Dispute Resolution Hotline
September 26, 2024
Beyond the Group of Companies Doctrine: Inclusion
of Non-Signatories in Arbitration Through Interlinked
Transactions
A non-signatory
can be arraigned into arbitration proceedings
if it is a party to an inter-connected agreement
which is executed to achieve a common commercial
goal. If a non-signatory
is part of a contractual relationship which
makes it responsible towards the claimant
in the arbitration proceedings, then such
a non-signatory can be made part of the
arbitration proceedings. Even if a non-signatory
is arraigned into arbitration proceedings
by a court appointing the arbitral tribunal,
it will be open for the tribunal to independently
consider such an issue.
INTRODUCTION
In the recent case of RBCL Piletech Infra
v. Bholasingh Jaiprakash Construction Limited &
Ors. (“RBCL”),
a Single Judge Bench of the Delhi High Court (“Court”)
held that the inclusion of a non-signatory in arbitration
proceedings is not solely dependent on the non-signatory
being part of the same group of companies as the
signatory. The Court relied on the principle that
a non-signatory can be referred to arbitration if
there is a contractual relationship that imposes
certain obligations upon the non-signatory towards
the claimant in the arbitration proceedings.
FACTUAL BACKGROUND
Bharat Heavy Electrical Ltd. (“BHEL”)
was awarded a project by National Thermal Power
Corporation (“NTPC”).1
BHEL subcontracted part of the project to Bholasingh
Jaiprakash Construction Ltd. (“BJCL”).
Subsequently, BJCL further subcontracted a portion
of the project to RBCL Piletech Infra (“RBCL”)
by way of a Work Order dated April 4, 2022 (“Work
Order”). This Work Order was executed
only between BJCL and RBCL. Neither BHEL or NTPC
were parties to the Work Order.
RBCL claimed idling charges, damages and other
costs from BJCL, BHEL and NTPC. However, the parties
failed to resolve the disputes. Consequently, RBCL
issued the notice of arbitration and commenced arbitration
proceedings under the Work Order against BJCL, BHEL
and NTPC.
The arbitration agreement in the Work Order provided
for dispute resolution by a sole arbitrator. Upon
failure to arrive at a consensus to appoint the
sole arbitrator, RBCL filed an application before
the Court to appoint an arbitrator. NTPC and BHEL
opposed inclusion in the arbitral proceedings and
contended that they have no privity of contract
with RBCL as they were not parties to the Work Order
which was a bilateral agreement solely between RBCL
and BJCL.
JUDGEMENT
The Court referred to the judgment of the Supreme
Court in Cox and Kings v. SAP India Pvt. Ltd.,2
and noted that the legal framework for including
a non-signatory in arbitration is well-established.
The Court noted that a non-signatory can be included
in arbitration proceedings if the non-signatory
and one of the signatories belong to the same ‘group
of companies’ (commonly referred to as the
Group of Companies Doctrine (“GOCD”)).
The Court stated that the GOCD is not the only
tool through which a non-signatory can be arraigned
in arbitration proceedings. The Court explained
that if the contractual relationship between the
parties is such that a non-signatory owes any obligation
to a signatory-party, then such a non-signatory
can also be included in the arbitration proceedings.
In this regard, the Court referred to a decision
in Ameet Lalchand Shah v. Rishabh Enterprises,3
wherein the Supreme Court upheld the inclusion of
a non-signatory to the arbitration proceedings based
on the fact that such non-signatory was a party
to an inter-connected agreement, which was executed
to achieve a common commercial goal. The Court also
drew reference to a decision in ONGC v. Discovery
Enterprises Pvt. Ltd.,4 wherein
the Supreme Court had held that a non-signatory
could be bound by principles other than GOCD as
well.
In the facts of the present case, the Court referred
to Clauses 21 and 28 of the Work Order which relate
to obligations of BHEL regarding payment and indemnity.
The Court noted that all payments made by BHEL affected
RBCL’s quantum of compensation in the project.
In light of the same, the Court found that the aforesaid
clauses established a prima facie case
for including BHEL in the arbitration proceedings.
The Court noted that NTPC did not have any contractual
responsibility towards RBCL and hence concluded
that NTPC should not be included in the arbitration
proceedings.
CONCLUSION
The judgment highlights the role of direct contractual
relationship of the non-signatory with the signatory
party in the arbitration. The thresholds set out
in Cox and Kings and Chloro Control
refer to ‘direct commonality of the
subject matter’, ‘agreements
forming part of a composite transaction’,
and ‘inter-related and inter-dependent
performance of agreements’. With the
judgment in RBCL, it is clear that the
aforesaid thresholds can apply independently without
fulfilling the requirement that the non-signatory
should form part of the group of companies with
the signatory parties. If these conditions are met,
the non-signatory parties may be included in the
arbitration.
It is important to refer to the observations
of the Court on the scope of interference and inquiry
in an application under Section 11 of the A&C
Act. The Court referred to earlier judgments which
have held that the scope of interference in a Section
11 application is limited to a scrutiny of prima
facie existence of the arbitration agreement.
The Court clarified that its order did not constitute
an opinion on merits, and hence its order should
not prevent (a) BHEL to contest its inclusion before
the arbitrator, and (b) RBCL to apply to the arbitral
tribunal to arraign NTPC as a necessary party. The
Court further clarified that the arbitrator is entitled
to consider the said applications on their merits
without any regard to the prima facie findings
in its order in the Section 11 application. The
aforesaid observations align with a pro-arbitration
approach which upholds the authority of an arbitral
tribunal to independently decide the issue of arraigning
a non-signatory.
- Shruti
Dhonde,
Adimesh Lochan and
Arjun
Gupta
The authors express their gratitude to Durgeshwari
Paliwal for her efforts on this article.
You can direct your queries or comments to the relevant member.
1At a site owned by NTPC.
2Cox and Kings Ltd. v.
SAP India Pvt. Ltd. and Ors., (2024) 4 SCC
1.
3(2018) 15 SCC 678
4(2022) 8 SCC 42.
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