‘Group Of Companies’ doctrine can be invoked to bind non-signatory companies to Arbitration if there is a direct relationship and/or composite nature of transaction between the parties

The Supreme Court held that the ‘Group of Companies’ doctrine could be invoked to bind the non-signatory company or inclusion of a third party to an arbitration is possible if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter and/or there is a composite nature of the transaction between the parties.

The said ruling was held in the matter of Mahanagar Telephone Nigam Ltd vs. Canara Bank & Anr. (Civil Appeal Nos. 6202-6205 of 2019), decided on 08.08.2019.

Challenge

That in the present petition there were broadly two issues that arose for consideration:

(i) Whether there is an existence of a valid arbitration agreement between the three parties- MTNL, Canara Bank and CANFINA (a wholly owned subsidiary of Canara Bank);

(ii) Whether the Respondent No. 2 herein – CANFINA cannot be impleaded in the arbitration proceedings as the same is not a party to the arbitration agreement.
Held

Dealing with the first issue, the Apex Court observed that 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.

It was also observed that an 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. Also, Section 7(4)(c) of the Arbitration and Conciliation Act, 1996 provides that there can be an arbitration agreement in the form of exchange of statement of claims and defense, in which the existence of the agreement is asserted by one party and not denied by the other.

In the instant case, the statement of Claim and Defense, counter claim filed before the Arbitrator by the parties 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.

Dealing with the second issue, the Division Bench of the Apex Court held and observed that as per the principles of contract law, an agreement entered into by one of the companies in a group cannot be binding on the other members of the same group as each company is a separate legal entity which has separate legal rights and liabilities. However, 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 parties to bind both the signatory as well as the non-signatory parties, it being a necessary party to the contract.

The circumstances in which the ‘Group of Companies’ doctrine could be invoked to bind the non-signatory affiliate of a parent company or inclusion of a third party is possible to an arbitration if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; there is a composite nature of the transaction between the parties. This doctrine will apply in particular when the funds of one company are used to financially support or re-structure other members of the group.

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 have a bearing on the dispute.

Hence, in the present case it was held that as there is a direct nexus between all the three parties and in the absence of CANFINA since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA, it would be a futile to effort to decide the disputes only between MTNL and Canara Bank. Also, 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.