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TMI BlogIMPLEADING A NON SIGNATORY TO THE AGREEMENT IN ARBITRATION PROCEEDINGSX X X X Extracts X X X X X X X X Extracts X X X X ..... IMPLEADING A NON SIGNATORY TO THE AGREEMENT IN ARBITRATION PROCEEDINGS - By: - Mr. M. GOVINDARAJAN - Corporate Laws / IBC / SEBI - Dated:- 19-9-2019 - - Arbitration agreement Section 2(1)(b) of the Arbitration and Conciliation Act, 1996 ( Act for short) defines the expression arbitration agreement as agreement referred to in section 7. Section 7 provides that arbitration agreement is an agreement by the parties to submit o arbitration all or certain disputes which have arisen on which or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement shall be in writing. The agreement shall contain- a document signed by the parties; an exchange of letters, telex, telegrams or other means of telecommunication including communication through electronic means which provide a record for agreement; or an exchange of statements of claim and defence in which the existence of agreement is alleged by one party and not denied by the other. Assignment If the subject matter of the arbitration agreement is capable of assignment, then the assignee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould step into the shoes of his assignor and be both bound by it and entitled to enforce it. Multi party arbitration agreement Alan Redfern and Martin Hunter have opined that when several parties are involved in a dispute, it is usually considered desirable that the dispute should dealt with in the same proceedings rather than in a series of separate proceedings. In general term, this saves time, money, multiplicity of litigation and more importantly avoids the possibility of conflicting decisions on the same issues of fact and law since all issues are determined by the same arbitral tribunal at the same time. Non signatory to agreement The parties to the arbitration agreement can able to refer the dispute to be settled by means of arbitration. Any person who was not a party to the arbitration agreement could not be brought into arbitration . But some Supreme Court judgments that the non signatory to the arbitration agreement may be impleaded in the arbitration proceedings in exceptional cases. Group of Companies doctrine In Chloro Controls India Private Limited v. Seven Trent Water Purification Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . and others 2014 (1) TMI 830 - SUPREME COURT the Supreme Court while interpreting section 45 of the Act, held that t hough the scope of an arbitration agreement is limited to the parties who entered into it and those claiming under or through them, the Courts under the English Law have, in certain cases, also applied the Group of Companies Doctrine . This doctrine has developed in the international context, whereby 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. This theory has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement. This evolves the principle that 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 partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The Court will examine these exceptions 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. Besides all this, the Court would have to examine whether a composite reference of such parties would serve the ends of justice. Once this exercise is completed and the Court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore-discussed. Even non-sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory parties to some of the agreements can pray and be referred to arbitration provided they satisfy the pre-requisites under Sections 44 and 45 read with Schedule I. Reference of non-signatory parties is neither unknown to arbitration jurisprudence nor is it impermissible. In the cases of group companies or where various agreements constitute a composite transaction like mother agreement and all other agreements being ancillary to and for effective and complete implementation of the Mother Agreement, the court may have to make reference to arbitration even of the disputes existing between signatory or even non-signatory parties. However, the discretion of the Court has to be exercised in exceptional, limiting, befitting and cases of necessity and very cautiously. In Cheran Properties Limited v. Kasthuri and sons and others 2018 (4) TMI 1412 - SUPREME COURT t he Supreme Court in its decision concluded that as the law has evolved, it has recognized that modern business transactions are often effectuated through multiple layers and agreements. There may be transactions with a group of companies. The circumstances in which they have entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them may reflect an intention to bind both signatory and non signatory entities within the same group. In holding a non signatory bound by an arbitration agreement, the court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non signatory to a party which is a signatory to the agreement, the commanlity of subject matter and the composite nature of the transaction weigh in the balance. The group of companies doctrine is essentially intended to facilitate the fulfillment of a mutuality held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not a formally a signatory but has assumed the obligation to be bound by the actions of a signatory. In Reckitt Benckiser (India) Private Limited v. Rynders Label Printing India Private Limited and another 2019 (7) TMI 65 - SUPREME COURT , the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant filed application filed under section 11(5), 11(9) and 11(12a) of the Act seeking for an appointment of a sole arbitrator. The facts of the case run as follows- The respondents had approached the applicant, including for booklets and leaflets and labels required for Mucinex, exported to USA. The respondents make a presentation to the applicant about their capability to print the labels for the applicant, including the booklet and leaflet labels as desired. They made many representations about the quality of their product. The respondents had held exhaustive negotiations for the execution of the agreement. The applicant vide email dated 23.04.2014 circulated a draft of the agreement along with the Code of Conduct and anti bribery policy of the applicant. The respondents replied to the same through Mr. Frederick Reynders by his email dated 23.04.2014. Mr. Frederick Reynders vide his email sent a copy of the draft with some attached comments from the headquarters of Respondent No. 2 in Belgium, which discussed about the indemnity of the respondents. By virtue of the actions of the respondent No. 2, the applicant considered the arbitration as an internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal commercial arbitration, since the respondent no. 2, though actually a non signatory to the agreement, by his action showed that respondent no. 2 is the principal to the respondent no. 1 and the respondent No. 2 is bound by the arbitration agreement and also to the arbitration. Therefore the applicant prayed before the Supreme Court to appoint a sole arbitrator to decide the international commercial arbitration. The issues taken by the Supreme Court is that- whether respondent No.2, a company established under the laws of Belgium, having its principal place of business at Nijverheldsstraat 3, 2530 Boechout, Belgium, could be impleaded in the proposed arbitration proceedings despite the fact that it is a non signatory party to the agreement dated 01.05.2014, executed between the applicant and the respondent no. 1, merely because respondent No. 2 is one of the group companies of which respondent no. 1 is the constituent? whether the indisputable circumstances go to show that the mutual intention of the parties was to bind both the signatory as well as non signatory parties, viz., respondent No. 1 and respondent no. 2 respectively, qua the exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of an arbitration agreement between the applicant and the respondents? The respondent no. 1 did not file any counter affidavit against the applicant. However the Counsel submitted the following before the Supreme Court- The respondent no. 2 has no concern on the subject agreement dated 01.05.2014. The agreement is only between the applicant and the respondent No.1 and as a result thereof, it would give rise to a domestic commercial arbitration and not an international commercial arbitration. The 1 st respondent is having no objection, whatsoever, if the Court were to appoint a sole arbitrator for resolving the dispute between the applicant and the first respondent, who would conduct the arbitration proceedings in accordance with the Act, in Delhi, as a domestic commercial arbitration. The applicant contended the following- In terms of clause 9 of the arbitration agreement the respondent No. 2 has assumed the liability to indemnify the applicant in case of any loss, damage etc., caused to the applicant on account of acts and omissions on the part of the respondent No. The Respondent No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an integral part to the agreement. Mr. Frederick Reynders is the promoter of the second respondent. Mr. Frederick Reynders was acting on behalf of the respondent No. 2 and the respondent No. 2 is the parent company of respondent no. 1 binds the respondent No. 2 to the agreement and consequently the arbitration agreement. The respondent No. 2 was aware of the fact that indemnity is being extended to the applicant and that the respondent No. 2 was the disclosed principal on whose behalf the respondent no. 1 was executing the agreement. The arbitral agreement was an integral part of the agreement executed between the applicant and respondent No. 1 on its behalf and on behalf of its disclosed principle viz., respondent No. 2. The respondent No. 2 through Krist of Vandenbroucke had shared comments on the agreement. The same Krist of Vandenbroucke subsequently participated in the escalation meeting held in Amsterdam for amicable resolution of the disputes that have arisen between the parties. The respondent No. 2 filed its counter affidavit vehemently opposing the contents of the applicant. The respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2 submitted the following before the Supreme Court- Respondent No. 1 and 2 both are part of Reynders Label Printing Group, which is an internationally operating group of 7 printing companies. These companies have their own separate legal entities and operate in different offices independently. These companies only share a common parent entity, viz., Reynesco NV which is also the holding company of the respondent companies. The respondent No. 2 had no presence or operation in India and was not involved in negotiation. There is no privity of contract between respondent No. 2 and the applicant. Mr. Frederick Reynders was not the promoter of respondent No. 2 and he was the employee of the respondent No. 2. The respondent no. 2 never made any representation before the applicant. The signatory to the agreement Mr. Kari Vandenbussche had neither exercised any managerial functions nor was he an authorized representative or a director of respondent No. 2 with any authority to represent the respondent No. 2. The respondent No. 1 has no authority to bind the respondent No. 2 and did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... execute the agreement on behalf of respondent No. 2. The Supreme Court considered the submissions by all the three parties ie., the applicant and the respondents No. 1 and 2. The Supreme Court is to consider whether respondent no. 2 can be said to have assented or had an intention to become a party to the arbitration agreement by its conduct, without being a signatory to the agreement dated 01.05.2014. The thrust of the claim of the applicant is that Mr. Frederick Reynders was acting for and on behalf of respondent no. 2. But the respondent no.2 has denied that Mr. Frederick Reynders was an employee of respondent No.2. The respondent No. 2 asserted that it is not a party to the agreement or to the arbitration agreement. The Supreme Court held that the respondent No. 2 is constituent of the group of companies of which respondent No. 1 is also constituent will be no avail to the applicant. The Supreme Court further held that it is the burden on the applicant to establish that the respondent No.2 has the intention to consent to the arbitration agreement and a party thereto, may be for the limited purpose of the indemnity clause. The applicant did not di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scharge the burden at all. Therefore the Supreme Court held that the respondent No. 2 cannot be subjected to the proposed arbitration agreement. Since the respondent No. 2 did not involve in the negotiation process the Supreme Court found that the application against respondent No. 2 must fail. Therefore the contention of the applicant that the arbitration is an international commercial arbitration cannot be taken forward. The Supreme Court held that the applicant can pursue its remedy against the respondent No. 1 for appointment of a sole arbitrator to conduct arbitration proceedings as a domestic commercial arbitration. The Supreme Court held that the application must fail against the respondent no. 2 and no relief can be granted to the applicant who has invoked the jurisdiction of the Supreme Court on that assumption that it is an international commercial arbitration. The Supreme Court dismissed the arbitration application as against respondent No. 2. However the Supreme Court appointed Mr. Justice Badar Durrez Ahamed, former Chief Justice, Jammu Kashmir High Court as the sole arbitrator to conduct the domestic commercial arbitration at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... New Delhi between the applicant and respondent No. 1 in accordance with the provisions of the Arbitration and Conciliation Act, 1996. Conclusion A non-signatory party may be bound by an arbitration clause if its subsequent conduct indicates its assuming the obligation to arbitrate. A non-signatory to an arbitration agreement may also be bound by the law of agency, if such agency can be proved contractually and its intention to arbitrate can be ascertained in the absence of a signed agreement. The veil could be pierced to hold a corporation legally accountable for the actions of the other, albeit , as a general rule a corporate relationship alone in itself is not sufficient to bind a non-signatory to an arbitration agreement. - Reply By Ganeshan Kalyani as = Nice article Sir. Dated: 19-9-2019 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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