Aniketh Nair Kaushal Udeshi June 28 2022 Principles to be considered for binding non-signatories to arbitration agreement Clasis Law | Litigation - India Aniketh Nair, Kaushal Udeshi Litigation FactsSubmissionsDecisionCommentFactsOil and Natural Gas Corporation Limited (ONGC) awarded a contract to Discovery Enterprise Private Limited (DEPL), a company belonging to the DP Jindal Group, for operating a floating, production storage and offloading vessel. A dispute arose between the parties with relation to duty drawback, the formalities of which were to be completed by DEPL. Due to a default by DEPL under the contract, an amount of 630.88 million Indian rupees became payable to ONGC. ONGC thereafter invoked arbitration proceedings against DEPL and Jindal Drilling Industries Limited (JDIL), one of its group companies.JDIL was not a signatory to the contract but was included as a party thereto. ONGC, in its statement of claim, contended that as DEPL and JDIL belonged to the DP Jindal Group of companies and since they constituted a single economic entity, the corporate veil should be lifted to compel the non-signatory (ie, JDIL) to arbitrate. ONGC claimed that DEPL was an alter ego and agent of JDIL.Aggrieved, JDIL filed an application under section 16 of the Arbitration and Conciliation Act 1996, seeking to delete itself as a party to the contract as it was not a signatory thereto. Subsequently, ONGC filed an application for discovery and inspection to support its case that DEPL was an alter ego of the DP Jindal Group of companies. The arbitral tribunal passed an interim award, stating that it lacked jurisdiction to decide ONGC's claims against JDIL.ONGC challenged the interim award under section 37 of the Act and the challenge was upheld by the Bombay High Court on the principle of privity of contract. Further, pending the arbitration proceedings, ONGC withheld JDIL's claims, for which JDIL had initiated a separate arbitration. ONGC's challenge to the award was dismissed under section 34, so ONGC filed an appeal under section 37 pending the special leave petition (SLP) arising out of the interim award and sought a transfer of the appeal along with the present SLP.SubmissionsONGCONGC submitted that DEPL and JDIL were one single commercial entity and thus ONGC was entitled by law to compel JDIL to participate in arbitration proceedings to enforce an award against it. An application for discovery and inspection was filed to secure materials that were in JDIL's custody. The tribunal, under section 7 of the Act, had wrongly held that JDIL, which was not a signatory to the arbitration agreement, could not be impleaded as a party. ONGC had been precluded from tendering evidence that JDIL could be made party on the basis of the group of companies doctrine. The tribunal had relied on the Supreme Court's decision in Indowind Energy Ltd v Wescare (India) Limited & Another;(1) however, subsequent decisions by the Supreme Court (Choloro Controls India Pvt Ltd v Seven Trent Water Purification, Cheran Properties and Sons v Kasturi & Sons Ltd and MTNL v Canara Bank)(2) had accepted and applied the group of companies doctrine.DEPL and JDILDEPL and JDIL put forward that JDIL held no shares in DEPL and nor were there any cross shareholding or common directors in both the companies. In 2010, DEPL had ceased to be part of the DP Jindal Group while JDIL continued to be part of it. As JDIL was not a signatory to the agreement between ONGC and DEPL as required under section 7 of the Act, it could not be held liable for claims against DEPL. It had rightly been held by the Bombay High Court that ONGC had failed to tender any evidence before the tribunal showing that the DEPL and JDIL had common shareholders or common directors. JDIL also had no role in negotiating the contract and nor had it participated in the execution of the contract on behalf of DEPL.DecisionThe Supreme Court outlined the evolution of the group of companies doctrine in light of Indian arbitration practice.The tribunal had relied on the judgment passed by the Supreme Court in Indowind. The Indowind judgment was in the context of an application under section 11(6) of the Act, wherein a party that was not a signatory to the arbitration agreement had raised an objection on the ground that the agreement to arbitration did not operate in relation to it. In the judgment, the Court had refused to pierce the corporate veil and relied upon the strict interpretation of section 7 of the Act.In the Indowind judgement, the Supreme Court observed that an arbitration agreement can come into existence only in the manner contemplated under section 7 of the Act. Therefore, if an application is filed under section 11 of the Act, an oral contract between the parties will not be sufficient to prove that the parties had performed certain acts to enact an arbitration agreement between them as section 7 of the Act states that the arbitration agreement should be in writing.Subsequently, in the judgment passed by the Supreme Court in Chloro Controls, the Court dealt with the provisions of section 45 of the Act by interpreting the expression "through or under" and observed that, though an arbitration would normally take place between parties to the arbitration agreement, it can take place between a signatory to the agreement and a third party. Further, on dealing with the scope of the arbitration agreement, the Supreme Court held that, though it is limited to the parties who have entered into it and those who claim under or through them, the courts under English law have developed the group of companies doctrine. This doctrine postulates that an arbitration agreement that has been entered into by a company within a group of companies can bind its non-signatory affiliates if the circumstances demonstrate the parties' mutual intention to bind both the signatory and the non-signatory affiliates.The principle of binding non-signatories as laid down in Chloro Controls was also applied in Ameet Lalchand Shah v Rishabh Enterprises.(3) Thereafter, the Supreme Court in Cheran Properties passed a judgment in the context of the enforcement of a domestic arbitration award against a non-signatory.In Cheran Properties, the three-judge bench of the Supreme Court held that the Indowind judgment had been rendered before the evolution and application of the group of companies doctrine. It observed that modern business transactions are often effectuated though multiple layers and agreements. Further, there may be transactions within the group of companies and the circumstances in which they have entered that reflect an intention to bind both the signatory and the non-signatory within the group of companies. On holding that a non-signatory is bound by an arbitration agreement, the Court approached the matter by attributing to the transactions a meaning consistent with the business sense that had been intended to be ascribed to them. The aim is to find the true essence of the business arrangement and the intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory.In the present case, the Supreme Court held that the written intention to arbitrate between parties can extend to bind non-signatories with the aim to target the creditworthy member of the group of companies. However, the principle of separate legal personalities of companies must also be balanced. The corporate veil can be pierced to bind non-signatories by taking into consideration:the construction of the arbitration agreement;the intention at the time of entering into the contract; andthe performance of the underlying contract.The Supreme Court also relied on the judgment passed in the matter of MTNL, wherein the two-judge bench of the Supreme Court held that the doctrine provides for a non-signatory to be bound by an arbitration agreement where the parent or holding company of the group of companies is a signatory and the non-signatory entity has engaged in the negotiation or performance of the commercial contact, or made statements indicating its intention to be bound by the contract.Thus, the Supreme Court observed that commentators have noted that signing a written agreement to submit a present and future dispute to arbitration does not exclude the possibility of an arbitration agreement binding a third party. A non-signatory may be bound by the operation of this doctrine, as well as by the operation of the principle of assignment, agency and succession. Further, a non-signatory may be bound by the arbitration agreement if it is an alter ego of a party that executed the agreement, which is a departure from the ordinary principles of contract law that every company in a group of companies is a distinct legal entity. The Court also referred to Gary B Born, International Commercial Arbitration, which explains the application of the alter ego principle in arbitration. The Court referred to an extract wherein the author provided the following explanation:Authorities from virtually all jurisdictions hold that a party who has not assented to a contract containing a arbitration clause may nonetheless be bound by the clause if that party is an 'alter ego' of an entity that did execute, or was otherwise a party to, the agreement. This is a significant, but exceptional, departure from the fundamental principle . . . that each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate rights and liabilities.It was further observed by the Supreme Court that a non-signatory may be bound by the arbitration agreement where:there exists a group of companies; andthe parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.In this context, the Supreme Court reproduced a passage from John Fellas, "Compelling Signatories to Arbitrate with Non-Signatories", New York Law Journal, in which the author elaborated the principle of binding a non-signatory from the lens of the doctrine of estoppel:There are at least two distinct types of estoppel doctrine that apply in the non-signatory context: "the direct benefits" estoppel theory and the "intertwined" estoppel theory. The direct benefits theory bears the hallmark of any estoppel doctrine-prohibiting a party from taking inconsistent positions or seeking to "have it both ways" by "rely[ing] on the contract when it works to its advantage and gnore[ing] it when it works to its disadvantage." Tepper Realty Co. v. Mosaic Tile Co., 259 F. Supp. 688, 692 (SDNY1966). The direct benefits doctrine reflects that core principle by preventing a party from claiming rights under a contract but, at the same time, disavowing the obligation to arbitrate in the same contract.CommentIn deciding whether a company within a group of companies that is not a signatory to an arbitration agreement would be bound by it, the Supreme Court held that the law considers the following factors:i) The mutual intent of the parties:(1) The relationship of a non-signatory to a party which is a signatory to the agreement;(2)The commonality of the subject matter;. . . iv) The composite nature of the transaction; and v) The performance of the contact.Thus, a non-signatory may be held to be bound either on a consensual theory founded on agency and assignment or on a non-consensual basis such as estoppel or alter ego. The Supreme Court thus held, among other things, that the tribunal had failed to determine the legal foundation for the application of the group of companies doctrine and there had been a fundamental failure to address the plea raised by ONGC for attracting such doctrine.For further information on this topic please contact Aniketh Nair or Kaushal Udeshi at Clasis Law by telephone (+91 22 4910 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.Endnotes(1) (2010) 5 SCC 306.(2) (2013) 1 SCC 641, (2018) 16 SCC 413 and (2020) 12 SCC 767.(3) (2018) 15 SCC 678.