Provisions of Law discussed:

Now let us first see what does Act mean by an Agreement and what is format of an Arbitration Agreement?

Arbitration Act,1996

7 Arbitration agreement. —

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

PARITIES TO ARBITRATION:

8.Power to refer parties to arbitration where there is an arbitration agreement.—1 [(1)A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.] (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof: 2 [Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.] (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

PART II ENFORCEMENT OF CERTAIN FOREIGN AWARDS CHAPTER I

 New York Convention Awards

  1. Power of judicial authority to refer parties to arbitration.—Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908),a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, 1 [unless it prima facie finds] that the said agreement is null and void, inoperative or incapable of being performed.

CHAPTER II Geneva Convention Awards

  1. Power of judicial authority to refer parties to arbitration.—Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, on being seized of a dispute regarding a contract made between persons to whom section 53 applies and including an arbitration agreement, whether referring to present or future differences, which is valid under that section and capable of being carried into effect, shall refer the parties on the application of either of them or any person claiming through or under him to the decision of the arbitrators and such reference shall not prejudice the competence of the judicial authority in case the agreement or the arbitration cannot proceed or becomes inoperative.

Non- Signatory to Agreement can be a Party a narrative:

Corporate Groups Agreements:

Normally, arbitration takes place between the persons who have, from the outset, been parties to both the arbitration agreement as well as the substantive contract underlining that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy onus lies on that party to show that, in fact and in law, it is claiming ‘through’ or ‘under’ the signatory party as contemplated under Section 45 of the 1996 Act. Just to deal with such situations illustratively, reference can be made to the following examples in Law and Practice of Commercial Arbitration in England (Second Edn.) by Sir Michael J. Mustill:

“1. The claimant was in reality always a party to the contract, although not named in it.

  1. The claimant has succeeded by operation of law to the rights of the named party.
  2. The claimant has become a part to the contract in substitution for the named party by virtue of a statutory or consensual novation.
  3. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence.”

Though 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. [‘Russell on Arbitration’ (Twenty Third Edition)].

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 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.

“A Party to the Arbitration” whether inclusive of non-signatories?

Indian Judicium:

Kasturi and Sons Ltd. (2018) 16 SCC 413, another three-judge bench of the Supreme Court of India more recently emphasised that the Section 7 requirement of the Indian Arbitration Act 1996 that an arbitration agreement must be in writing, does not exclude the possibility of binding third parties who may not be signatories to an agreement between two contracting entities.

MTNL v. Canara Bank 2019 SCC Online SC 995 , a decision of a two-judge bench of the Supreme Court of India, given in 2019, reaffirmed that 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.

The jurisprudence developed by the Supreme Court on the issues of non-signatories to an arbitration agreement is consistent with the definition of the term party under the Indian Arbitration Act 1996. Under Section 2(1)(h) of the Indian Arbitration Act 1996, a ‘party’ is defined as a party to the ‘arbitration agreement’ and, crucially, not as a signatory’ to the arbitration agreement.

In Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia Private Ltd. (2015) 13 SCC 477, the Supreme Court reiterated the importance of this distinction and emphasized that ―in order to constitute an arbitration agreement, it need not be signed by all the parties.

Indian Judicium: Bifurcation of Claims:

Sukanya Holdings Pvt. Ltd vs Jayesh H. Pandya & Anr on 14 April, 2003 Supreme Court:

Interpreting inter-alia Section 8 of Arbitration Act,1940 Court held that , it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.

Secondly, such bifurcation of suit in two parts, one to be decided by the arbitral tribunal and other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.

In  Chloro Controls(I) P.Ltd vs Severn Trent Water Purification  28 September 2012 passed by Supreme Court  while applying ratio decidendi of Sukanya Holdings (supra) held 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.

Normally, arbitration takes place between the persons who have, from the outset, been parties to both the arbitration agreement as well as the substantive contract underlining that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy onus lies on that party to show that, in fact and in law, it is claiming ‘through’ or ‘under’ the signatory party as contemplated under Section 45 of the 1996 Act.

Law of England

In Law and Practice of Commercial Arbitration in England (Second Edn.) by Sir Michael J. Mustill:

“1. The claimant was in reality always a party to the contract, although not named in it.

  1. The claimant has succeeded by operation of law to the rights of the named party.
  2. The claimant has become a part to the contract in substitution for the named party by virtue of a statutory or consensual novation.
  3. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence.”

“Group of Companies Doctrine”:

Though 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 is 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. [‘Russell on Arbitration’ (Twenty Third Edition)].

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.

 UNCITRAL Model Law on International Commercial Arbitration :

The US Supreme Court in Ruhrgos AG v Marathon Oil Co. [526 US 574 (1999)] discussed this doctrine at some length and relied on more traditional principles, such as, the non- signatory being an alter ego, estoppel, agency and third party beneficiaries to find jurisdiction over the non-signatories.

ICC Award No. 4131, YCA 1984, at 131 et seq. (also published in: Clunet 1983, at 899 et seq.) This Principle has been developed by international arbitral tribunals as the so-called “group of companies doctrine” for cases in which a member of a corporate group, even though not a signatory to an arbitration agreement concluded by another member of the corporate group, appeared in economic reality as the real party to the arbitration agreement and was therefore treated as such by these tribunals. While the Principle is disputed in the arbitration context because of the form requirement for arbitration agreements, e.g. under Art. 7 of the UNCITRAL Model Law on International Commercial Arbitration, it can be extended to contracts in general for which no such form requirement exists. However, its application must be limited to clear cases in which the involvement of the non-signatory in the performance of the contractual obligations is so evident and strong that the case comes close to one of apparent authority.

When can Arbitrators lift  Corporate Veil ?

Piercing the corporate veil

(a) The separate legal personality of a corporation (“corporate veil”) may be disregarded in exceptional cases in order to hold a shareholder liable for the corporation’s debts.

(b) Exceptional cases are cases of:i) clear under-capitalization, ii)mingling of corporate and financial spheres, especially in case of total control of the parent company over the business and financial affairs of its subsidiary, or iii)fraud.

The Principle reflects situations in which the idea of the nature of corporations which constitute entities that are separate and distinct from its members, who are liable only to the extent that they have contributed to the company’s capital, must be disregarded due to the application of the Principle of Good Faith. More specifically, the Principle is an example of the prohibition of the abuse of rights, here the abuse of the principle of separate legal personality of corporate entities to the detriment of their creditors who have relied on the independent and sustained existence of those entities.
In all three scenarios listed in the Principle, the concept of the corporation as a separate legal entity is misused by its founders or initiators. In these cases, the corporation is a mere “façade“, used by its founders to shield themselves from claims raised  against them by their   creditors by hiding behind the corporate entity which they have established but which does not possess any assets necessary to satisfy the claims of these creditors.
It must be emphazised that  d the Principle is an exception to the fundamental rule of corporate law that corporations possess separate legal personality. The application of the Principle therefore requires not only an element of abuse of rights, but also a very strict test, i.e. clear, convincing evidence of under-capitalization, mingling of spheres or fraud, so as to ensure that the Principle remains the exception.

Conclusion:

Indian law has made consequential strides since that decision. Non- signatories may now be bound by an arbitration agreement if the circumstances compellingly show that it was the mutual intention of all the parties to bind both signatories to the arbitration agreement as well as certain non-signatory entities. Amazon.Com Nv Investment vs Future Coupons Private Limited &  Passed on 18 March, 2021 Delhi High Court

 

Shruti Desai

11th September,2021