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.”
