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Author: Avik Sarkar
Year of study: 4th-year
Institute of affiliation: K.L.E Society’s law college, Bengaluru
An arbitration always arises out of violations of contractual agreements. According to the general rule, it is always the signatories of the contractual agreements that are parties to the arbitration. But of late, there has been a contentious question with regard to compelling a non-signatory to arbitration. Does the general rule extend to non-signatories as well? If yes, then in what situations can they be compelled? This piece holistically analyses the same through the judgment given in the case of Shapoorji Pallonji and Co. Pvt. v. Rattan India Power Ltd & Anr.
Keywords: arbitration, non- signatories, compelling, agreement.
The Arbitration and Conciliation Act, 1996 has proved very instrumental for the new age companies as it provides an effective mechanism to get their matters settled without any kind of judicial intervention. But it must be noted that an arbitration always arises out of contractual default committed by the parties. Therefore, according to the general rule, it is only the parties to the contract which can opt for arbitration on commission of defaults in carrying out their contractual obligations. This brings us to an interesting question: can non-signatories be compelled to be part of an arbitration proceeding? For example, an agent gets into a contract on behalf of his principal and commits certain defaults as per the instructions received from the principal. Now, the parties opt for arbitration to settle their disputes. As the agent had entered into a contract, it becomes a party to the arbitration proceeding. Now, can the principal also be made a party to the arbitration despite being a non-signatory to the contract? A similar conundrum arose in the case of Shapoorji Pallonji and Co. Pvt v. Rattan India Power Ltd & Anr. This piece tries holistically discussing the above recent judgment with special accentuation given to the doctrine of a group of companies.
In the present case, Indiabulls was desirous in creating a thermal power plant at Amravati, Maharashtra. Therefore, to attain the same, it called for tender on Boiler Turbine Generator Package (hereafter ‘BTG Works’), which was an important part of the project. Accordingly, Shapoorji had submitted its bid and was awarded the tender. Therefore, Shapoorji entered into an agreement with Elena (a wholly-owned subsidiary of Indiabulls) for the BTG contract.
Following which there were numerous other orders that were awarded to Shapoorji by Indiabulls. After sometime, a dispute arose with regard to the execution of contracts due to which Shapoorji invoked the arbitration clause.
Though Shapoorji had invoked the arbitration clause, Indiabulls denied the possibility of any sort of arbitration as they contended that they were never signatories to any contract of BTG with Shapoorji. As per Indiabulls, the contract was signed between Elena and Shapoorji and therefore they were never a party to the contract. Therefore, the court tried to look into the nuances of the case so that it can find whether Indiabulls, despite being a non-signatory to the contracts, can be made a party to the arbitration or not.
Ways of involving a non-signatory
The intention behind forming an arbitration agreement in writing is to make sure that the existence of an arbitration agreement is not in question. An arbitration agreement mechanism works with the consent of the parties. The agreement is mainly between the signatories and according to the general rule, a non-signatory cannot be made a party to the same. But this general rule is subjected to exceptions.
For the same, the court had relied on the case of Cheran Properties Ltd. v. Kasturi & Sons Ltd where the judge had stated: “the evolving body of academic literature, as well as adjudicatory trends, indicate that in certain situations, an arbitration agreement between two or more parties may operate to bind other parties as well.” The courts around the world have enumerated different circumstances to invoke the exception rule. Courts in America use the contractual method for compelling a non-signatory to arbitration, whereas Germany and Switzerland use a narrower method to invoke the same.
In India, there are three ways of compelling a non-signatory to an arbitration proceeding. Two of them were propounded in the case of Chloro Control(supra), where the following two ways were given:
- The theory of Implied Consent. It basically included third party beneficiaries, guarantors and other transfer mechanisms of contractual rights. The theory majorly relies on the principle of good faith. It applies to both private as well as public legal entities.
- The second way is by going by the doctrine of agent-principal relationship, lifting of the corporate veil (also called as alter ego), estoppel etc.
In addition to the above two
- another doctrine to compel a non-signatory to arbitration is by applying the Group of Companies doctrine.
In several cases, the theory of implied consent is used to bind non-signatories to the arbitration agreement. These are mainly instances when an agent acts on behalf of its principal (non-signatory), therefore the principal can be made a party to the arbitration agreement without even being a signatory to the same. The only thing that needs to be established here is that the principal-agent relationship exists between signatory and non-signatory and that the agent was acting under the authority of the principal.
Lifting corporate veil
Now coming to the next set of instances where the non-signatory is compelled by disregarding their corporate façade or where the signatory is found to be an Alter ego of the non-signatory. In the case of Barcelona Traction, Light and Power Company Ltd, the concept of the lifting of the veil was explained. It was stated that this concept is imperative in order to prevent misuse of the privileges of legal personality.
Gary B. Born had explained the doctrine of Alter ego in his book, International Commercial Arbitration, Volume I, (Third Edition), p. 1546. He stated that the doctrine of Alter ego is attracted in such instances where one party dominates the affairs of the other party. It dominates to an extent where it is considered to be misusing its control. Therefore, in such cases, the separate legal entity of the two companies is disregarded and the two entities are treated as one.
Group Companies doctrine
There is also another way of compelling non-signatories; that is by using the doctrine of Group Companies. This principle was first applied in the case of Dow Chemical v. Isover-Saint-Gobain. In this case, Dow Chemical Venezuela and Dow Chemical Europe were both owned by Dow Chemical Co. They had entered into a distribution agreement with several companies. The contract of Dow Chemical was given to Dow Chemical AG, and on the contrary, Dow Chemical France was performing the obligation in place of the formal signatories. Later on, a dispute arose and, in the dispute, not only were the two signatories part, but also the parent company that is Dow Chemical Co and the following was the reason.
Reason: Dow Chemical Co exercises plenary power over its subsidiaries (also signatories). It is to be noted that each and every subsidiary is a separate legal entity. But the distinct judicial entity of each of its subsidiaries is disregarded as a group company consists of one and the same economic reality of which the arbitral tribunal takes note.
In another instance, in the case of Mahanagar Telephone Nigam Ltd. v. Canara Bank, Canara Bank had filed a petition against the decision to cancel bonds and also sought the direction of payment towards accrued interest. During the proceeding, the parties decided to resort to the matter through an arbitration proceeding. There was a sole arbitrator appointed for the same. In the arbitration proceeding, the wholly-owned subsidiary of Canara Bank-CAFINA was also made a party to the arbitration. Canara bank did oppose it and therefore the arbitrator passed an interim award stating that CAFINA had never appeared before the court when the matter was being transferred to arbitration and hence, they are not a party to the arbitration. MTNL filed a Special Leave Petition before the Supreme Court. The Supreme court had accordingly stated that CAFINA is to be added in the arbitration proceeding as they were also a subscriber to the bonds issued to MTNL.
- Application of the above theories in light of the present case
There was ample evidence on record to show that Indiabulls had actively participated in the contract.
Firstly, from the above facts, it can be construed that Indiabulls (not Elena) had invited tenders for the BTG contract, reacting to which Shapoorji had submitted a bid to Indiabulls. The said bid was accepted, thereby making both the parties binding by the contract. From here it can be clearly concluded that Indiabulls had participated in the negotiation of the contract thereby making it a party to it. The same was held in the case of Gvozdenovic v. United Air Lines, where the Court held that “where a party conducts itself as it were a party to a commercial contract, by playing a substantial role in negotiations and/or performance of the contract, may be held to have the implied consent to be bound by the contract”.
Secondly, the bank guarantees and the performance bank guarantees were furnished by Shapoorji as towards Indiabulls.
Thirdly, Indiabulls had issued a Letter of Credit and had directed certain payments towards Shapoorji which were due under the BTG contract.
Fourthly, in clause 8 of the contract, it was stated that Shapoorji had to get into a formal agreement with Indiabulls. In this particular clause, the name of Elena was mentioned in parenthesis. Parenthesis can be said to be extra information that doesn’t necessarily become part of the actual topic that is being discussed. The same was held in the case of Fuerst Day Lawson Limited v. Jindal Exports Limited: here the Supreme court had referred to various dictionaries to construe the meaning of parenthesis. So, it came across Oxford Advanced Learner’s Dictionary which defined “bracket” to mean “either of a pair of marks, () placed around extra information in a piece of writing or part of a problem in mathematics.”
Lastly, after looking at all the material evidence on record, Indiabulls cannot contend that it was oblivious to the fact of being a party to the contract and Indiabulls can be estopped from contending the same. The principle of estoppel has constantly been invoked by America in order to bind a non-signatory by the arbitration clause. In the case of Life Techs Corp. v. AB Sciex Prop, it was held that a non-signatory can be estopped from avoiding the arbitration clause.
From the facts, it can be construed that Indiabulls was the direct beneficiary to the contract therefore, despite being a non-signatory to the contract, it can be made a party to the arbitration. Though it must be noted that the benefit that is being received must be a direct one and not an indirect one. In light of the above statements, the court held that Indiabulls can be compelled to be a party in the arbitration proceedings against Shapoorji.
The United States has been regularly relying on the practice of binding a non-signatory to the arbitration clause of a contract. In the recent case of GE Energy Powe Conversion France SAS, Corp. v. Outokumpu Stainless it was held that there is nothing in the Recognition and Enforcement of Foreign Arbitral Award (New York Convention) and in the local law that prohibits the inclusion of a non-signatory to be part of the arbitration proceeding.