[Amazon v. Future Retail] From Emergency Arbitrator to Group of Companies Doctrine – Delhi HC covers all while restraining Future Group from proceeding further with Disputed transaction

Delhi High Court: In the notable ruling of Amazon v. Future Retail, J.R. Midha, J. of Delhi High Court considered three crucial questions:

♦ What is the legal status of an Emergency Arbitrator?

♦ Whether the Emergency Arbitrator misapplied the Group of Companies doctrine which applies only to proceedings under Section 8 of the Arbitration and Conciliation Act?

♦ Whether the interim order of Emergency Arbitrator is Nullity?

Amazon.com invested Rs 1431 Crore in Future Coupons Private Limited (FCPL) based on certain special, material protective/negative rights available to FCPL in Future Retail Limited (FRL), namely, that the Retail Assets of FRL would not be alienated without the prior written consent of Amazon.com (Petitioner), and never to a Restricted Person. Further, an agreement was attained wherein it was stated FRL would be the sole vehicle for the conduct of FCPL and FRL’s conduct of business, resulting in benefit of the entire investment to FRL.

Within months of investment it was noted that the Biyanis which controls FRL breached the agreements by violating the contractual obligations, approved transaction relating to the transfer of its retail assets to Mukesh Dhirubhai Ambani Group (MDA) which is a Restricted Person as per Shareholders’ Agreement between petitioner and respondents (FCPL-SHA) [Disputed Transaction].

Timeline of Events:

05-10-2020
  • Arbitration Proceedings initiated.
  • Application filed to seek an ‘Emergency Interim Relief to restrain respondents from pursuing Disputed Transaction.
06-10-2020
  • Respondent 2 raised an objection with respect to Emergency Arbitrator’s jurisdiction.
09-10-2020
  • Petitioner requested for status quo to be maintained, however, respondents declined to give any assurance during the pendency of proceedings before the Emergency Arbitrator.
13-10-2020

Emergency Arbitrator called upon both the parties to submit their response pertaining to the following 4 Supreme Court Judgments:

Respondents raised objection to Emergency Arbitrator’s Jurisdiction.

16-10-2020 Arbitrator heard all the parties.
25-10-2020

Emergency Arbitrator passed an interim order and held that:

“the Emergency Arbitrator is an Arbitral Tribunal for all intents and purposes. The Emergency Arbitrator further noted that the Emergency Arbitrators are recognized under the Indian Arbitration framework.

Arbitrator observed that the petitioner made out a strong prima facie case that respondents were in breach of the contractual obligations. Further, the arbitrator added that the petitioner would suffer irreparable injury if the interim injunction was not granted.

Conclusion of Emergency Arbitrator

Petitioner has a strong prima facie case on the merits of the dispute, the petitioner’s rights under the FCPL-SHA, the SSA, and the FRL-SHA (insofar as it has been incorporated into the FCPL SHA) have been apparently compromised by the Respondents and the Respondents have given no good legal reasons for effecting the sale of FRL’s Retail Assets to the Restricted Person behind the petitioner’s back.

Point-Wise Analysis of the crucial questions raised in the present matter:

Legal Status

 Status of an Emergency Arbitrator is solely based on the party autonomy and the powers of such an arbitrator are similar to Arbitral Tribunal to decide an interim measure. Though Arbitral Tribunal is empowered to reconsider, modify, terminate or annul the order/award of the Emergency Arbitrator.

Emergency Arbitration is a very effective and expeditious mechanism to deal with the Emergency Interim Relief Application and has added a new dimension to the protection of the rights of the parties.

With this mechanism, a litigant gets justice within 15 days, though if the order of Emergency Arbitrator is not enforced, it would make the entire mechanism redundant.

In the present matter, by agreeing to incorporate the Rules of SIAC into the arbitration agreement, parties agreed to the provisions relating to Emergency Arbitration.

Current legal framework is sufficient to recognize the Emergency Arbitration and no amendment in this regard was required.

Section 2(1)(d) defines “arbitral tribunal” to mean a sole arbitrator or a panel of arbitrators, it is wide enough to include Emergency Arbitrator.

Under Section 17(1) of the Arbitration and Conciliation Act, the Arbitral Tribunal has the same powers to make interim order, as the Court has, and Section 17(2) makes such interim order enforceable in the same manner as if it was an order of the Court. The Interim Order is appealable under Section 37 of the Arbitration and Conciliation Act.

Whether Doctrine of Group of Companies applies only to proceedings under Section 8 of the Arbitration and Conciliation Act? 

Law relating to the Group of Companies doctrine is well settled by the Supreme Court in Chloro Controls India Private Limited v. Sever N Trent Water Purification Inc., (2013) 1 SCC 641, Cheran Properties Limited v. Kasturi and Sons Limited, (2018) 16 SCC 413 and MTNL v. Canara Bank, (2020) 12 SCC 767.

Group of Companies doctrine binds the non-signatory entity where the multiple agreements reflect a clear intention of the parties to bind both the signatory and non-signatory entities within the same Group.

 Supreme Court has laid down various tests for invoking the said doctrine.

Following are the Tests:

  • 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 the 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 has to examine whether a composite reference of such parties would serve the ends of justice.

Bench also observed that the said doctrine has been very succinctly explained in the 4th Edition of Malhotra’s Commentary on the Law of Arbitration by Justice Indu Malhotra.

Here’s a Summary for a quick glance at the principles laid down by the Supreme Court on Group of Companies doctrine:

  • As the law has evolved, it has recognised that modern business transactions are often effectuated through multiple layers and agreements. There may be transactions within a Group of Companies. The circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group.
  • The Group of Companies doctrine is essentially intended to facilitate the fulfilment of a mutually 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 formally a signatory but has assumed the obligation to be bound by the actions of a signatory.
  • Doctrine can be invoked to bind a non-signatory entity where a Group of Companies exist and the parties have engaged in conduct, such as negotiation or performance of the relevant contract or made statements indicating the intention assessed objectively and in good faith, that the non-signatory be bound and benefited by the relevant contracts.
  • Doctrine will bind a non-signatory entity where an arbitration agreement is entered into by a company, being one within a group of companies, if the circumstances demonstrate that the mutual intention of all the parties was to bind the signatories and non-signatory affiliates.
  • A non-signatory party can be subjected to arbitration where there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties who are part of Group of Companies. In other words, ―the intention of the parties‖ is a very significant feature that must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.
  • 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 the 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 has to examine whether a composite reference of such parties would serve the ends of justice.
  • Where the agreements are consequential and in the nature of a follow-up to the principal or mother agreement, the latter containing the arbitration agreement and such agreements being so intrinsically intermingled or interdependent that it is their composite performance which shall discharge the parties of their respective mutual obligations and performances, this would be a sufficient indicator of intent of the parties to refer signatory as well as non-signatory parties to arbitration. The principle of ‚composite performance would have to be gathered from the conjoint reading of the principal and supplementary agreements on the one hand and the explicit intention of the parties and the attendant circumstances on the other.
  • While ascertaining the intention of the parties, attempt should be made to give meaning and effect to the incorporation clause and not to invalidate or frustrate it by giving it a literal, pedantic and technical reading.
  • Tests laid down are:

◊ The conduct of the parties reflect a clear intention of the parties to bind both the signatory as well as the non-signatory parties.

◊ The non-signatory company is a necessary party with reference to the common intention of the parties.

◊ The non-signatory entity of the group has been engaged in the negotiation or performance of the contract.

◊ The non-signatory entity of the group has made statements indicating its intention to be bound by the contract.

◊ A direct relationship between the signatory to the arbitration agreement and the non-signatory entity of the group; direct commonality of the subject-matter and composite nature of transaction between the parties.

◊ The performance of the agreement may not be feasible without the aid, execution and performance of the supplementary or ancillary agreement for achieving the common object.

◊ 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.

◊ The funds of one company are used to financially support or restructure other members of the group.

◊ The composite reference of disputes of fresh parties would serve the ends of justice.

Bench in view of the above, decided that the Group of Companies Doctrine is applicable to the present case and respondent 2 is a proper party to the proceedings – Why? Lets’ read the reasons:

  • Signatory and non-signatory company (FRL) belong to the same Biyanis
  • Parties Conduct reflected clear intention to bind the signatory as well as non-signatory company (FRL) of Biyanis
  • Common negotiating and legal team represented the signatory and non-signatory company (FRL).
  • Statutory disclosure made by the non-signatory company to the public.
  • Direct relationship of the non-signatory company to the signatory company of the Group, direct commonality of the subject matter and composite nature of transactions.
  • Funds of Signatory Company used to financially support the non-signatory company of the Group.
  • Agreements are so intrinsically intermingled that their composite performance only shall discharge the parties of their respective mutual obligations.
  • Common intention of all the parties, to arbitrate.
  • Supreme Court’s observation in the decision of Cheran Properties Limited v. Kasturi and Sons Limited, (2018) 16 SCC 413 would squarely apply to the present matter.

Whether the Interim Order is Nullity?

In Court’s opinion, respondent plea of Nullity is to mislead this Court.

Bench agreed with the Emergency Arbitrator that the protective rights do not amount to control of the petitioner over FRL and do not violate the law.

In the present matter, since the respondents were continuing to violate the agreement even after the Emergency Arbitrator’s decision, the petitioner approached this Court for enforcement of the interim order of the Emergency Arbitrator.

Respondents did not dispute the breach of the agreements either before the Emergency Arbitrator or before this Court.

High Court noted that the whole thrust of the respondents before this Court is that the petitioner is a trillion-dollar company and Rs 1430 crore invested by them in the present case is peanuts for them and they should forget about this money as it is worth zero today.

Bench also quoted the senior counsel for respondent 2 for the above-said observation:

“…What happens to his 1430 crores………that is worth zero today. FRL is zero. FCPL coupon business is gone. For this American behemoth, 1400 crore would be rounded off………..”

Before parting with this decision, High Court stated that Emergency Arbitrator, V.K. Rajah SC is a well-known jurist.

Conclusion

All the objections raised by the respondents were rejected with a cost of Rs 20,00,000 to be deposited by the respondents with the Prime Minister Relief Fund for being used for providing COVID vaccination to the Below Poverty Line (BPL) category – senior citizens of Delhi.

Since the respondents deliberately and willfully violated the interim order, hence they are liable for the consequences enumerated in Order XXXIX Rule 2A of the Code of Civil Procedure.[Amazon.Com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2021 SCC OnLine Del 1279, decided on 18-03-2021]

One comment

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    It looks like a judicial terror attack on FG and RIL in Delhi High Court coming after few days of heinous terror ploy at Mukeshji near his residence at Antillia Mumbai. It seems in both the cases the protector have reversed their role. While Justice Mukta Gupta and bench of two judges quashed on merit the order of Emergency Arbitrators judgement in SIAC Singapur on ground that their verdict is not solely applicable in line with Indian laws and provided lifeline relief to FG and continuation of deal and then approval were given by regulatory authorities like CCI and SEBI and there after came this verdict which in tone and tenor flouted all limits as if KB committed heinous crime in saving FR along with 10s of thousands of employees after failing in repeated efforts to get financial help from Amazon ( bound by moral obligation to help and stear out of crisis and saving such an iconic Retail chain built over decades of hard work ). This verdict also puts 10s of thousands of crores of public money the PSU banks had lend to FG. Were the judgment of Justice Mukta Gupta and 2 judge bench were rendered as nullity. Yet another surprising factor that by indirectly acquiring 4.8% stake in FR through Future coupon can any entity foreign or domestic can have the right of binding clauses as perpetuated in agreement? Is it legally tenable?

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