final resolution to the disputes was possible only with its participation.

The objective of expeditious adjudication of disputes through arbitration can only be achieved if all parties participate in the same proceedings.

Karthik Somasundram is a partner and Shreya Gupta is a managing associate at Bharucha & Partners.

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