Authored By: Devashish Bodhankar
Citation - [(2021) SCC Online Del 2875]
Date of Judgment – 07/04/2021
Bench - Honorable MR. Justice Vibhu Bakhru
Court – High Court of Delhi
Introduction
The Arbitration and Conciliation Act, 1996 has given many benefits for the new age companies because it provides the companies an efficient mechanism to get their disagreements settled outside the courts. It provides the companies an effective benefit that they can settle their matters in the Arbitration courts which do not involve any kind of judicial intervention. The concept of Arbitration arises when there are any contractual defaults between the parties, and only the parties to the contract can invoke the Arbitration clause. This brings us to the issue in the present case- Whether Non- Signatories of the contract be compelled to be part of proceedings of the Arbitration. However, in some exceptional circumstances, a non-signatory to the contract can also be compelled to arbitrate.
Facts of the case
In the present case, India bulls wanted to build a thermal power plant in the district Amravati of the state of Maharashtra. Therefore, to attain the same, India bulls called for tender on BTG works (Boiler Turbine Generator Package) which was also an important part of the thermal power plant project. In response to the tender, Shapoorji submitted their bid and ware awarded the tender. Thereafter Shapoorji entered into an agreement with a wholly-owned subsidiary of India bulls (Elena). Then Elena also issued a Letter of Acceptance with Shapoorji for civil construction and structural work in the project.
Following this, India bulls gave several orders to Shapoorji. After some time a disagreement arose between both the parties regarding with the execution of the contracts, which is the main reason why Shapoorji invoked the clause of Arbitration.
Though the petitioner (Shapoorji) invoked the clause of Arbitration, the respondents clearly denied the possibility of invoking the arbitration clause as they contended that they were never signatories to any contract or any contractual obligations of the BTG project with Shapoorji. They further contended that the contract was signed between two parties which were Shapoorji and Elena and they were never the signatories to the contract. As a result, the court tried to investigate nuances of this case to effectively determine whether the respondent, not being a signatory to the contract, could be made a party to the arbitration or not.
Issue Involved
Whether a party which is non-signatory to the contract could be compelled to arbitrate?
Contentions by the Petitioner
1. The learned counsel for the petitioner contented that both the parties have agreed and acted in such a way that they had accepted the clause of Arbitration. Both the parties did not deny the fact that the arbitration should not be opted as a one-step method of resolving disputes.
2. The counsel for the petitioner further stated that it did not make commercial sense for both the parties that they have agreed to resolve disputes regarding the main contract with the arbitration and denied to include disputes regarding other contracts like supplemental and connected contracts.
3. The petitioner’s counsel further argued that the petitioners issued bank guarantees for the performance of the contract of BTG in favor of respondents not Elena and also the payments made to the petitioners are done directly by the India bulls, not Elena.
Contentions by the Respondent
1. The counsel for the respondents argued that the India bulls was non-signatory to the contract of BTG and only Elena is a signatory to the BTG contract with Shapoorji therefore India Bulls could not be compelled to arbitrate.
2. The learned counsel for the respondent argued that the notice invoked by the petitioners was a composite notice in respect of four contracts that are separate and don’t have any connection with each other and thus they are invalid (Lawyer Services ).
Judgment
The Court opined that in Chloro Controls (India) Ltd. vs. Severn Trent Water Purification[1], the Supreme Court referred to the Group of Companies doctrine and also applied it to compel certain parties to arbitrate in that case despite the fact that they are non-signatory to the contract. In Mahanagar Telephone Nagar Ltd. Vs. Canara Bank[2], the court decided that a Non-signatory affiliate of a parent company can arbitrate if there is a direct relationship between the parties, which is a signatory to the contract or the party which is not.
In the present case, the High Court held that India bulls was a direct beneficiary under the contract of BTG with the Respondents because of the fact that they directly participated in the proceedings of the negotiation and the execution of the contract. India bulls had also insured itself against the performance of the contracts as well as it also paid Shapoorji directly. The court further stated that Elena which was a subsidiary of India bulls was also formed specifically by the India bulls to carry out the contract of BTD with Shapoorji.
As a result of the High Court’s observations and evidence provided by the petitioner and also keeping in mind the doctrine of Lifting of the Corporate Veil, the court opined that the party compelling a non-signatory to participate in the proceedings of the Arbitration must show that the Non-Signatory is a direct beneficiary to the contract. The Delhi High Court observed that the India bulls was directly involved in the contract and was also beneficiary to the contract. The court further stated that the officials of India bulls which are acting on behalf of the Elena indicate that the India Bulls has direct control over all the affairs and operations of the Elena. Finally, the High Court of Delhi compelled India bulls to participate in proceedings of the Arbitration because Elena is it alter- ego of India bulls[3].
Case analysis
In a ruling, the Supreme Court stated that the respondents failed to prove that they are non-beneficiaries to the contract hence they are compelled to participate in the Arbitration. The court went on to say that there must be some sufficient materials or doctrines to substantiate respondents as non-signatory to the contract before the court. Here, in this case, the petitioner had submitted several evidences to show that India bulls had actively participated in the contract.
1.Firstly India bulls (not Elena) itself invited tenders for the BTG contract, in respect of this Bid was submitted by the petitioners and then accepted by the respondents. This clearly states that are the India bulls had involved in the negotiation thus making it a party to it. The same has happened in the case of Gvozdenovic vs. United Air Lines[4].
2.Secondly, the performance of the bank guarantees by Shapoorji towards the India bulls and issuance of Letter of Credit and certain payments by India bulls towards Shapoorji, concludes that they are beneficiary to the contract.
3.Thirdly, Clause 8 of the contract states that the petitioners had to get into a formal agreement with the respondents. In this clause, the name of Elena was mentioned in Parenthesis. The same has happened in the case of Furest Day Lawson Ltd. vs. Jindal Export Ltd[5].
From all the above-stated facts and the evidence, I am of the opinion that the petitioners were the direct beneficiary to the contract; therefore despite the fact that they are non-signatory to the contract, it can be made a party to the contract of BTG. Also, this case taught us that to prove a party as the beneficiary to the contract, the benefits they are getting should be a direct one and not an indirect benefit.
Conclusion
The High Court of Delhi gave its decision in favor of the petitioners. The Delhi High Court compelled the respondents to participate in the proceedings of the arbitration because the courts have sufficient material which proves that the respondents are the direct beneficiaries to the contract. Considering all the facts, precedents, evidence it was held that the India bulls was directly involved in the contract. It was also held that in any contracts whether it was main contract or supplemental and connected contracts, where the India bulls was directly involved and any dispute arises then that must be referred to the arbitration for the adjudication.
Bibliography
Motta, D. (2021). Can a Non-signatory but directly involved party to a contract be compelled to arbitrate?
Indian Council of Arbitration, (ICAI)
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