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Appointment Of Arbitrator By A Party During Pendency Of Section 11(6) Petition

Arbitration

An appeal against the order of the Hon’ble High Court of Orissa, declining to appoint an arbitrator under section 11(6) of the Arbitration and Conciliation Act, 1996,  was filed before the Hon’ble Supreme Court in the matter of Durga Welding Works v. Railway Electrification [(2022) 3 SCC 98].

The parties entered into a contract agreement pursuant to a tender floated by the appellant. The agreement had an arbitration clause. On dispute having arisen between the parties, the appellant served a legal notice dated 03.08.2009 for appointment of arbitrator and settlement of claim. Since the parties failed to appoint an arbitrator, the Appellant filed an application under section 11(6) of the 1996 Act for appointment of an arbitrator. However, just after filing of the arbitration petition, the appellant forgot to take any action in furtherance to the application and no notice was served to the respondents at any stage.

In the meanwhile the respondents responded to the legal notice dated 03.08.2009 and suggested two names of arbitrators as an option in their response dated 28.01.2010. The appellant filed an application seeking to restrain the respondents from proceeding to appoint an arbitrator since the matter was pending in the Court under section 11(6) of the 1996 Act. The said application also remained unattended by the appellant and no further action was taken.

Subsequently, the appellant itself on 28.08.2010 selected two officers from the panel suggested by the respondents and accordingly, the respondents constituted an Arbitration Tribunal vide letter dated 24.09.2010. The appellant thereafter not only appeared before the Arbitral Tribunal but also preferred statement of claim. The respondents submitted their statement of defence. Thereafter, the appellant moved an application before the Tribunal stating that the Arbitral Tribunal was not nominated within the stipulated time and hence, the constitution of the Arbitral Tribunal was not valid and that the Tribunal should not proceed with the arbitration proceedings.

The Appellant, however, till this point of time had not proceeded with the application under section 11(6) of the 1996 Act filed in 2009. On the other hand, the Arbitral Tribunal conducted the arbitral proceedings wherein the Appellant did not participate any further. Consequently, while an award dated 21.06.2013 was passed by the Ld. Arbitral Tribunal ex-parte rejecting the claims of the Appellant, the notices in the application under section 11(6) were only issued in 2016. In the light of the peculiar facts of the case, the Hon’ble High Court dismissed the arbitration petition filed under section 11(6) by an order dated 26.07.2019.

The Hon’ble Supreme Court while deciding the issue expounded the law on the issue which has been long settled by the courts in the following terms:

“11. The exposition of legal principles is indeed well settled by this Court in Datar Switchgears Ltd. v. Tata Finance Ltd. [Datar Switchgears Ltd. v. Tata Finance Ltd., (2000) 8 SCC 151] followed in Punj Lloyd Ltd. v. Petronet MHB Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., (2006) 2 SCC 638] that once an application under Section 11(6) of the Act has been filed for appointment of an arbitrator before the High Court, the respondents forfeited their right to appoint an arbitrator and the High Court alone holds jurisdiction to appoint an arbitrator in exercise of power under Section 11(6) of the Act.”

In Datar Switchgears Ltd the respondent failed to pay the amount claimed under the legal notice and further did not appoint the arbitrator as stipulated in the arbitration clause conditionally invoked under the legal notice. The respondent, however, filed an application under section 9 of the 1996 Act for seeking interim reliefs. The 1st respondent thereafter also appointed the 2nd respondent as an arbitrator in November 1999 by invoking arbitration clause. Subsequently, the appellant filed an arbitration application before Hon’ble Bombay High Court praying for appointment of another arbitrator. 1st respondent opposed this application. The petition was rejected by the Court as not maintainable as the arbitrator had already been appointed by the first respondent. The Court held that “An application under sub-section (6) of Section 11 can be filed when there is a failure of the procedure for appointment of an arbitrator.” As per the arbitration clause there was no failure of the respondent as the arbitration clause gave unfettered right to the respondent to appoint an arbitrator and there was no necessity of putting the appellant to notice or taking its consent. The Court framed the issue whether for purposes of Section 11(6) the party to whom a demand for appointment is made, forfeits his right to do so if he does not appoint an arbitrator within the reasonable time or time stipulated.

In the said matter the Court held that “So far as cases falling under Section 11(6) are concerned — such as the one before us — no time limit has been prescribed under the Act, whereas a period of 30 days has been prescribed under Section 11(4) and Section 11(5) of the Act. In our view, therefore, so far as Section 11(6) is concerned, if one party demands the opposite party to appoint an arbitrator and the opposite party does not make an appointment within 30 days of the demand, the right to appointment does not get automatically forfeited after expiry of 30 days. If the opposite party makes an appointment even after 30 days of the demand, but before the first party has moved the court under Section 11, that would be sufficient. In other words, in cases arising under Section 11(6), if the opposite party has not made an appointment within 30 days of demand, the right to make appointment is not forfeited but continues, but an appointment has to be made before the former files application under Section 11 seeking appointment of an arbitrator. Only then the right of the opposite party ceases. We do not, therefore, agree with the observation in the above judgments that if the appointment is not made within 30 days of demand, the right to appoint an arbitrator under Section 11(6) is forfeited.” Since in that case the respondent made the appointment before the appellant filed the application under Section 11(6), though it was beyond 30 days from the date of demand, the appointment of the arbitrator by the respondent was held as valid. The Court further relied on the settled law that ‘court cannot interpose and interdict the appointment of an arbitrator’ generally, whom the parties have chosen under the terms of the contract and that due importance has to be given to such procedure as agreed by the parties.

In  Punj Lloyd Ltd.   the respondent had not made appointment as per the arbitration clause within the time stipulated in the notice invoking arbitration till the date of filing of the application under section 11(6) of the 1996 Act by the appellant and therefore, the application for the appointment of arbitrator was allowed by the Hon’ble Supreme Court while applying the principles laid down in Datar Switchgears Ltd.

The Court, after referring to the settled law laid down by the Supreme Court, took the view that although the appointment of an arbitrator was undisputedly made by the respondents after the appellant filed arbitration petition under Section 11(6) of the 1996 Act, however, the matter in hand had peculiar facts and circumstances that the on one hand Appellant slept over its arbitration application filed in 2009 and notices were issued only in 2016  and on the other hand appellant did not participate in the arbitral proceedings before the Tribunal constituted with the consent of  the appellant, and therefore, the High Court did not commit any error in declining to exercise its jurisdiction under Section 11(6) of the Act for appointment of an arbitrator and dismissing the arbitration petition. The Court held that although there is a settled law that after the application has been filed for appointment of an arbitrator under Section 11(6) of the Act, the respondents are deemed to have forfeited their right to appoint an arbitrator under the arbitration clause, however, the law would not be applicable to the facts of the present matter.

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Group Of Companies Doctrine Can Be Applied To Bind Non Signatory To An Arbitration Agreement

Arbitration, Uncategorized

In a recent judgment in Oil and Natural Gas Corporation Ltd. Versus M/s Discovery Enterprises Pvt. Ltd. & Anr. decided on 27.04.2022 by a three Judges Bench of the Hon’ble Supreme Court, once again the dispute regarding the applicability of the ‘group of companies’ doctrine has been discussed and decided by the Court. The issue arise out of the interim order allowing the application to delete the group entity Jindal Drilling and Industries Limited (JDIL) from the array of parties. A contract for operating a floating, production, storage and offloading vessel was awarded by ONGC to Discovery Enterprises Private Limited (DEPL), a company belonging to the D P Jindal Group. As per the contract, a vessel was to be imported. The vessel was accordingly imported and ONGC paid the customs duty on the understanding that the vessel would be re-exported after completion of work under duty drawback and DEPL shall complete the necessary formalities in this regard. The vessel left Indian territorial waters and did not return. According to ONGC, DEPL failed to complete the formalities for duty drawback and did not compensate ONGC for customs duty and other expenses (Disputed Amount).

Arbitration was invoked by ONGC wherein DEPL and JDIL were made respondent parties. An application under Section 16 of the Arbitration and Conciliation Act, 1996 was filed by JDIL seeking its deletion from the arbitral proceedings on the ground that it is not a party to the arbitration agreement. It was contended by ONGC that DEPL and JDIL belonged to the DP Jindal Group of Companies and since they constitute a single economic entity and the corporate veil should be lifted to compel the non-signatory, JDIL, to arbitrate. The contention of ONGC was based on the fact that JDIL has a vital business interest in DEPL, JDIL is the ultimate beneficiary of the business of DEPL, DEPL has close corporate unity with Jindal Group and the shareholders are almost common, DEPL has throughout represented that they are group company of Jindal amongst the fact that the letter head also depicted the same and that there existed a corporate and functional unity between them.

The Arbitral Tribunal passed an interim award and held that JDIL was not a party to the arbitration agreement and hence the Arbitral Tribunal lacked the jurisdiction to arbitrate on the claims against it. The name of JDIL was therefore deleted from the array of parties.  The Arbitral Tribunal relied on the judgment of Hon’ble Supreme Court in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. [(2010) 5 SCC 306]. For the same reason that the Tribunal does not have the jurisdiction, an application filed by ONGC for discovery and inspection was also not allowed. The appeal against the interim award was dismissed by the Hon’ble Bombay High Court on the ground that ONGC failed to show that the companies had common shareholders and common board of directors. Even if this was the case, they do not become the single entity in the light of the judgment in Indowind Energy even if the son and daughter-in-law of the managing director of JDIL are directors in DEPL. The fact remained that JDIL was not the signatory to the contract.

The judgment was challenged under Article 136 of the Constitution.

In the mean while the final award was also delivered allowing the claims of ONGC. ONGC in turn withheld payment due to JDIL in another dispute arising out of 4 agreements between ONGC and JDIL as an adjustment against the dues owed to ONGC by DEPL in the first arbitration. The dispute culminated in an arbitral award in favour of JDIL. This award was challenged under section 34 which was dismissed. The appeal against the order was also dismissed and finally the jurisdiction of the Hon’ble Supreme Court under Article 136 was invoked. This case, on the request of ONGC, was transfered before the Bench looking into the validity of the interim award passed in the first arbitration deleting JDIL from the array of parties.

The Hon’ble Supreme Court started its analysis by looking into the definition of arbitration agreement provided under section 7 of the Arbitration and Conciliation Act, 1996.  Further, expression “party” is defined in Section 2(h) to mean a party to an arbitration agreement. The Court observed that the judgment in Indowind Energy deals with interpretation of the term “parties” vis-à-vis an arbitration agreement in the context of an application for the appointment of an arbitrator under Section 11(6) of the 1996 Act. The Court in the matter had concluded that Indowind in no communication had ever acknowledged or confirmed that it was a party to the arbitration agreement. It was held that “Each company is a separate and distinct legal entity and the mere fact that the two Companies have common shareholders or common Board of Directors, will not make the two Companies a single entity. Nor will the existence of common shareholders or Directors lead to an inference that one company will be bound by the acts of the other.” It was further observed that “The very fact that the parties carefully avoided making Indowind a party and the fact that the Director of Subuthi though a Director of Indowind, was careful not to sign the agreement as on behalf of Indowind, shows that the parties did not intend that Indowind should be a party to the agreement.”

The Court also analysed the judgments in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors (2013) 1 SCC 641, Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors (2018) 16 SCC 413 and MTNL v. Canara Bank & Ors. 16 (2020) 12 SCC 767. In Chloro Controls India it was held that “an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates”. It was further held that in exceptional cases “a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.” Direct relationship to the party signatory to the arbitration agreement; direct commonality of the subject matter; and 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 were stated to be relevant questions to be applied in the facts and circumstances of the case while determining the applicability o fthe doctrine of group companies.

The principle was subsequently applied to Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr (2018) 15 SCC 678 where in it was held that “a non-signatory would be bound by the arbitration clause in the mother agreement, since it is a party to an inter-connected agreement, executed to achieve a common commercial goal.” In Cheran Properties group of companies doctrine was applied against a non-signatory to the arbitration agreement in the case of the enforcement of a domestic arbitration award. It was held that “the group of companies doctrine has been applied to pierce the corporate veil to locate the “true” party in interest, and more significantly, to target the creditworthy member of a group of companies.” A word of caution was however added that since the doctrine stares at the face of established principle companies being separate legal entity, the doctrine may be applied after construction of the arbitration agreement and analysis of the circumstances relating to the entry into and performance of the underlying contract. So where there is a conscious intention of the parties to subject themselves to separate arbitration agreements under their individual contracts, the doctrine shall not apply (Duro Felguera v. Gangavaram Port Limited (2017) 9 SCC 729). Similarly, a mere existence of an indemnity by the foreign company, in the absence of any other factors, would not signify its intention to be bound by the arbitration agreement (Reckitt Benckiser (India) P Ltd. v. Reynders Label Printing (2019) 7 SCC 62). In MTNL the Hon’ble Court had on the same lines observed that the doctrine is applicable where conduct of the parties evidences that there is clear intention of the parties to bind a non-signatory. The Courts generally satisfy themselves that non-signatory company was a necessary party to the contract. The instances of conduct may be when 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.

The Court appreciated the work of Gary B. Born, according to whom a group of companies doctrine has also been invoked in cases where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality or when that party is an ‘alter ego’ of an entity which is signatory.  As per John Fellas, the principle of binding a non-signatory can also be looked from the angle of the doctrine of estoppel where the non-signatory group entity which has been reaping the benefits of the contract shall be directly estopped from taking inconsistent position and disavowing the obligations under the contract.

On analysing various judgments and views of the scholars, the Court propounded that the factors of mutual intent of the parties, relationship of a non-signatory to a party which is a signatory, commonality of the subject matter, composite nature of the transaction and performance of the contract shall determine whether a company within a group of companies which is not a signatory to arbitration agreement would be bound by the arbitration agreement.

On facts, the Court observed that the Arbitral Tribunal erred in not deciding the application for inspection and discovery and deferring it instead despite the fact that inspection and discovery was relevant for the determination of applicability of doctrine of group companies. In addition to the submissions of ONGC before the Tribunal, it was also stated in the course of the evidence by ONGC’s witness that almost all the senior officers of JDIL, including its Managing Director, actively participated in matters relating to the hiring of the vessel, its deployment, performance and related issues. ONGC’s assertions were based on the fact that even in the initial meeting between ONGC and DEPL, General Manager of JDIL attended on behalf of the DEPL. The Court regretted to state that the Ld. Tribunal did not even consider whether the group of companies doctrine would be applicable and precluded itself from deciding as to whether the application for discovery and inspection should be allowed which in turn “goes to the root of the process in as much as it disabled ONGC from pursuing its fundamental claim based on the application of the group of companies doctrine.”  The Court further observed that if the Arbitral Tribunal accepts a plea that it lacks jurisdiction, the order of the Tribunal is amenable to a challenge in appeal under Section 37(2)(a) and therefore it cannot be conclusive as it is subject to an appellate remedy.

While applying the law to the two appeals arising out of two different transactions, the Court observed that the issue of jurisdiction arose only in the first set of proceedings between ONGC, DPEL and JDIL. DEPL was not a party to the second proceeding. However, the evidence in one proceedings was used in the subsequent proceedings. In the subsequent proceeding between ONGC and JDIL, ONGC did not plead any defence on merits but asserted a right to adjust the amounts which were due to JDIL against the claims which ONGC had against DEPL under a distinct contract which was in dispute in the first proceeding. In this light the Court observed that there was significant amount of overlapping in the two arbitrations which was further confirmed by the fact that the grounds on which ONGC opposed JDIL’s application under Section 16 in the first arbitral proceeding overlapped with the basis on which ONGC sought adjustment of the claims due to JDIL in the second arbitral proceeding and Arbitral Award in the second proceeding relied on the findings contained in the interim award of the first Arbitral Tribunal.

The Court further took note of the deposition of the ONGC’s witness. It was deposed that first meeting was attended by the General Manager of JDIL, the expression of interest was signed by Manager (Commercial and Development), JDIL, bid was submitted by DEPL with a resume that stated it to be the part of the DP Jindal Group of Companies, DEPL and JDIL shared a common addresses and telephone numbers, DEPL was created by the Jindal Group with the definite purpose of rendering a particular service to the oil and gas sector, DEPL has indicated on the website that it works under the “fraternal hood of the said group, DEPL is promoted and managed by the son and daughter in law of the Managing Director of JDIL, bid was submitted by employee of JDIL, the Managing Director of JDIL had negotiated with the owners of the vessel for hiring on behalf DEPL etc. The Court found the deposition relevant and stated that there was merit in the submission which was been urged on behalf of the ONGC that the application for discovery and inspection had to be decided before the plea of jurisdiction was adjudicated upon. The Court went on to observe that the primary basis for the determination by the Tribunal of an absence of jurisdiction was that the arbitration agreement was between ONGC and DEPL whereas the legal foundation of the group of companies doctrine was not evaluated, on facts or law.

The Court accordingly held that “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. As a matter of fact, it emerged from the record that no evidence was adduced by JDIL in support of its plea of the absence of jurisdiction under Section 16. JDIL having taken the plea of absence of jurisdiction was required to establish the grounds on which it set about to establish its plea.”

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Sufficiency Of Stamp Duty On Agreement Cannot Be Adjudicated By Court at Pre-<br>reference Stage Under Section 11 Of Arbitration and Conciliation Act, 1996

Arbitration

In the matter of Parsvnath Developers Ltd v. Future Retail Limited (ARB.P. 14/2020) before Hon’ble Delhi High Court [decided on 12.04.2022], the petitioner moved an application under section 11(6) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) for appointment of the presiding arbitrator in a dispute that erupted between the parties in relation to the Sub-License Agreement. Under the said agreement, the petitioner had sub-licensed certain area of the Parsvnath Mall to the Respondent for running a departmental store under the name of ‘Big Bazaar’.

The dispute arose on account of the introduction of service tax on the service of renting/licensing of immovable properties for commercial use with effect from 01.06.2007 under the Finance Act, 2007 enacted by the Government of India.  As per the Petitioner, the Respondent was liable to bear the additional burden of service tax. However, the Respondent failed to reimburse the service tax paid by the Petitioner. It was contended by the Respondent that it was liable to pay any service tax since there was no stipulation contained in the Sub-License Agreement for payment of service tax. Between the period of period 01.06.2007 to 31.12.2017, the amount payable added up to Rs. 4,27,93,994/- towards service tax and GST.

When the parties approached the Hon’ble High Court, the moot question for determination was since the main Agreement is not sufficiently stamped whether the petition for appointment of an arbitrator is required to be rejected?

The Hon’ble Court referred to the judgments in N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Limited & Ors (2021) 4 SCC 379 and Garware Wall Ropes Limited v. Coastal Marine Constructions & Engineering Limited (2019) 9 SCC 209 wherein the Hon’ble Supreme Court held that non-payment or deficiency of stamp duty did not invalidate the main contract.  By virtue of doctrine of severability, the arbitration agreement or arbitration clause in a main contract is an independent agreement. It does not require mandatory registration. Therefore, invalidation of main contract on account of non-stamping, insufficient stamping or non-registration does not necessarily affect the arbitration agreement adversely.

The Court also referred to the law laid down in the matter of Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1 wherein a thumb rule of non-interference was laid down by the Hon’ble Supreme Court at the stage of reference unless it is found that the disputes ex facie are not arbitrable or the principal agreement is plainly invalid and unenforceable. It was held that the Courts would abstain from carrying out any adjudicatory exercise in respect of any contentious issue at a pre-reference stage.

The Court went on to further affirm the settled position by virtue of Section 6A of the  Arbitration and Conciliation Act, 1996 which lays down plainly that the scope of examination under Section 11 of the Arbitration and Conciliation Act, 1996 is confined to the existence of an Arbitration Agreement. The Court in this regard referred to the judgment in Duro Felguera, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729. The Court also went on to analyse Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714 and Bharat Sanchar Nigam Limited and Ors. v.Nortel Networks India Pvt. Ltd. (2021) 5 SCC 738.It was held in the matter of Bharat Sanchar Nigam Limited  that “It is only in the very limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time-barred, or that the dispute is non-arbitrable, that the court may decline to make the reference. However, if there is even the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the tribunal.” Similarly in the matter of NCC Limited v. Indian Oil Corporation Limited (2019) SCC OnLine Del 6964, it was held that “Thus, unless it is in a manner of speech, a chalk and cheese situation or a black and white situation without shades of grey, the concerned Court hearing Section 11 petition should follow the more conservative course of allowing parties to have their say before the Arbitral Tribunal”.

The Court therefore concluded that although there was an existing dispute as to whether the contract was sufficiently stamped or not and the same was contentious issue in the light of the arguments forwarded by the petitioner that Agreement was in the nature of leave and license and did not create any interest in respect of the premises in question, in favour of the respondent. In the light of same position of law, the Court further stated that the question of limitation, which is a mixed question of law and facts, is also required to be examined, not at the pre-reference stage by the Court but subsequently by the Arbitral Tribunal. The Court referred to the judgment in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd (2020) 2 SCC 455. In the said judgment the Hon’ble Apex Court made the following observation:

In view of the provisions of Section 16, and the legislative policy to restrict judicial intervention at the pre-reference stage, the issue of limitation would require to be decided by the arbitrator. Sub-section (1) of Section 16 provides that the Arbitral Tribunal may rule on its own jurisdiction, “including any objections” with respect to the existence or validity of the arbitration agreement. Section 16 is as an inclusive provision, which would comprehend all preliminary issues touching upon the jurisdiction of the Arbitral Tribunal. The issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the pre-reference stage under Section 11 of the Act. Once the existence of the arbitration agreement is not disputed, all issues, including jurisdictional objections are to be decided by the arbitrator.

In the light of the discussion the Hon’ble Court appointed an arbitrator for the adjudication of the disputes between the parties.

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Court can Pass an Order under Contempt of Courts Act, 1971 for Willful Disobedience of an Executable Order/Award of Arbitral Award

Arbitration, Contempt Petition

The matter pertains to judgment in Urban Infrastructure Real Estate Fund v. Dharmesh S. Jain and Anr. [Contempt Petition (C) No. 940 of 2021] passed by the Hon’ble Supreme Court on 10.03.2022. The Petitioner initiated arbitral proceedings and received an Arbitral Award dated 30.08.2018 in its favour. The Arbitral Tribunal directed the respondent for specific performance of the Share Purchase Agreement and also directed recovery of an amount of Rs. 78,33,37,500/- along with the interest from the respondents. The Arbitral Award was challenged under section 34 of the Arbitration and Conciliation Act, 1996. The Award Debtor further moved a notice of motion praying for the stay of the Award. The Hon’ble Single Bench of the Delhi High Court granted the interim stay on the condition that respondents deposit 50% of the awarded sum within twelve weeks.

The order of the Hon’ble Single Bench was challenged by the respondents. The application was dismissed by the Division Bench of the Hon’ble High Court. The respondents then preferred a special leave petition which was also dismissed by the Hon’ble Supreme Court vide order dated 28.10.2021. The Court, however, granted the respondents a period of eight weeks, as prayed, for depositing 50% amount as directed by the Single Bench with a rider that non-compliance of the order shall be taken very seriously and non-deposit of the amount shall be considered to be non-compliance of the order of the Hon’ble Supreme Court with serious consequences.

The respondents not only miserably failed to comply with the orders of the Hon’ble Supreme Court despite various reminders and a legal notice issued by the Petitioner, but also moved an application before the Hon’ble Supreme Court praying for recall of order dated 28.10.2021. The application was dismissed by a detailed order dated 25.01.2022.

The Petitioner moved an application alleging disobedience of the order dated 28.10.2021. The application was opposed by the respondents inter alia on the ground that section 36 of the Arbitration and Conciliation Act, 1996 separately provides for execution of award and “the weapon of contempt cannot be used for purposes of executing a decree or implementing an order for which law provides appropriate procedure” [reliance placed on R.N. Dey and Ors. Vs. Bhagyabati Pramanik and Ors., (2000) 4 SCC 400]. Petitioners on the other hand pleaded that as on date the total amount due from the respondents was Rs. 190 crore. The respondents, on one pretext or the other, have been taking extensions of time for deposit of the 50% amount as directed.

As to the findings of fact, the Hon’ble Supreme Court observed that for approximately two years, the respondents have been able to successfully avoid deposit of the 50% amount by seeking extensions and consequently has obstructed the execution proceedings for this long. The order directing the respondents to disclose their assets was not complied until 2 years. The Court rejected the argument of the respondent that since they have not deposited the amount as per the order dated 08.08.2019, necessary consequences under Section 36 of the 1996 Act shall follow and the execution proceedings have to be proceeded further. The Court opined that the conduct of respondent was an abuse of process of law. It showed the wilful disobedience of the respondent by non-compliance of the order that included order of the Hon’ble High Court as well as the Hon’ble Supreme Court, more so when the application for recall of its order dated 28.10.2021 was dismissed by the Hon’ble Supreme Court. This also belied the contention of the respondent that order dated 28.10.2021 was not a mandatory order when the respondent itself applied for its recall. The respondent had gone ahead to consciously not comply with order dated 28.10.2021 even when it was specifically observed in the order that non-compliance of the said order shall be treated very seriously and non-deposit of the amount as directed by the High Court shall be treated as non-compliance of the order of this Court and also having a serious consequence.

With regard to the case laws cited by the respondents, the Court observed that “We are mindful of the fact that contempt proceedings should not be of the nature of ‘execution proceedings in disguise.’ However, we hold that the case law cited supra would not come to the aid of the contemnor herein as the facts of the said case were significantly different from the case at hand. In the said case, no stay was operating on the decree of which contempt was alleged. Therefore, the decree-holder therein could very well initiate execution proceedings.” In the present case, the award was stayed subject to the deposit of an amount.

While dealing with the argument of the respondent that failure to comply with the order dated 28.10.2021 would have no consequences under the Contempt of Courts Act, 1971, the Court observed that “it is trite law that the jurisdiction of a Court under the Act, would not cease, merely because the order or decree of which contempt is alleged, is executable under law, even without having recourse to contempt proceedings.” The Court clarified that “Contempt jurisdiction could be invoked in every case where the conduct of a contemnor is such as would interfere with the due course of justice”. The Court further elaborated that “Contempt is a matter which is between the Court passing the order of which contempt is alleged and the contemnor; questions as to executability of such order is a question which concerns the parties inter-se. The power of the Court to invoke contempt jurisdiction, is not, in any way, altered by the rights of the parties inter-se”. The reliance was placed on Bank of Baroda vs. Sadruddin Hasan Daya  [(2004) 1 SCC 360] and Rama Narang vs. Ramesh Narang  [(2006) 11 SCC 114.

The Court explained that when an order or direction is given by the Court, the party is required to comply with the order within the time given and if the party is unable to do the needful in the given time, the party is required to apprise the Court of the same to seek reasonable extension of time. If the party has not resorted to either of the two things and has caused delay in compliance, the said party is liable for contempt. The further relied on Maruti Udyog vs. Mahinder C. Mehta AIR 2008 SC 309 where in it was held that the conduct of the contemnor is the relevant factor in determining the offence of contempt and this is irrespective of whether the decree is executable or not.

On the basis of the above discussion, the Court held that the conduct of the respondent-contemnors justified invocation of contempt jurisdiction of this Court.

D & H India Ltd. vs Superon Schweisstechnik India Ltd. [FAO(OS)(COMM) No. 237/2019] decided on 16.03.2020 it was held that On a plain reading, the proviso to Section 13 (1A) of the Commercial Courts Act is an enabling, rather than a disabling, provision. There is nothing, in the said proviso, which would seem to indicate that it dilutes the effect of sub-section (1A) of Section 13. If we were to read the said proviso as excluding, from the jurisdiction of the appellate court, all orders, passed by a Commercial Court, save and except those which find specific enumeration in Order XLIII of the CPC, it may amount to rewriting the proviso to read “Provided that no appeal shall lie, except from such orders passed by a Commercial Division or the Commercial Court as are specifically enumerated under Order XLIII of the Code of Civil Procedure, 1908 (5 of 1908) as amended by this Act and section 37 of the Arbitration and Conciliation Act, 1996 (26 of 1996).” We are not convinced that the province of our jurisdiction, in the present case, allows us to so legislate. To our mind, therefore, sub-section (1A) of Section 13 of the Commercial Courts Act allows appeals to be preferred against all judgements and orders of the Commercial Division of the High Court, to the Commercial Appellate Division thereof, and the proviso, to the said sub-section merely clarifies that, in the case of orders specifically enumerated in Order XLIII of the CPC, such appeals shall lie Order XLI Rule 1(3) and Rule 5 also provide for opportunity to the judgment debtor to obtain a stay against the decree upon deposit of the disputed amount in the Court.

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Applicability of Group Companies Doctrine while deciding applications under section 9 of the Arbitration and Conciliation Act, 1996

Arbitration

In the matter before the Division Bench of the Hon’ble Delhi High Court [Eveready Industries India Ltd. v. KKR India Financial Services Limited FAO(OS) (COMM) 2/2021 and CM APPL. 173/2021 & 2166/2021 decided on 07.02.2022], the Hon’ble Court once again elaborated on the applicability of Group Companies Doctrine to arbitration agreements when dealing with applications under section 9 of the Arbitration and Conciliation Act, 1996.

The issues arise out of the default in repayment of a loan granted in favour of two Indian companies. There were two personal guarantors and an obligor for the said loan.  Since there was an arbitration agreement, the Lender (Respondent No. 1) which is a non-banking financial Company, moved an application under section 9 of the Arbitration and Conciliation Act, 1996 seeking an order to restrain the borrowers, guarantors and the obligor from dealing with their assets along with seeking similar order for restraining the appellants, which were stated as “Reference Entities” in the loan documents. In order to justify the same, the Respondent No. 1 invoked the Group Companies Doctrine stating that credit facility under the loan agreement was advanced to borrowers after due verification of the credit worthiness of the group companies including the appellants. The Ld. Single Judge granted the injunction against the appellants wherein they were restrained from selling, transferring, alienating, disposing, assigning, dealing or encumbering or creating third party rights on the assets and from carrying out any change in their capital structure, or any corporate or debt restructuring, during pendency of the arbitral proceedings. The order was challenged before the Division Bench of the Hon’ble High Court.

After hearing the parties at length, the Hon’ble Court first discussed the origin and scope of the Group Companies Doctrine. The doctrine was propounded in the case of Dow Chemicals v. Isover Saint Gobain ICC Case No. 4131, YCA 1984. The Hon’ble Supreme Court applied the doctrine for the first time in Chloro Controls India v Sereven Trent Water Purification (2013) 1 SCC 641. The Supreme Court, while acknowledging the nature of modern business transactions which are carried out through multiple agreements creating intrinsically related transactions between the parties within a corporate group, clarified that a third party or a non-signatory can be subjected to an arbitration agreement without its consent but only in exceptional cases and propounded two legal theories on the basis of which an arbitration agreement may also bind a non-signatory – one on the good faith principle when there is a clear intention of parties to bind a non-signatory and second on legal principle of principal and the agent. In such circumstances, the arbitration agreement entered into by one of the entity in the group can bind the non-signatories and affiliates or the parent company.

The Court held that in addition to examine the aspect whether composite reference of third parties would serve the ends of justice, the Court shall also look at the issue from the “touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute.” The Court further added that “The principle of ‘composite performance’ would have to be gathered from the conjoint reading of the principal and supplementary agreements on the one hand and the explicit intention of the parties and the attendant circumstances on the other.”  

The doctrine was applied in Cheran Properties Ltd. V. Kasturi& Sons Ltd. (2018) 16 SCC 413to enforce an award against a non-signatory. In Mahanagar Telephone Nigam Ltd V. Canara Bank, (2019) SCC Online SC 995, the Court went on to  established the test of “single economic entity” or “single economic reality”. The court explained through illustrations as to when a non-signatory is held to be bound. For instance, a non-signatory is bound when the entity is engaged in the negotiation or performance of the commercial contract. It is also construed to be bound when it made statements indicating its intention to be bound by the contract. The Court also elaborated that an entity in a group is bound when the nature of transaction is composite. A composite transaction refers to “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 Court also explained that the Doctrine is also applicable 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”. The Court illustrated that this will apply in particular when the funds of one company are used to financially support or re-structure other members of the group.

Applying the principles to the facts and circumstances of the case, the Court found that the facility was extended to the borrower companies for repayments of existing loans of one of the appellants. The appellant was therefore beneficiary of the loan. The appellant however had contended that it had no obligation to either repay, or secure the facility. As per the loan documents any entity controlled by the two guarantors was included in the promoter group. One of the guarantors was the Vice Chairman and Managing Director of the appellant. His father was the Chairman. The other guarantor and cousin of the first guarantor was the director of the appellant. The Court stated that while a managing director as per the Companies Act is entrusted with substantial powers of the management of the affairs of the company, a promoter has control over the affairs of the company. In the same manner, the guarantors held similar positions in the other two appellants also. Moreover, the borrower companies and guarantors and their families were part of the promoter group. They had control over the reference entities which included the appellants.

The Court then went on to further observe that the promoter group held a substantial portion of Eveready Industries Ltd. The two borrower companies and Eveready Industries Ltd. were promoters of one of the appellants. The Court after extensively reviewing the shareholding pattern of the group entities observed that as per the loan documents all security providers, along with guarantors, were also obligors and  the borrowers, guarantors and promoter group were restrained from selling, transferring or disposing off, the shareholding in borrowers. A similar bar on selling, transferring, or disposing off shares of any reference entities held by the promoter group without prior consent of the lenders was also provided for. In the loan documents there were several terms and conditions to be observed with respect to the reference entities which showed that the group entities including the appellants consciously sought to provide comfort and binding assurance to the lender so as to secure their loans, by binding the reference entities in every way. To state few of such terms and conditions, it was provided in the loan documents that promoter group, borrowers and obligors or any of their directors were obliged to ensure that they did not appear in the RBI’s list of defaulters and ECGS caution list; reference entities were to be protected from any material adverse effect ; operations of the reference entities had to be in compliance with applicable laws; there was obligation on borrowers to maintain the corporate character of the reference entities and to maintain transparency in the matter of maintenance of the accounts of the reference entities; Event of Default clause set out in loan agreement provided defaults that were with respect to reference entities etc.

The Court therefore concluded that the intention of the parties was clearly to bind the appellants i.e. the reference entities. It was further stated by the Court that the email exchanges clearly showed that the appellants had not just knowledge of the loan agreement, they acknowledged their obligations under the loan agreement. Further, it confirmed that the appellants were intended by all parties, including the appellants, to be bound by the terms of loan document.

The Court, therefore concluded that the ‘tight group structure’ is writ large from the overlapping shareholding pattern in the group, guarantors holding important positions in the appellant companies and a perceivable involvement of the appellant towards giving promise of performance under the loan documents. The Court further stated in strong terms that had there been no security of assets and shareholding of the reference entities/appellants, the Respondent No. 1 would not have extended the loan to the borrower companies. The Court held that respondents as lenders heavily relied on the assets, shareholding and the valuation of the reference entities/appellants and rejected “the contention placed by the Appellants that their assets could be only reached after lifting the corporate veil.” The Court further clarified that “The reason why the assets of the Appellants are liable to be preserved is, because it was the underlying financial strength of the Appellants, on the basis of which the loan was extended by the Lenders/ Respondents. The borrowers have no assets of their own, so it becomes imperative to protect these assets for the aid of the Arbitral tribunal.” The Court finally dismissed the appeal imposing the cost of Rs. 2 lakhs each.

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