Non-signatory parties can be subjected to arbitration in accordance with Doctrine of Group of Companies: Delhi High Court

Delhi High Court

Delhi High Court: In an arbitration petition under Section 11 of the Arbitration and Conciliation Act, 1996, (‘Arbitration Act’) filed by Aditya Birla Finance Limited seeking appointment of a Sole Arbitrator, the single judge bench of V. Kameswar Rao, J., stated that non-signatory or third party could be subjected to arbitration without their prior consent if there was a clear intent of the parties to bind both the signatory as well as non-signatory parties which was in accordance with clause 12 of Credit Arrangement Letter (‘CAL’) and clause 33 of the Facility Agreement.

In the matter at hand, the petition was filed for adjudication of disputes and differences which had inter alia arisen in relation to the term loan of ₹ 150,00,00,000/- (‘Term Loan’) extended by the petitioner to respondent 1 under CAL read with the Facility Agreement, and Letters issued by the respondent 2 (‘Letter of Guarantee 1’) and issued on behalf of respondent 3 (‘Letter of Guarantee 2’).

It was contended that clause 12 of CAL and clause 33 of the Facility Agreement provided for settlement of disputes through arbitration and the said documents were binding upon both the parties. Further it was alleged that respondent 1 had defaulted in the payment of the term loan and a total outstanding amount of ₹ 134,00,00,000/- was payable.

It was further contended that respondent 2 and 3 had issued letter of guarantee to ensure that respondent 1 would make payments under the Facility Agreement on the relevant due dates.

Issue for consideration

Whether all parties could be referred to arbitration by appointing an Arbitrator even when admittedly respondent 2 and 3 were not signatories to CAL and Facility Agreement?

Court Analysis

The Bench while agreeing with the petitioner, stated that according to clause 33 of the Facility Agreement, the remedy of arbitration would be available to the parties if the remedy of both the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 were not available to the lender.

The Court referred to the ‘Doctrine of Group of Companies’ while deciding whether a company within a group of companies would be bound by the arbitration agreement and stated that the question had to be seen from two prospectives:

a) the perspective of the CAL and the Facility Agreement

b) the effect of the two letters issued by the respondent 2 and 3.

The Court referred to Chloro Controls India Private Limited v. Severn Trent Water Purification Inc, (2013) 1 SCC 641 which had laid down the verdict that a non-signatory party could also be subjected to arbitration, provided the transactions were within the group of companies and there existed a clear intent of the parties to bind both the signatory as well as non-signatory parties in a contract.

The Bench, therefore, held that non-signatory or third party could be subjected to arbitration proceedings without their prior consent in an exceptional case. It stated that it was necessary to examine the touchstone of direct relationship of signatory parties to the arbitration agreement, commonality of the subject matter and the agreement between the parties forming part of a composite transaction. It was also pertinent to examine whether a common reference of such parties to arbitration would serve the ends of justice.

The Bench was of the view that once the Court answers the same in affirmative, the reference of even a non-signatory party would fall within the aforesaid exceptional case.

The Court dismissing the submission of the respondents that the letters issued by them were mere letters of comfort, stated that the position of law was well settled inasmuch as that a document had to be read as a whole in a commercial sense, therefore, by applying ordinary rules of constructions and interpretation relating to contracts, a letter of comfort could be treated as a letter of guarantee. However, the same must conform to the provisions of Section 126 of the Indian Contract Act, 1872 (‘Contract Act’).

The Court noted that there was no assurance in the said letters that respondents 2 and 3 would pay the credit facility to the petitioner on the failure of respondent 1 to repay the petitioner. In the absence of such stipulation, the letters do not meet the requirement of section 126 of the Contract Act as the letter only stated that the respondents shall assure and confirm that the petitioner would repay the facilities on the relevant due dates.

The Bench declining the submission put forth by the respondent that the letters of comfort had not created any legal obligation on the parties stated that the statements made by respondent 2 and 3 assuring that respondent 1 shall repay the Facility Agreement on the relevant due dates, was made in the midst of a commercial transaction which was promissory in character and thus, enforceable.

The Court further stated that the respondent did not contest the existence of the arbitration clauses between petitioner and respondent 1 and the fact that disputes had arisen in terms of CAL / Facility Agreement, the petitioner and respondent 1, 2 and 3 would be liable to be referred to Arbitration. The Court answered the question in positive that respondent 2 and 3 can be referred to arbitration.

With this observation, the Court appointed Justice L. Nageswara Rao, a Former Judge of Supreme Court of India as the sole Arbitrator, who shall adjudicate the disputes between the parties, through claims and counter claims, if any and shall give his disclosure under Section 12 of the Act of 1996.

[Aditya Birla Finance Limited v SITI Networks Limited, 2023 SCC OnLine Del 1290, decided on 03-03-2023]

Judgment authored by Justice V. Kameswar Rao

Advocates who appeared in this case:

For the petitioner- Senior Advocate Shekhar Rao, Advocate Mr. Aseem Chaturvedi, Advocate Ravitej Chilumuri, Advocate Mihika Jalan, Advocate Raddhika Khanna, Advocate Pragya Dahiya, Advocate. Aanchal Tikmani, Senior Advocate Abhishek Manu Singhvi, Senior Advocate Darpan Wadhwa, Advocate Siddhant Kumar, Advocate Shivank Diddi, Advocate Amer Vaid, Advocate Neelakshi Bhadauria and Advocate Ashima Chauhan;

For the Respondent- Senior Advocate Joy Basu, Advocate Ritwika Nanda, Advocate Akshita Salampuria Advocate. Kanak Bose, Senior Advocate P. Chidambaram, Senior Advocate Sandeep Sethi, Advocate Aman Raj Gandhi, Advocate Vardaan Bajaj, Advocate Bindi Dave and Advocate Pranay Tuteja, Advocate Mr. Samar Singh Kachwaha, Advocate Shivangi Nanda and Advocate Kavita Vinayak.

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