The Supreme Court on Wednesday held that a non-signatory to a contract containing an arbitration clause, may be bound by the arbitration agreement, if it is an alter-ego of the party which executed the arbitration agreement [Oil and Natural Gas Corporation Ltd. v Discovery Enterprises Private Ltd. & Ors.].
A Bench of Justices DY Chandrachud, Surya Kant and Vikram Nath analysed existing literature on the ‘group of companies doctrine’ and stated that a non signatory may be bound by an arbitration agreement where:
There exists a group of companies; and
Parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.
“A party, which is not a signatory to a contract containing an arbitration clause, may be bound by the agreement to arbitrate if it is an alter ego of a party which executed the agreement,” the judgement stated.
Further, the top court observed that, in deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors:
The mutual intent of the parties;
The relationship of a non-signatory to a party which is a signatory to the agreement;
The commonality of the subject matter;
The composite nature of the transaction; and
The performance of the contract.
“Consent and party autonomy are undergirded in Section 7 of the Act of 1996. However, a non-signatory may be held to be bound on a consensual theory, founded on agency and assignment or on a non-consensual basis such as estoppel or alter ego,” the Court said.
As such, the court quashed the interim award of an arbitration tribunal for the following reasons:
The failure of the arbitral tribunal to decide upon the application for discovery and inspection filed by Oil and Natural Gas Corporation Ltd. (ONGC);
The failure of the arbitral tribunal to determine the legal foundation for the application of the group of companies doctrine; and
The decision of the arbitral tribunal that it would decide upon the applications filed by (the claimant) ONGC only after the plea of jurisdiction was disposed of.
“The first arbitral tribunal has made a fundamental error of law in not deciding the application by ONGC on discovery and inspection of documents before it ruled on jurisdiction. In doing so, the first arbitral tribunal’s interim award dated 27 October 2010 goes against the principles of natural justice. The failure to consider the application for discovery and inspection of documents results in a situation where vital evidence that could have assisted the Tribunal in its determination of the challenge under Section 16 was shut out,” the apex court said in its judgment.
The Supreme Court was considering an appeal against a June 2021 judgment of the Bombay High Court which dismissed a plea moved by ONGC under Section 37 of the Arbitration and Conciliation Act, 1961.
Facts of the case
The First Arbitration Tribunal
On March 22, 2006, ONGC awarded a contract to Discovery Enterprises Private Ltd. (DEPL), the first respondent, which is a company belonging to the DP Jindal Group, for operating a floating, production, storage and offloading vessel.
In April 2008, ONGC invoked arbitration against DEPL and Jindal Drilling and Industries Ltd. (JDIL) claiming ₹63.88 crores as dues.
In its statement before the tribunal, ONGC argued that DEPL and JDIL belonged to the DP Jindal Group of Companies and since they constitute a single economic entity, the corporate veil should be lifted to compel the non-signatory, JDIL, to arbitrate.
ONGC also filed an application for discovery to establish its claim that DEPL is an alter-ego and agent of JDIL.
The tribunal, by way of its interim award in October 2010, held that JDIL was not a party to the arbitration agreement and must be deleted from the array of parties.
ONGC challenged the interim award but the Bombay High Court dismissed the same prompting the appeal before the Supreme Court.
Meanwhile, the arbitral tribunal delivered its final award holding that ONGC is entitled to recover the claimed amount along with interest from DEPL.
The Second Arbitration Tribunal
During the pendency of the arbitration between ONGC and DEPL, ONGC withheld an amount of ₹64.88 crores from JDIL against four contracts between them.
In response to a letter from JDIL seeking release of the dues, ONGC stated that they are withholding the sum as adjustments against the dues owed to ONGC by DEPL.
Therefore, JDIL invoked its arbitration clause and a second arbitral tribunal was constituted.
The arbitral tribunal in October 2013, directed ONGC to pay the amount due along with interest to JDIL.
ONGC’s petition against the award was dismissed by a single-judge of the Bombay High Court following which they filed an appeal.
The appeal before the Bombay High Court was transferred to the Supreme Court which heard the cases together.
Supreme Court’s Analysis and Findings
The Supreme Court analysed the facts of the case along with the arguments raised by both sides against the ‘group of companies’ doctrine.
The court recalled that in Chloro Controls(I) P. Ltd. v Severn Trent Water Purification, a three-judge Bench had held that though an arbitration normally would take place between parties to the arbitration agreement, it could take place between a signatory to an arbitration agreement and a third party as well.
Further, the Court noted that the fundamental basis of the interim award of the tribunal is that in view of the provisions of Section 7 and the definition of the expression “party” in Section 2(1)(h), the provisions of the Act of 1996 could not be invoked or applied to a non-signatory to an arbitration agreement.
The tribunal also held that it has no jurisdiction to investigate, enquire into or record any findings on the basis of ONGC’s claim against JDIL.
However, the apex court opined that by failing to consider the application for discovery and inspection, the tribunal has foreclosed itself from inquiring into whether there was sufficient material to establish the application of the group of companies doctrine.
Therefore, the top court issued the following directions:
The judgment of the single-judge of the Bombay High Court dated 27 June 2012 in arbitration petition No 814 of 2011 is set aside;
The appeal filed by ONGC under Section 37 of the Act of 1996 against the interim award of the arbitral tribunal dated 27 October 2010 is allowed and the interim award of the tribunal dated 27 October 2010 shall stand set aside;
A fresh arbitral tribunal shall be constituted by ONGC and JDIL each nominating their arbitrators within a period of two weeks from the date of this judgment and the two arbitrators thereafter will jointly appoint the third arbitrator;
The present judgment will not have any bearing on the arbitral award dated 6 June 2013 passed in favour of ONGC against DEPL;
The transferred cases shall stand remitted back to the Bombay High Court. The hearing of the transferred cases is adjourned sine die so as to await the outcome of the arbitral proceedings between ONGC and JDIL in terms of (iii) above;
In pursuance of the interim orders of this Court, ONGC was directed to deposit the amount due to JDIL under the arbitral award in the second proceeding dated 9 October 2013 which was permitted to be withdrawn by JDIL subject to furnishing a bank guarantee. The bank guarantee furnished by JDIL shall be kept alive to the satisfaction of the Prothonotary and Senior master of the Bombay High Court pending the disposal of the arbitration appeals against the judgment of the single-judge dated April 28, 2015 dismissing the petition under Section 34 challenging the arbitral award dated October 9, 2013; and
Upon the reconstitution of the arbitral tribunal, the plea of JDIL under Section 16 shall be decided afresh. All the rights and contentions in that regard are kept open to be decided by the arbitral tribunal. The oral and documentary evidence which was produced before the earlier arbitral tribunal shall form part of the proceedings before the fresh arbitral tribunal to be constituted in pursuance of the above directions. ONGC would be at liberty to pursue its application for discovery and inspection and to seek further directions before the arbitral tribunal. Parties would be at liberty to apply for leading further evidence before the arbitral tribunal if they are so advised.
Advocate KR Sasiprabhu, who filed the instant appeal on behalf of ONGC told, Bar & Bench that the judgement is of significant import.
“Fifteen years ago, the Group of Companies Doctrine was unknown to Indian jurisprudence. When I pleaded it before a tribunal at the time, they just gave me a strange look. Then in the Indowind case, the Supreme Court said that you cannot commence arbitration against a party who is not a signatory to the agreement… Now we carried this matter to the Supreme Court and finally it said that our arguments need to be considered, restored the proceedings to the High Court and ordered constitution of a new arbitral tribunal”, he said.
Additional Solicitor General KM Nataraj appeared on behalf of ONGC and Senior Advocate Shyam Divan appeared for JDIL.
Source Link
