August 09, 2019

A non-signatory can be bound by an arbitration agreement on the basis of the “Group of Companies” doctrine: Supreme Court

[ by Legal Era News Network ]


Mahanagar Telephone Nigam Ltd (MTNL) floated Bonds worth Rs. 425 crores. MTNL placed bonds worth Rs.200 crores with Can Bank Financial Services Ltd. (CANFINA) under an MOU agreement. CANFINA was set up as a wholly owned subsidiary of Canara Bank.

The bond amount of Rs. 200 cores was placed as fixed deposit by MTNL with CANFINA. CANFINA paid back Rs. 50 crores of the fixed deposit. The balance fixed deposit amount of Rs. 150 crores along with interest was not paid by CANFINA to MTNL. MTNL posited that since it did not receive the entire bond amount of Rs. 200 crores, the entire deal did not go through. MTNL serviced the bonds of approximately Rs. 31 crores to the public. MTNL was of the view that only a sum of Rs.5.41 crores was payable to CANFINA, which was not accepted by CANFINA.

According to Canara Bank, there was an out-break of a security scam which led to a collapse of the secondary market in shares, security and bonds due to which CANFINA was faced with a severe liquidity crunch.

MTNL sent a statement of accounts by adjusting the proceeds of the cancellation of bonds towards the dues of CANFINA. Canara Bank, however, returned the cheque demanding the restoration and registration of the bonds.

A Writ Petition before the Delhi High Court was filed by Canara Bank challenging the cancellation of the Bonds, and a direction to pay the interest accrued. The Writ Petition was dismissed on the ground of availability of an alternative and efficacious remedy before the Company Law Board under Section 111 of the Companies Act, 1956.

The Delhi High Court referred the disputes between the parties to the Committee on Disputes (Committee). The Committee, after hearing the parties, expressed the view that all the three parties should take recourse to arbitration in view of the different inter-linked transactions between them.

Canara Bank later entered into an arbitration agreement with CANFINA on one side and with MTNL on the other. The Bank filed an application for Restoration of the Writ Petition, which was restored by the Delhi Court and two principal issues noted:

(i) Whether Canara Bank is liable for the acts or omissions of CANFINA

(ii) Whether Canara Bank should take over the liabilities and admit them in the arbitration agreement itself.

Subsequently, the parties agreed that the issues may be referred to arbitration. The learned Arbitrator passed an interim award holding that CANFINA had not appeared before the High Court, when the disputes were referred to arbitration and was therefore not a party to the arbitration agreement. MTNL filed an appeal before the Delhi High Court as to whether CANFINA ought to be impleaded as a necessary party to the arbitration agreement. However the Delhi Court dismissed the order.

Aggrieved by the Delhi High Court’s order, MTNL filed Special Leave Petition with the Supreme Court.

A bench of Justices Indu Malhotra and Abhay Manohar Sapre presided over the case.

The Apex Court held that it would be a futile effort to decide the disputes only between MTNL and Canara Bank in the absence of CANFINA, since the original transaction emanated from a transaction between MTNL and CANFINA - the original purchaser of the Bonds.

The Court ruled that the arbitration agreement need not be in any particular form. The intention of the parties to settle their disputes through arbitration whether expressly or impliedly spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the parties needs to be ascertained.

The Court invoked the doctrine of “Group of Companies” and applied its principle to the facts of the case so as to enable the arbitral tribunal to determine the rights of the three parties.

The Court further ruled that 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. A commercial document has to be interpreted in such a manner so as to give effect to the agreement, rather than to invalidate it. An ‘arbitration agreement’ is a commercial document inter partes, and must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities.

The Court held that since the main object of the arbitral proceedings is to decide the disputes expeditiously and within a time frame disputes have to resolved as far as possible in arbitral proceedings. In this case, this object could be achieved only when all the three parties namely MTNL, Canara Bank and CANFINA were made party in the arbitral proceedings to enable the arbitral tribunal to finally decide the dispute on merits in accordance with law.

The Supreme Court remitted the matter to the Sole Arbitrator to continue with the arbitral proceedings, and conclude the same as expeditiously as possible.

Full View Judgement

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