A three judge bench of the Hon’ble Supreme Court of India in its recent judgment dated April 27, 2022, in Oil and Natural Gas Corporation Limited v. M/s Discovery Enterprises Pvt. Ltd. & Anr.[1], while deciding on a challenge to an interim award on the ground that the arbitral tribunal failed to apply the group of companies doctrine, has held that a non-signatory company within a group of companies can be held bound to an arbitration agreement.
Background
On March 22, 2006, Oil and Natural Gas Corporation Limited (“ONGC”) had awarded a contract to Discovery Enterprises Private Limited (“DEPL”). Due to certain defaults by DEPL under the contract, an amount of INR 63.88 crores purportedly became payable to ONGC. The contract provided for settlement of disputes through arbitration, therefore, ONGC instituted an arbitration against DEPL and Jindal Drilling and Industries Limited (“JDIL”), a group entity, to recover its outstanding dues of INR 63.88 crores. JDIL was not a signatory to the contract, but was arrayed as a party on the ground that JDIL and DEPL constituted a single economic entity.
Aggrieved, JDIL filed an application under Section 16 of the Arbitration and Conciliation Act, 1996 (“Act”), seeking deletion from the array of parties on the ground that being a non-signatory to the contract containing the arbitration agreement, it was not bound by it (“Section 16 Application”). Thereafter, ONGC filed an application for discovery and inspection to support its argument that DEPL is an alter ego/ agent of JDIL. According to ONGC, documentary evidence demonstrated that a “close corporate unity and functional unity existed between these two companies”. The arbitral tribunal deferred the decision on this application till the issue of jurisdiction was decided.
Ultimately, on October 27, 2010, the arbitral tribunal passed an interim award holding that it lacked jurisdiction to arbitrate ONGC’s claim against JDIL since JDIL was a non-signatory to the arbitration agreement and hence could not be impleaded as a party to the proceedings (“Interim Award”). The Interim Award was challenged by ONGC under Section 37 of the Act before the Hon’ble Bombay High Court (“Hon’ble BHC”), wherein, the interim award was upheld on the principle of privity of contract, holding that JDIL cannot be held liable in a contract between DEPL and ONGC (“Impugned Judgment”). In the interregnum, the arbitral tribunal delivered its final award in favour of ONGC.
Further, during the pendency of the above arbitration proceedings, ONGC had withheld certain sum of monies payable to JDIL under other contracts as adjustment against the dues owed by DEPL. A separate arbitration was initiated by JDIL for payment of the withheld dues. Submissions of ONGC that DEPL and JDIL constitute the same economic entity was rejected by the arbitral tribunal. A challenge to the Award by ONGC under Section 34 of the Act was dismissed. Thereafter, ONGC appealed under Section 37 of the Act, during the pendency of the special leave petition arising out of the Interim Award. ONGC sought a transfer of the appeals, which came up before the Hon’ble Supreme Court (“Hon’ble SC”), along with the special leave petition in the present case.
Decision of the Hon’ble Supreme Court
The Hon’ble SC has outlined the evolution of the group of companies doctrine in the context of domestic arbitration in India. The decision upholds the group of companies doctrine which provides that a non-signatory to a contract containing an arbitration clause may be bound by the agreement to arbitrate if it is an alter ego of a signatory party. The decision established that the law at present requires courts to consider the following factors while deciding whether the doctrine applies:
(i) Mutual intent of parties;
(ii) Relationship of a non-signatory to a signatory;
(iii) Commonality of the subject matter;
(iv) Composite nature of the transaction; and
(v) Performance of the contract.
After considering the previous judgments on this issue, the Hon’ble SC held that the Interim Award stands vitiated since the tribunal failed to consider whether the group of companies doctrine would stand attracted. The first arbitral tribunal failed to allow evidence, which could have bearing on the issue of whether JDIL had an economic unity with DEPL and could hence be made a party. Accordingly, the Impugned Judgment was also set aside and the Section 16 application filed by JDIL was directed to be decided afresh after allowing discovery of the required documents.
Further, the Hon’ble SC held that there was a significant degree of overlap between the issues which arose in the Interim Award and those decided by the second award. In fact, the second award directly relied on the findings in the Interim Award. Hence, the transferred cases arising from the second proceedings were remitted back to the Hon’ble BHC and directed to be held in abeyance until JDIL’s plea challenging jurisdiction is decided afresh.
Analysis
The Interim Award, deleting JDIL from the array of parties, was passed by relying on the judgment of the Hon’ble SC in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr.[2]. The Hon’ble SC herein drew a distinction from Indowind, which had interpreted “parties” with respect to an arbitration agreement under Section 7 of the Act in the specific context of an application under Section 11(6) of the Act. The Hon’ble SC has moved away from the strict interpretation of Section 7 of the Act, adopted in Indowind, and adopted the modern view of group of companies doctrine.
The evolution of the group of companies doctrine in the Indian legal discourse can be traced through the Hon’ble SC’s decisions. A three judge bench in Chloro Controls India Pvt. Ltd. v. Seven Trent Water Purification Inc. & Ors.[3] adopted the group of companies doctrine, developed under the English Law, and applied it in the context of Section 45 of the Act to hold that an arbitration agreement entered into by a company within a group of companies can bind its non-signatory affiliates or sister concerns if there is a mutual intention of the parties to bind the non-signatory. The ratio in Chloro Controls was applied in the domestic arbitration context in Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr.[4], wherein it was held that a non-signatory would be bound by the arbitration clause in the mother agreement if it is a party to an inter-connected agreement, which had been executed to achieve a common commercial goal.
This doctrine received further support in Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors.[5], wherein it was observed that Indowind was rendered before the evolution of group of companies doctrine in Chloro Controls and applied the doctrine to enforce a domestic award against a non-signatory. Further, in MTNL v. Canara Bank & Ors.[6], a non-signatory was held to be a proper party due to a “clear and direct nexus” of the disputed transaction with the non-party and the non-party being a wholly owned subsidiary of the signatory. The Hon’ble SC has now explicitly recognised that a non-signatory may be bound on a consensual theory (agency or assignment) or a non-consensual basis (the doctrine of estoppel or alter ego of parties).
In essence, this decision is evidence of the Hon’ble SC’s attempt to recognise the complex nature of modern multiple layered commercial transactions, which often involve one company acting for the benefit of another group company, as a single composite economic entity. Hon’ble Justice Chandrachud has authored this decision in congruence with his long held opinion that the Act should be interpreted “in a manner that is consistent with prevailing approaches in the common law world”[7]. This judgment is a welcome step forward in bringing the Indian arbitration law in line with the international regime.
For further information, please contact:
Raunak Dhillon, Partner, Cyril Amarchand Mangaldas
ketaki.mehta@cyrilshroff.com
[1] Civil Appeal No. 2042 of 2022.
[2] (2010) 5 SCC 306 (“Indowind”).
[3] (2013) 1 SCC 641 (“Chloro Controls”).
[4] (2018) 15 SCC 678.
[5] (2018) 16 SCC 413.
[6] (2020) 12 SCC 767.
[7] A. Ayyasamy v. Parmasivam & Ors., (2016) 10 SCC 386 at ¶53.
