Non-signatories of a group are bound to arbitrate

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.

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.

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

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