17 July 2020

INDIAN ARBITRATION UPDATE | IMPLEADMENT OF NON-SIGNATORY GROUP COMPANIES

Delhi High Court (DHC) in the recent case of Magic Eye Developers Private Limited v Green Edge Infra Private Limited and Ors (2020 SCC OnLine Del 597), held that group companies can be impleaded in an arbitration proceeding even if they are not signatory to the Arbitration Agreement. The judgment places reliance on the judgments of the apex court which have evolved and accepted the “Group Companies Doctrine”.

FACTS:

• Magic Eye Developers Private Limited (Plaintiff) and Green Edge Infra Private Limited (Defendant No.1) entered into multiple agreements including a Shareholders’ Agreement (SHA), a Share Purchase Agreement (SPA), and a Memorandum of Understanding. (MOU). Defendant No.1 is involved in construction activities of Real Estate projects and other ancillary civil-engineering services. The Plaintiff, as a part of multiple transactions with Defendant No.1, also advanced loans to one Mr. S.K. Hooda, the erstwhile managing director of the Defendant No.1 company, at his request.
• Due to breach of contract by Defendant No.1, there were delays in the launch of the project of the Plaintiff. The Plaintiff filed a suit before the DHC claiming for recovery of loan and damages and compensation for loss of reputation. Plaintiff also claimed that Defendant No.1 is a sham company and is run as a front for money-laundering activities of the Hooda family.
• The Plaintiff also stated that the said family also runs two more companies, viz.,Vera Edu-Infra Pvt. Ltd (Defendant No.2), involved in the business of providing higher education and Vega Schools (Defendant No.3), which is involved in the buying/selling and renting of self-owned real estate. The Plaintiff impleaded these two companies in the suit as defendants. The Plaintiff made allegations on all the defendants, inter alia of money-laundering and defrauding innocent people to achieve the same.
• Defendant No.1, along with its written statement, also filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act), claiming that the SPA contained an arbitration clause which amounted to an arbitration agreement between the Plaintiff and Defendant No.1. Since the agreements are interconnected, the dispute may be referred to the arbitration.
• The Plaintiff objected to such an application on the ground that the -
  
  • The dispute was not arbitrable because the claim included the recovery of loan, which was given under a separate loan agreement, which does not contain an arbitration clause, nor was such a loan contemplated under the SPA which contains the arbitration clause.
• Only the Defendant No.1 was a party to the agreements viz. the SPA, the SHA and the Loan Agreement, while Defendant Nos 2 and 3 are not party to the said agreements; thus they cannot be impleaded as a party to the arbitration.

ISSUES:

• Whether the dispute was arbitrable?.
• Whether the non-signatory entities could be impleaded in the Arbitration?

HELD:

The DHC allowed the interim application, and referred the parties to arbitration on the following grounds:

• As regards the arbitrability of the dispute, the court held that the claim for damages was based on the failure of Defendant No.1 to perform its contractual obligations under the various agreements. This was an arbitrable dispute duly governed by arbitration clauses under the various agreements. As such, the two reliefs were not required to be bifurcated and could be decided by arbitration.
• As regards the impleadment of Defendant Nos.2 and 3 in the arbitration, the court observed that the Supreme Court (SC) has interpreted the scope of Section 7 of the Act (which defines an Arbitration Agreement) to include non-signatories and held that they could be made parties to the arbitration. The DHC placed heavy reliance on two landmark judgments of the SC:
  
  
  • Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc (2013 (1) SCC 641) where it was held that under the “Group Companies Doctrine”, an arbitration agreement entered into by a company within a group of companies can bind its non- signatory affiliates, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties.
• Cheran Properties Limited vs Kasturi & Sons Limited (2018 (16) SCC 413) where it was held that the “Group Companies Doctrine” is akin to the principle of implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, despite their formal status as non-signatories.

MHCO Comment: The question of impleadment of non-signatories in the arbitration has been a long-discussed one in Indian jurisprudence. The courts have held that the scope of Section 7 read with Section 35 (finality of arbitral awards) of the Act is wide enough to include non-signatories under certain circumstances. The DHC in this case reaffirms the “Group Companies Doctrine” and holds that the group companies can be made a party to the arbitration even if they are not a signatory to the arbitration agreement.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance