CCDQ - May, 2022

Questions Answered in this Month’s CCDQ:

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In Oil and Natural Gas Corporation Ltd. vs Discovery Enterprises Pvt. Ltd (DEPL), (#SupremeCourtofIndia, three judge bench, decided on 27.04.2022), the Supreme Court (SC) explained, and revisited the concept of the Group of companies doctrine to bind non-signatories to an arbitration agreement.

In this case, ONGC had a contract with DEPL, which is a company belonging to DP Jindal Group.

ONGC had attempted to join Jindal Drilling and Industries Limited (JDIL) to the arbitration proceedings. ONGC had also moved an application for discovery and inspection of documents to prove the necessity of such a joinder. However, the Arbitral Tribunal (AT) had passed an interim award refusing the joinder, without deciding the said application, substantially on the fact that JDIL was not a party to the contract.?

The interim award was under challenge, and the SC made the following observations:

1. The Group of Companies doctrine postulates that an arbitration agreement which has been entered into by a company within a group of companies, can bind its non-signatory affiliates or sister concerns if the circumstances demonstrate a mutual intention of the parties to bind both the signatory and affiliated, non-signatory parties.
2. The doctrine applies only in exceptional circumstances, and the factors which need to be examined are:

(i)???A direct relationship to the party signatory to the arbitration agreement.

(ii)?Direct commonality of the subject matter.

(iii)Whether the agreement is of a composite transaction where the performance of a mother agreement may not be feasible without the execution or performance of a subsidiary or ancillary agreement (Reliance placed on?Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification?Inc. & Ors,?(2013) 1 SCC 641, ).

3. party who has not assented to a contract containing an 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. (Reliance placed on Gary Born: International Commercial Arbitration, Vol. I, 2009).

4.????The judgment of?Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr (2010) 5 SCC 306?was rendered before the evolution and application of the group of companies doctrine by a three-judge Bench in Chloro Controls. (Reliance placed on Cheran Properties Ltd v. Kasturi and Sons Ltd & Ors (2018) 16 SCC 413).

5.????It was in view of the above propositions, that SC analysed the facts of the case, wherein (I) DEPL was created by the DP Jindal Group with a definite purpose to render services to the oil and gas sector; (ii) There is a close corporate and functional unity between DEPL and JDIL; The executives of JDIL had been closely associated with the negotiation of the agreement;(iii) The bid as well as the contract with DEPL were signed by G D Sharma who was an employee of JDIL; (v) same person was signing letters on behalf of DEPL as their authorized signatory as well as on behalf of JDIL; (vi) Person, who was the General Manager of JDIL, used to visit the witness who deposed on behalf of the ONGC in connection with the subject contract; and (vii) The MD of JDIL, had negotiated with the owners of the vessel in connection with the same tender.(viii)?ONGC’s witness stated that almost all the senior officers of JDIL, including its MD, actively participated in matters relating to the hiring of the vessel, its deployment, performance and related issues.?

6.????The Arbitral Tribunal failed to consider whether the group companies doctrine would apply and also precluded itself from deciding?the application for discovery and inspection.

In view of the above, the Supreme Court held that there was a fundamental failure of the Arbitral Tribunal to address the plea which went to the root of the matter, and therefore the interim award of the Arbitral Tribunal was required to be set aside.?

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?In the case of Narinder Garg & Others v.?Kotak Mahindra Bank?(#SupremeCourtofIndia, three judge bench decided on 28.03.2022), a Writ Petition had been filed seeking to quash Criminal Complaints under Section 138 of the Negotiable instruments Act, 1881 (Cheque Bouncing), which were filed against the Petitioner Company and its Directors. The quashing was sought in view of NCLT, Chandigarh’s order of moratorium.??

The Petitioners alleged that once the resolution plan was accepted and approved in which the dues of the complainant(Respondent) also figured, the effect of such an acceptance would be to obliterate any pending trial under Sections 138 and 141 of the Negotiable Instruments Act.?

The Supreme Court observed as follows:

1.????The moratorium provisions contained in Section 14 of the Insolvency and Bankruptcy Code, 2016 would apply only to the corporate debtor and that the natural persons mentioned in Section 141 (Directors etc.) of the Negotiable Instruments Act would continue to be statutorily liable under the provisions of the Negotiable Instruments Act.

2.????However, as far as the company is concerned, moratorium under section 14(1)(a) of the IBC would be applicable to proceedings under Section 138 of the Negotiable Instruments Act.?

(Reliance placed on P. Mohanraj & Others v. Shah Brothers Ispat Private Limited, (2021) 6 SCC 258)

In view of the same, the Writ Petition was dismissed.?

Apart from this, the Mohanraj Judgment has also been relied on in Gimpex Private Ltd. v. Manoj Goel, 2021 SCC Online SC 925 : 2021 (12) SCALE 269.

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In the case of Ircon International Ltd. (Govt. of India Undertaking) v. GPT-Rahee JV (Delhi High Court, decided on 25.03.2022), the parties had entered into two contracts, one for Fabrication & one for Erection, of steel girders for Rail-Road bridge across river Ganga at Patna.?

Owing to various delays in the project, the Contracts were extended for a period of more than 3 years from the original stipulated date of completion and the Respondent invoked arbitration to pursue its claims.?

One of the questions which had fallen for consideration before the Arbitral Tribunal (AT) was whether the Respondent had furnished the No Claims Certificate (NCC) under duress or voluntarily.

The Award was challenged under an objection petition under section 34 of the #arbitration?& conciliation Act, 1996.

The Court while perusing the evidence relied upon by the Arbitral Tribunal, had observed as follows:

1.????The parties had held a meeting to settle issues. After the meeting several issues remained pending.

2.????Four days prior to issuing the No Claims Certificate, the Respondent had written a letter to the Petitioner, whereby it had mentioned its pending claims and also mentioned that it was advised to issue the NCC, without which no payments would be made.

3.????It was only after this that the NCC was issued. The objections of the Respondent were even raised in the cover letter of the NCC.

4.????If the NCC would not have been issued, then the same would have resulted in withholding of payments, non-refund of Liquidated Damages and even invocation of Bank Guarantees of the Respondent. Therefore it was clear that the NCC had been issued under economic duress.?

5.????In light of the above, the NCC could not be considered to be an accord and satisfaction of the claims of the Respondent.?

6.????The Arbitral Tribunal had also made specific observations regarding the delays on the part of the Petitioner in handing over the site and handing over GFC (Good for Construction) drawings.?the AT then went on to also consider the delays by the Respondent in the Contract, on the basis of which the AT apportioned the damages, and accordingly reduced the amounts payable to the Respondent.

In view of the same the Court observed that there was no “Patent Illegality” or “public policy” violation in the AT's award, as the Court could not re-appreciate the evidence. Further the Arbitrator’s views were a plausible one, and could not be interfered with.

Therefore the award was upheld and the Petition dismissed.

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In the case of Cox & Kings Limited v. SAP India Private Limited, (#SupremeCourtofIndia, three judge bench, decided on 06.05.2022), the Court noted that there were some inherent contradictions in the current state of Group Companies Doctrine in India. These are owing to the following reasons:

1.????In Chloro?Controls?India?Private?Limited?v. Severn Trent Water Purification Inc. (2013)?1?SCC 641, there seems to be an inherent contradiction, where on the one hand the Court emphasises the intention of the parties (to include non-signatory party), but on the other hand, it goes on to add that non-signatories may be added only in “exceptional cases”, thus placing a premium on the intent of the parties and even discarding it, if so required in interests of justice.

2.????In Mahanagar Telehpone Nigam v. Canara Bank?(2020)?12?SCC?767, court applies the Group companies doctrine as “single economic entity”, which has a tendency to completely overlook the principle of separate legal entity and seems to dispense almost entirely with intent of the party.

3.????Cheran?Properties?Ltd.?v.?Kasturi?and?Sons?Ltd.?& Ors 2018 16 SCC 413, provides the widest possible meaning of Group Company Doctrine, whereby a party is bound to a final award, where it had not even participated in the arbitration proceedings.?

4.????Where?Reckitt?Benckiser?(India) (P) Ltd. v. Reynders Label Printing (India) (P) Ltd (2019) 7 SCC 62, fixes a higher threshold of evidence for the doctrine to apply,?Oil & Natural Gas Corporation Ltd.?v.?M/s?Discovery?Enterprises?Pvt.?Ltd.?&?Anr (Civil Appeal No. 2042?of?2022) holds necessity for a deeper probe to determine whether the Doctrine is attracted in a particular set of facts of circumstances. Thus questions of standard of proof are doubtful.

All of the above judgments were mostly three judge bench, and some are two judge bench.

In view of the above discussion and also considering the importance and growth of the doctrine in the India Context, the Supreme Court of India has referred following questions to larger bench:

1.????Whether?the?Group?of?Companies?Doctrine?should?be read into Section 8 of the Act or whether it can exist in the Indian jurisprudence independent of any statutory provision?

2.????Whether?the?Group?of?Companies?Doctrine?should continue to be invoked on the basis of the principle of ‘single economic entity’?

3.????Whether?the?Group?of?Companies?Doctrine?should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?

4.????Whether?the?principles?of?alter?ego?and/or piercing the corporate veil can alone justify?pressing?the?Group?of?Companies Doctrine into operation even in absence of implied consent?

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In the case of M/S Garg Builders vs Hindustan Prefab Ltd. (Delhi High Court, decided on 02.05.2022), the Petitioner, as a part of the construction agreements entered between parties, was required to submit Bank Guarantees towards Security Deposit and Performance.?

As disputes arose between the parties, the Respondent invoked the Bank Guarantees by writing a letter to the Bank, and the Petitioner in turn approached the High Court under Section 9 of the #Arbitration & Conciliation Act, 1996 seeking a stay on the invocation of the Bank Guarantees.

One of the many questions which the Court was called upon to answer was whether the recitals of the Bank Guarantee would have a bearing on the issue of whether the Bank Guarantee is conditional or unconditional.

The Court observed as follows:?

1.????The recitals of a Bank Guarantee often set out the background of why the Bank Guarantee is being issued (for example to ensure performance or protect security Deposit).

2.????The recital, by itself does not make performance of the contract by the issuer, a “condition” for the invocation of the Bank Guarantee.

3.????The recitals of the Bank Guarantee need to be distinguished from the actual conditions of invocation placed in the Bank Guarantee. Where the condition entitling the beneficiary to the benefit is mere “a “demand. stating amount claimed to be due from the Petitioner”, the Bank Guarantee is in fact unconditional.

4.????Although in stricto senso it may be said that such Bank Guarantees are not unconditional, but the only condition attached is a demand. These Bank Guarantees are considered “unconditional”.

5.????The only select circumstances where an unconditional bank guarantee may be interdicted by Court are:

(i)????Clear Fraud by the beneficiary, which the Bank has notice of. Such fraud must be of an egregious nature as to vitiate the entire underlying transaction.

(ii)???when there are 'special equities' in favour of injunction, such as when 'irretrievable injury' or 'irretrievable injustice' would occur if such an injunction were not granted. the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country; it must be proved to the satisfaction of the Court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.

6.????Both of these circumstances have not been met by the Petitioner, therefore no case for interdiction of Bank Guarantees was made out.

In view of the above, the Petition was dismissed.

The Court while discussing the rival assertions observed:

?“This is yet another a case in which valuable time of this Court has been expended in dealing with a prayer for a restraint against invocation of "unconditional" and irrevocable bank guarantees… despite the law in that regard being practically fossilized, Courts were being inundated with repeated requests for stay of unconditional bank guarantees.”

?

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In the case of Union of India v. Indian Agro Marketing Cooperative Limited (Delhi High Court, decided on 02.05.2022), the #Arbitrator had terminated the Arbitral proceedings before her.

The said termination was in exercise of Arbitrator’s jurisdiction under Section 25(a) of the #Arbitration & Conciliation Act, 1996, on the ground of the Petitioner’s defaults in filing Statement of Claim, despite repeated opportunities having been granted for the same.

The Petitioner had, before approaching court, also filed applications before the Arbitrator for recall of the said orders, but no order was passed on the said recall application.

Thereafter the Petitioner moved Writ Petition before the Delhi High Court.

The High Court observed as follows:

1.????For an order passed under Section 25(a) of the Arbitration & Conciliation Act, 1996, the Act does not provide for any remedy against such an order, either under Section 34 or Section 36. Since no alternate remedy is available, Writ Petition under Article 227 of the Constitution of India would be maintainable.(Distinguished Bhaven Construction v. Executive Engineer, Sardar Sarovar Narmada Nigam Ltd?(2022) 1 SCC 75 ).

2.????Section 25(a) deals with cases in which the Claimant is not ready to show sufficient cause for failing to file Statement of Claim within stipulated time. Where the Claimant is able to show sufficient cause, the Arbitral Tribunal cannot terminate proceedings under Section 25(a). On sufficient grounds being shown, the arbitrator has power to recall the order terminating the arbitral proceedings. (Reliance placed on Srei Infrastructure Finance Ltd v. Tuff Drilling Private Limited (2018) 11 SCC 470).

In view of the above, the High Court disposed off the Writ Petitions with a direction to the arbitrator to consider and to take a decision on the Petitioner’s recall applications seeking recall of arbitrator’s order terminating the proceedings.

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In Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal (#SupremeCourtofIndia, decided on 05.05.2022), there was no written agreement between the parties, & arbitrator was appointed by mutual consent of parties for resolution of disputes.

Here, the sole #arbitrator was allegedly unduly delaying the disputes, owing to which Respondent approached High Court (HC) under S. 14 of #Arbitration & Conciliation Act, 1996 (A&C Act). The Appellant had in the said petition, filed an Order VII Rule 11 application, for rejection of the S. 14 application which was dismissed by HC. Even the Writ Petition filed against this dismissal was dismissed. It was against the Order of dismissal of the Writ Petition that the Appellant had approached the Supreme Court.

Simultaneously, while the S. 14 application was still pending, Respondent also moved an application under S. 11(6) of the A&C Act, 1996 requesting to terminate the sole arbitrator & to appoint fresh arbitrator. This Application was allowed by the HC & fresh arbitrator was appointed. The Appellant also approached the Supreme Court against this order of the HC.?

Further, once the S. 11(6) application was decided, the Respondent had withdrawn its S. 14 application which had been pending before the HC.

The Court while observing and being mindful of the facts of the case observed as under:

1.????There is a difference between S. 11(5) & 11(6) of the A&C Act, 1996. S. 11(5) gets attracted when there is no procedure for appointment of arbitrator agreed between the parties, & S. 11(6) is attracted when there is a procedure for appointment agreed upon.?

2.????In the present case, where there was no agreement, S. 11(5) would be attracted & not S.11(6). Once dispute is referred to arbitration & #arbitrator is already appointed, the arbitration agreement cannot be invoked for a second time by invoking S. 11(6). Therefore HC was not correct to entertain the Petition under S. 11(6) for appointment of arbitrator.

3.????Under S. 14 of A&C Act, If grounds on which the mandate of arbitrator is sought to be terminated is de jure and/or de facto inability of arbitrator to perform his functions, or to act without undue delay, the aggrieved party has a right to approach Court to adjudicate on the same. This is because this would amount to a disqualification of the arbitrator, and the same needs to be adjudicated before Court. (Not to be moved before the Arbitrator).

4.????HC was at least right in dismissing the Order VII Rule 11 Application filed by the Appellant in the S. 14 Petition, & HC should have decided on merits whether there was in fact an undue delay by the arbitrator or not.

In view of the above observations, HC's order passed under S. 11(6) was quashed & set aside, S. 14 application was directed to be revived, & be decided in accordance with law.?

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In the case of Millennium School v. Pawan Dawar (Delhi High Court, decided on 10.05.2022), the parties had entered into agreement whereby the Respondent was to provide transport services to the Petitioner school.?

Disputes arose between the parties, when the Respondent had outstanding payments owed from the Petitioner, the petitioner alleged deficiency of services and terminated the Agreement.?

When the disputes were referred to the #arbitrator, the Arbitrator allowed one of the Claims of the Respondent, on the ground that the Petitioner failed to prove deficiency of services.?

The Petitioner had brought on record several emails to prove deficiency of services, but the Arbitral Tribunal had rejected all of these on the ground that the requirements under Section 65-B of the Evidence Act were not complied with. Although a certificate under Section 65-B was filed by the Petitioner, the Arbitral Tribunal held it was defective.?

The Court’s observations were as follows:

1.????An objection with regard to Section 65-B certificate is not available if not taken at the relevant time. (Reliance placed on?R.V.E. Venkatachala Gounder v. Arulmigu Viswesaraswami & V.P. Temple And Anr.: (2003) 8 SCC 752, Sonu v. State of Haryana: (2017) 8 SCC 570 and Om Prakash v Central Bureau of Investigation: 2017 SCC Online Del 10249).?In this case, the Respondent had not specifically taken any objection with regard to Section 65-B certificate, and the Arbitral tribunal had suo moto taken it upon themselves.

2.????As per Section 1 of the Evidence Act, Section 65-B is not applicable to arbitral proceedings, even though principles of Evidence Act are usually applied in arbitral proceedings. Despite the same, the Arbitral Tribunal has disregarded the entire evidence led by the Petitioner regarding deficiency of service solely on the ground that the certificate produced under Section 65-B was defective.?

3.????In fact, several communications relied on by the Petitioner, were admitted by the Respondent. Despite the same, the said communications were rejected as not admissible on the ground of Section 65-B certificate being defective.

4.????Keeping in mind the above, the decision of the Arbitral to completely ignore the said emails was held to be manifestly erroneous. The Arbitral Tribunal had failed to address itself as to whether in fact, there was any deficiency of services warranting termination of the Agreement.?

In view of the above, because loss of profit was solely awarded on the basis that the termination of the Agreement was illegal, the said award of loss of profits was set aside.?

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In the case of Rajesh Gupta v. Ram Avtar (Delhi HC, decided on 19.05.2022), parties had entered into an Agreement for purchase of Respondent’s factory by Petitioner.?

Petitioner had already paid a large sum of 37.5% of the entire purchase price as “Earnest Money” (EM).?

The Agreement provided that incase the Petitioner failed to complete the transaction within stipulated time, then the Respondent would be entitled to recovery double the amount of the EM paid.

The Petitioner had discovered, after entering into Agreement that the Respondent had fraudulently misrepresented the area of the factory premises by 3500 Square feet. In view of the same, the Petitioner had asked the Respondent to either reduce the purchase price or to refund the EM.?

These disputes, when they came before the #Arbitrator, he did not allow refund of EM & permitted forfeiture of EM, citing terms of Agreement.

This award came to be challenged before Court in an objection petition under Section 34 of the #Arbitration & Conciliation Act, 1996, & regarding EM forfeiture, the Court observed as follows:

1.????The question whether the amount given as EM could in fact be considered as “a guarantee to fulfil the contract” or indeed formed part of the purchase price, needed to be seen having regard to the quantum of the amount. (Reliance placed on Shree Hanuman Cotton Mills v. Tata Air Craft Ltd.(1969) 3 SCC 522).?

2.????Mere use of words "EM" was not conclusive proof that the amount paid was not an advance or part of the purchase price. The intention of parties & surrounding circumstances need to be seen. (Reliance placed on Videocon Properties Ltd. v. Bhalchandra Laboratories (2004) 3 SCC 711).

3.????All stipulations in agreements, providing for amounts to be paid in case of breach would be covered under Section 74 of the Indian Contract Act, 1872. This is true even for EM. Since section 74 awards reasonable compensation for damage or loss caused by breach of contract, damage or loss caused is a sine qua non for the applicability of the section. (Reliance placed on Kailash Nath Associates v. Delhi Development Authority (2015) 4 SCC 136).

4.????If no loss is caused to the party claiming forfeiture of EM & there is no pleading of loss suffered, then the party claiming forfeiture can forfeit no more than a nominal sum. (Reliance placed on M.C. Luthra v. Ashok Kumar Khanna, 27.02.2018).

5.????In the present case, the Respondent had neither pleaded nor established any loss suffered. Here the EM paid was an extremely substantial sum being 37.5% of the entire sale consideration, & thus could not be allowed to be forfeited without actual loss being proved.?

In view of the above, the Court observed that it would be impermissible for the Respondent to forfeit the EM & the award was set aside.?

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In the case of Board of Trustees for Syama Prasad Mookerjee Port v. Marinecraft Engineers Private Limited (Calcutta High Court, decided on 17.05.2022), the Respondent was registered under the Micro Small and Medium Enterprises (“MSME”) Development Act, 2006 (“MSME Act”).

In this case, the Respondent had invoked disputes before the MSEFC (MSME Facilitation Council) for conciliation. Once the conciliation had failed, the disputes were referred to arbitration.?

In the #Arbitration proceedings, the Petitioner challenged the jurisdiction of the arbitrator, whereby the arbitrator rejected the said application.?

The Petitioner then challenged this order of the arbitrator before the High Court under Section 34 of the #Arbitration & Conciliation Act, alleging that the said order amounted to an interim award.

?The Court observed as follows:

?1.????Where a Section 16 application ( challenging jurisdiction of arbitrator) is dismissed, the drill is that there is no appeal available, and the challenge to the section 16 being dismissed must await the passing of the final award where it may be raised under Section 34. (Reliance placed on Deep Industries Limited Vs Oil and Natural Gas Corporation Limited and Another (2020) 15 SCC 706 and Bhaven Construction Vs Executive Engineer 2021 SCCOnLine 8).

2.????It is a different matter, if the Arbitrator accepts the challenge to the jurisdiction under Section 16, and the matter comes to an end. Such an order will be deemed to be an award and will be amenable to a challenge under Section 34 of the Arbitration & Conciliation Act, 1996. It is the nature of the order on the objection, which decides which remedy is available to the objector and not the character of the objection itself. (Reliance placed on Ranjiv Kumar & Another vs. Sanjiv Kumar & Another APO No.60 of 2018 and GA No.506 of 2018 in AP No.679 of 2017, Division Bench, Calcutta High Court).

3.????Since the order in this particular case related to the jurisdiction of the Arbitral Tribunal it did not pass the test of an interim award permitting an application under section 34 of the Arbitration & Conciliation Act, 1996 at that particular stage of the proceedings.?

In view of the above, the objection petition was dismissed.