Supreme Court's latest judgement on 'Valid Arbitration Agreement' and 'Joinder of Non-Signatory to Arbitration Agreement'

Mahanagar Telephone Nigam Ltd. Versus Canara Bank & Ors. [Civil Appeal Nos. 6202-6205 of 2019]

A.   FACTS

Canara Bank purchased the Bonds issued by MTNL, of the face value of Rs. 80 crores, from CANFINA which is its wholly owned subsidiary. Canara Bank requested for registration of these Bonds with MTNL, and lodged letters of allotment for purchase of the bonds from CANFINA. Disputes arose between the parties pursuant to which Canara Bank filed a writ petition before the Delhi High Court to challenge the cancellation of the Bonds, and a direction to pay the Interest accrued. It is relevant to note that CANFINA was joined as a proforma party in the Writ Petition filed by Canara Bank.

B.     PROCEEDINGS BEFORE THE ARBITRATOR

Thereafter, a sole arbitrator was appointed by the court who issued notice to all the three parties i.e. MTNL, Canara Bank, and CANFINA. Canara Bank raised an objection to joining CANFINA as a party to the arbitration. The Arbitrator heard the parties on the issue whether CANFINA should be joined as a party to the proceedings. The learned Arbitrator passed an interim award holding that CANFINA had not appeared before the High Court, when the disputes were referred to arbitration. CANFINA was not a party to the arbitration agreement, and cannot be joined as a party to proceedings. Subsequently, MTNL filed its reply to the Statement of Claim filed by Canara Bank, and also made a Counter-Claim against Canara Bank.

C.     SLP

Aggrieved by the Order(s) of the High Court, MTNL (APPELLANT) filed a SLP in which notice was issued to all three parties including CANFINA (Respondent No.2)

D.     SUBMISSIONS OF THE APPELLANT (MTNL)

•  In the absence of a written agreement for arbitration between the parties, as stipulated by Section 2(b) r.w. 2(h) and 7(3) of the Arbitration and Conciliation Act, 1996, the arbitration cannot proceed.
•  The arbitration proceeding cannot proceed in the absence of Respondent No. 2 – CANFINA as the Bonds in question were subscribed by Respondent No, 2 – CANFINA, and were subsequently transferred to its parent Company i.e. Respondent No. 1 – Canara Bank.
•   In the absence of Respondent No. 2 – CANFINA being made a party to the arbitration, the arbitral proceedings may be rendered infructuous.

E.      SUBMISSIONS OF RESPONDENT NO.1 (CANARA BANK)

• The present appeal is not maintainable as the Appellant – MTNL filed the present Appeal after filing its reply to the Statement of Claim and Counter-Claim before the learned Sole Arbitrator, and has therefore submitted itself to the jurisdiction of the learned Sole Arbitrator.
•  The only remedy available to Appellant – MTNL was to file an application under Section 16 of the Arbitration and Conciliation Act, 1996
• MTNL has not filed any claim against Respondent No. 2 – CANFINA, and therefore, cannot seek any remedy or relief against Respondent No. 2 – CANFINA

F.      ISSUES RAISED

    i.  The first issue raised by the Appellant – MTNL with respect to the existence of a valid arbitration agreement between the three parties;

     ii.  The second issue raised by Respondent No. 1 – Canara Bank that Respondent No. 2 – CANFINA, is not a party to the arbitration agreement, and hence cannot be impleaded in the proceedings.

G.    THE EXISTENCE OF A VALID ARBITRATION AGREEMENT

• A valid arbitration agreement constitutes the heart of arbitration. An arbitration agreement is the written agreement between the parties, to submit their existing, or future disputes or differences, to arbitration. A valid arbitration agreement is the foundation stone on which the entire edifice of the arbitral process is structured. A binding agreement for disputes to be resolved through arbitration is a sine-qua-non for referring the parties to arbitration.
• The arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The essential elements or attributes of an arbitration agreement is the agreement to refer their disputes or differences to arbitration, which is expressly or impliedly spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the parties.

H.    INTERPRETATION OF A CONTRACT

• The meaning of a contract must be gathered by adopting a common sense approach, and must not be allowed to be thwarted by a pedantic and legalistic interpretation.
•  An ‘arbitration agreement’ is a commercial document inters partes, and must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities.

I.       DECISION ON VALIDITY OF ARBITRATION AGREEMENT

•  The court held that The Appellant – MTNL after giving its consent to refer the disputes to arbitration before the Delhi High Court, is now estopped from contending that there was no written agreement to refer the parties to arbitration.
• The statement of Claim and Defence filed before the Arbitrator would constitute evidence of the existence of an arbitration agreement, which was not denied by the other party, under Section 7(4)(c) of the 1996 Act.

J.       JOINDER OF CANFINA IN THE ARBITRAL PROCEEDINGS

• ·A non-signatory can be bound by an arbitration agreement on the basis of the “Group of Companies” doctrine, where the conduct of the parties evidences a clear intention of the 2 parties to bind both the signatory as well as the non-signatory parties.
• The doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.

K.     CIRCUMSTANCES IN WHICH ‘GROUP OF COMPANIES’ DOCTRINE CAN BE INVOKED

• If there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties.
• A ‘composite transaction’ refers to a transaction which is inter-linked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.
• The Group of Companies Doctrine can also be invoked in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality. In such a situation, signatory and non-signatories have been bound together under the arbitration agreement. This will apply in particular when the funds of one company are used to financially support or re-structure other members of the group.

 L.      DECISION ON JOINDER OF NON SIGNATORY TO ARBITRATION AGREEMENT

• The court held that it will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds. The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration was not paid.
• There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings.
• Given the tri-patite nature of the transaction, there can be a final resolution of the disputes, only if all three parties are joined in the arbitration proceedings, to finally resolve the disputes which have been pending for very long.
• Court took note of the fact that CANFINA participated in the proceedings before the High Court, and the Committee on Disputes. CANFINA was also represented by its separate Counsel before the Sole Arbitrator. Further, Canara Bank in writ petition filed before the Delhi High Court, had joined CANFINA as Respondent No. 2, even though it was joined as a proforma party. CANFINA was represented by Counsel in the Writ Proceedings before the Delhi High Court. The Counsel for CANFINA was however not present on two dates i.e. on 16.09.2011 and 21.10.2011, when the High Court recorded the agreement between the parties for reference of disputes to arbitration.
•  Lastly, it was held that the present case is one of implied or tacit consent by Respondent No. 2 – CANFINA to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties.
• Court held that since Respondent No. 2 – CANFINA has throughout participated in the proceedings before the Committee on Disputes, before the Delhi High Court, before the Sole Arbitrator, and was represented by its separate Counsel before this Court in the present appeal. There was a clear intention of the parties to bind both Canara Bank, and its subsidiary – CANFINA to the proceedings. Therefore, there can be no final resolution of the disputes, unless all three parties are joined in the arbitration. For the foregoing reasons, the appeal was partly allowed.
• The court invoked the Group of Companies doctrine, to join Respondent No. 2 – CANFINA i.e. the wholly owned subsidiary of Respondent No. 1 – Canara Bank, in the arbitration proceedings pending before the Sole Arbitrator.