Mahanagar Telephone Nigam Ltd. vs Canara Bank & Ors.

1 and its subsidiary, respondent no. 2 – Respondent no. 2 subscribed to the bonds floated by appellant and subsequently transferred the Bonds to its holding Company-respondent no. 1 – Case of appellant that since respondent no. 2 did not pay the entire sale consideration for the Bonds, appellant constrained to cancel the allotment of the Bonds – Appointment of an arbitrator to settle the dispute through arbitration – Objection by appellant with respect to existence of valid arbitration agreement between the parties and objection by respondent no. 1 to the joining of respondent no. 2 as party to arbitration since respondent no. 2 was not party to the arbitration agreement, it could not be impleaded in the proceedings – Held: Agreement between appellant and respondent no. 1 to refer the disputes to arbitration is evidenced from the documents exchanged between the parties, and the proceedings and is final and conclusive – Appellant after giving its consent to refer the disputes to arbitration before the High Court, is now estopped from contending that there was no written agreement to refer the parties to arbitration – Respondent no. 1 had filed its statement of claim before the Arbitrator, and appellant filed its reply to the statement of claim, and also made a counter claim against respondent no. 1, which would constitute evidence of the existence of an arbitration agreement, and the same was not denied by the other party – As regards an objection to the joinder of respondent No. 2 in arbitral proceedings, it will be a futile effort to decide the disputes only between appellant and Respondent no. 1, in the absence of respondent no. 2, since undisputedly, the original transaction emanated from a transaction between appellant and respondent no. 2-original purchaser of the Bonds – Disputes arose on the cancellation of the Bonds by appellant on the ground that the entire consideration was not paid – There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by respondent No. 2 to respondent no. 1, and the cancellation by appellant, which has led to disputes between the three parties – Thus, respondent no. 2 is a necessary and proper party to the arbitration proceedings – 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, to finally resolve the disputes which have been pending – respondent no. 2 has participated in the proceedings before the High Court, and the Committee on Disputes, was represented by its separate counsel before the Sole Arbitrator – Respondent no. 1 filed before the High Court, had joined respondent No. 2, even though it was joined as a proforma party – objection to respondent No. 2 being impleaded as a party to the arbitration proceedings was raised by Respondent no. 1, and not respondent No. 2 – There is no merit in the objection raised by Respondent no. 1 opposing the joining of respondent No.

2 as a party to the dispute. Respondent no. 1 had enclosed a Draft Arbitration Agreement to appellant, wherein it has clearly stated that the arbitration would be between three parties i.e. Respondent no. 1 and respondent No. 2 as party of the first part, and appellant as party of the second part – There was implied or tacit consent by respondent No. 2 to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties – Respondent No. 2 has throughout participated in the proceedings before the Committee on Disputes, before the High Court, before the Sole Arbitrator, and was represented by its separate counsel before this Court in the instant appeal – There was a clear intention of the parties to bind both Respondent no. 1, and its subsidiary- respondent No. 2to the proceedings – There can be no final resolution of the disputes, unless all three parties are joined in the arbitration – Group of Companies doctrine is invoked to join respondent No. 2 in the arbitration proceedings pending before the Sole Arbitrator – Matter remitted to the Sole Arbitrator to continue with the arbitral proceedings. Arbitration agreement – Existence of valid arbitration agreement – Held: Arbitration agreement is the written agreement between the parties, to submit their existing, or future disputes or differences, to arbitration – Valid arbitration agreement is the foundation on which the arbitral process is structured – Binding agreement for disputes to be resolved through arbitration is a sinequa-non for referring the parties to arbitration – 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 – If it can prima facie be shown that parties are ad idem, even though the other party may not have signed a formal contract, it cannot absolve him from the liability under the agreement – Intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties – If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract – ‘Arbitration agreement’ must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities. Doctrines: Group of Companies Doctrine – Invocation of – Held: Group of Companies doctrine can be invoked to bind a nonsignatory by an arbitration agreement 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 – Courts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract – ‘Group of Companies’ doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi-party business transactions – Doctrine provides that a nonsignatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the 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 – Circumstances are if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties.

Partly allowing the appeals, the Court

HELD : PER INDU MALHOTRA, J.

THE EXISTENCE OF A VALID ARBITRATION

AGREEMENT

1.1 A valid arbitration agreement constitutes the heart of an arbitration. 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. A binding agreement for disputes to be resolved through arbitration is a sine-qua-non for referring the parties to arbitration. The 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. [Paras 9, 9.2][679-A-B, H; 680-A]

1.2 Section 7(4)(b) of the Arbitration and Conciliation Act, 1996 states that an arbitration agreement can be derived from exchange of letters, telex, telegram or other means of communication, including through electronic means. The 2015 Amendment Act inserted the words “including communication through electronic means” in Section 7(4)(b). If it can prima facie be shown that parties are ad idem, even though the other party may not have signed a formal contract, it cannot absolve him from the liability under the agreement. [Para 9.3][680-B-C]

1.3 Arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract. 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. In interpreting or construing an arbitration agreement or arbitration clause, it would be the duty of the court to make the same workable within the permissible limits of the law. A common sense approach has to be adopted to give effect to the intention of the parties to arbitrate the disputes between them. Being a commercial contract, the arbitration clause cannot be construed with a purely legalistic mindset, as in the case of a statute. [Paras 9.4, 9.5, 9.7][680-D-G; 681-D] Enercon (India) Ltd. and Ors. v. Enercon GMBH (2014)

5 SCC 1 : [2014] 2 SCR 855 – relied on.

1.4 The agreement between MTNL and Canara Bank to refer the disputes to arbitration is evidenced from the documents exchanged between the parties, and the proceedings. The agreement between the parties as recorded in a judicial Order, is final and conclusive of the agreement entered into between the parties. The appellant-MTNL after giving its consent to refer the disputes to arbitration before the High Court, is now estopped from contending that there was no written agreement to refer the parties to arbitration. Furthermore, Section 7(4)(c) 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, Canara Bank had filed its Statement of Claim before the Arbitrator, and MTNL filed its Reply to the Statement of Claim, and also made a Counter Claim against Canara Bank. The statement of Claim and Defence filed before the Arbitrator would constitute evidence of the existence of an arbitration agreement, which was not denied by the other party, under s. 7(4)(c) of the 1996 Act. [Para 9.9-9.10][683-E; 684-A-B]

Union of India v. DN Revry and Co., (1976) 4 SCC

147 : [1977] 1 SCR 483 ; Khardah Company Ltd. v. Raymon and Co. (India) Pvt. Ltd. [1963] 3 SCR 183 ; Savitri Goenka v. Kanti Bhai Damini & Ors., 2009 (1) Arb LR 320 (Del) (DB) ; State of Maharashtra v. Ramdas Shrinivas Nayak (1982) 2 SCC 463 : [1983] 1 SCR 8 ; Chitra Kumari v. Union of India (2001) 3 SCC

208 - referred to.

JOINDER

PROCEEDINGS

OF

CANFINA

IN

THE

ARBITRAL

2.1 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. The parent, or the subsidiary company, entering into an agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group, to be bound by that agreement. Similarly, an arbitration agreement is also governed by the same principles, and normally, the company entering into the agreement, would alone be bound by it. [Paras 10, 10.2][684-C-F]

2.2 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. Courts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract. The ‘Group of Companies’ doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi-party business transactions. The ‘Group of Companies’ doctrine has been invoked by courts and tribunals in arbitrations, where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group. The doctrine provides that a non-signatory may be bound by an arbitration agree-ment where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the 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 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 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; the composite nature of the transaction between the parties. 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 having a bearing on the dispute. [Paras 10.3, 10.4][684-F-H; 685-D-G; 686-A-C]

2.3 The Group of Companies Doctrine has been invoked in cases 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. In such a situation, signatory and non-signatories have been bound together under the arbitration agreement. This will apply in particular when the funds of one company are used to financially support or restructure other members of the group. [Para 10.5][686-D-E]

2.4 CANFINA was set up as a wholly owned subsidiary of Canara Bank. This is evident from the Report of the Joint Committee to Enquire into Irregularities in Securities and Banking Transactions, 1993. The disputes between the parties emanated out of the transaction dated 10.02.1992, whereby CANFINA has subscribed to the bonds floated by MTNL. CANFINA subsequently transferred the Bonds to its holding Company-Canara Bank. It is the contention of MTNL, that since CANFINA did not pay the entire sale consideration for the Bonds, MTNL eventually was constrained to cancel the allotment of the Bonds. [Para 10.7, 10.8][687-A; 688-A-B]

2.5 It will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA-the original purchaser of the Bonds. The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration was not paid. There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings. [Para 10.9][688-C-E]

2.6 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, to finally resolve the disputes which have been pending for over 26 years now. CANFINA has participated in the proceedings before the High Court, and the Committee on Disputes. CANFINA was also represented by its separate counsel before the Sole Arbitrator. Canara Bank filed before the High Court, had joined CANFINA as Respondent No. 2, even though it was joined as a proforma party. CANFINA was represented by Counsel in the Writ Proceedings before the High Court. The Counsel for CANFINA was however not present on two dates i.e. on 16.09.2011 and 21.10.2011, when the High Court recorded the agreement between the parties for reference of disputes to arbitration. MTNL had submitted before the High Court that Canara Bank should agree to take over the liabilities of CANFINA before the arbitration could commence. The High Court recorded that there was no necessity of requiring Canara Bank to agree to take over the liabilities of CANFINA, prior to the arbitration proceedings. This issue would be decided in the arbitration. [Para 10.10][688E-H; 689-A-B]

2.7 On the commencement of arbitration proceedings before the Sole Arbitrator, notice was issued by the Arbitrator to all the three parties including CANFINA, which was represented by its Counsel. The objection to CANFINA being impleaded as a party to the arbitration proceedings was raised by Canara Bank, and not CANFINA. There is no merit in the objection raised by Canara Bank opposing the joining of CANFINA as a party to the dispute. Canara Bank by letters had enclosed a Draft Arbitration Agreement to MTNL, wherein it clearly stated that the arbitration would be between three parties-Canara Bank and CANFINA as party of the first part, and MTNL as party of the second part. [Paras 10.11-10.13][689-C-E]

2.8 The instant case is one of implied or tacit consent by respondent No. 2-CANFINA to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties. Respondent No. 2-CANFINA has throughout participated in the proceedings before the Committee on Disputes, before the High Court, before the Sole Arbitrator, and was represented by its separate counsel before this Court in the instant appeal. There was a clear intention of the parties to bind both Canara Bank, and its subsidiary-CANFINA to the proceedings. There can be no final resolution of the disputes, unless all three parties are joined in the arbitration. [Para 10.14][689-F-H; 690-A]

2.10 The Group of Companies doctrine is invoked to join CANFINA i.e. the wholly owned subsidiary of Respondent No. 1Canara Bank, in the arbitration proceedings pending before the Sole Arbitrator. The matter is remitted to the Sole Arbitrator to continue with the arbitral proceedings, and conclude the same as expeditiously as possible. [Para 11][690-A-C]

O.N.G.C. v. Commissioner of Central Excise (1995) Supp. 4 SCC 541; Electronics Corporation of India Ltd. v. Union of India & Ors. (2011) 3 SCC 404 : [2011] 2 SCR 971; Chloro Controls India (P) Ltd. v. Severn Trent WaterPurification Inc.,(2013) 1 SCC 641 : [2012]13 SCR 402; SEI Adhavan Power Pvt. Ltd. v. Jinneng Clean Energy Technology Ltd. & Ors. 2018 (4) CTC 46; Ameet Lal Chand Shah v. Rishabh Enterprises, (2018) 15 SCC

678 : [2018] 6 SCR 1001 – referred to.

Dow Chemical v. Isover-Saint-Gobain 1984 Rev Arb 137; 110 JDI 899 (1983) Gary B. Born: International Commercial Arbitration, Vol. I, 2009, pp. 1170-1171 referred to. PER ABHAY MANOHAR SAPRE, J: (Supplementing):

HELD: 1.1 The agreement is essentially a tri-partite agreement between the parties, namely, the appellant, respondent no. 1 and CANFINA. This is clear from the documents exchanged between the parties, pleadings and orders of the Court. It is also clear when one examines the nature of the dispute. It is so inextricably linked between the three parties that it can be effectively decided only when all the three parties are made parties to the arbitral proceedings. [Paras 6, 7][691-A-B]

1.2 Once the issue is examined on facts in the light of requirements of Section 7(4)(b) and (c) of the Act, there is no hesitation in coming to a conclusion that the agreement in question is, in fact, a tri-partite agreement between the three parties mentioned. It satisfies the requirements of Section 7(4)(b) and

(c) of the Act. [Para 8][691-C]

1.3 Since the main object of the arbitral proceedings is to decide the disputes expeditiously and within a time frame, this object can be achieved only when the disputes are resolved as far as possible in one arbitral proceedings. In the instant case, this object can be achieved only when all the three parties named are made party in one arbitral proceedings to enable the arbitral tribunal to finally decide the dispute on merits in accordance with law. The facts in clear terms, entitles this Court to invoke the well known doctrine of “Group of Companies” and apply its principle to the facts of this case so as to enable the arbitral tribunal to determine the rights of three parties named. The doctrine “Group of Companies” has its application to arbitral proceedings and, in appropriate cases, it can be so applied. [Paras 13, 14][691-H; 692-A-C]

International Arbitration by Redfern and Hunter - Sixth Edn pages 141 to 153 - referred to.