DELHI HIGH COURT REITERATED THAT A NON-SIGNATORY OR A THIRD PARTY TO A CONTRACT CAN ALSO BE SUBJECTED TO ARBITRATION
A Single Bench of the Delhi High Court presided by Justice Neena Bansal Krishna passed a Judgment dated 07.10.2022 in Esha Kedia vs Milan R.Parekhi & Ors. in ARB.P No.809 of 2019 and decided upon a Petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 seeking appointment of Arbitrator (hereinafter referred to as ‘A&C Act, 1996’).
The Respondent Nos. 1 and 2 are brothers and are in the business of share broking for the last 35 years and Respondent No. 3, M/s Action Financial Services India Limited is a Company registered under the provisions of Companies Act, 1956. The Respondent No. 1 is the Managing Director of Respondent No. 3. The Petitioner and the Respondents had entered into a Memorandum of Understanding (hereinafter referred to as ‘MoU’) dated 01.04.12 for the purpose of share broking business where the Petitioner was taken as the business partner as per the terms and conditions enshrined in the MoU.
The Petitioner decided to exit from the Business Partnership with the Respondents for which they entered into an Exit MoU dated 14.11.14. The Respondents failed to comply with the Exit MoU and requested the Petitioner not to initiate any legal action for recovery of money and an Addendum MoU dated 16.02.16 was executed between the Parties, containing the terms and conditions for the exit of the Petitioner. However, the Respondents failed to abide by the Addendum MoU as well.
The Petitioner sent a Letter demanding her legitimate payments, but the Respondents did not comply with the MoU dated 16.02.16. Further, the Respondents denied such claims and failed to come forward to solve the disputes between the parties. Therefore, the Petitioner wrote a Letter for Invocation of Arbitration Clause and nominated the Arbitrator to adjudicate upon the claims of the Petitioner. However, the Respondents refused to accept the Arbitrator nominated by the Petitioner. Hence, the present Petition is filed before the Delhi High Court for the appointment of the Arbitrator.
The High Court while passing the Judgement dated 07.10.2022 made the following observations:
1) The Hon’ble High Court observed that the MoU dated 01.04.12 executed between all the Parties, including the Respondent No. 3, contained no Arbitration Agreement.
2) Whether the Stamp Paper for the Addendum MoU has been purchased on 17.02.16, while as per the contents of the Addendum MoU, the same was executed on 16.02.16?
The Hon’ble Court observed that the Stamp Paper may have been purchased subsequently but it cannot be denied that at this stage what the Court has to consider, is that prima facie there exists an Arbitration Agreement in writing. The MoU and the Addendum MoU admittedly bear the signatures of the Petitioner and the Respondent Nos. 1 and 2. Any challenge to the genuineness of the said document or any issue of threat and coercion in signing the said documents by Respondent Nos. 1 and 2 cannot be a subject matter of adjudication in the present Petition.
3) Whether the signatures of the Respondent Nos. 1 and 2 were obtained by threat and coercion and whether in the absence of signature of the Respondent No. 3-Company in the MoU or Addendum MoU, the matter be referred to arbitration?
The Hon’ble High Court held that there exists a binding Arbitration Clause in writing between the Petitioner and the Respondent Nos. 1 and 2. Further, no averment of threat and coercion has been pleaded in respect of Addendum MoU dated 16.02.16. The plea that the signatures were obtained by threat and coercion cannot be considered while considering the Application under Section 11 of A&C Act, 1996 for appointment of the Arbitrator.
4) Whether a non-signatory to an Arbitration Agreement be referred to Arbitration?
The Hon’ble Court observed that the courts have evolved the concept of “Group of Companies”:
(i) In this regard, as per the principles of contract law, an agreement entered into by one of the Companies in a group, cannot be binding on the other members of the same group, as each Company is a separate legal entity which has separate legal rights and liabilities. However, in certain exceptional circumstances, an arbitration Agreement can be binding on non-signatories.
(ii) The issue whether a non-signatory can be referred to Arbitration has been exhaustively dealt by the Delhi HC in Shapoorji Pallonji& Co. Pvt. Ltd. v. Rattan India Power Ltd. & Anr., (2021) 281 DLT 246, wherein it was observed that the Courts in different jurisdictions have evolved various principles on the basis of which, in certain exceptional circumstances non-signatories may be compelled to arbitrate.
(iii) Placing reliance on Supreme Court and other foreign judgments, the Delhi High Court concluded that when a party is a direct beneficiary of the contract then it can be compelled to arbitrate. Further, a non-signatory company which is an alter ego to a signatory can also be compelled to arbitration. The Court also held that a non-signatory can be compelled to arbitration under equitable estoppel principles, because it received a copy of the contract, did not object to it, offered no persuasive reason for its action and knowingly accepted benefits of contract.
(iv) The doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding Company, or a member of the Group of Companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.
(v) The Hon’ble Court on the above issue though observed the Group of Companies Doctrine to refer a non-signatory party company to arbitration, but considering that prima facie the Respondent No. 3 is not a party to the Arbitration Agreement even though Respondent No.1 is Managing Director of Respondent No. 3 and signed it in his personal capacity, it is left open for the Parties to move an appropriate application for impleadment of Respondent No. 3, if so advised.
Thus, based on the aforesaid grounds, the High Court allowed the Application for Appointment of Arbitrator and Learned Counsels for the Parties were directed to contact the learned Arbitrator within one week of being communicated a copy of this Order to them by the Registry.
The Indian Lawyer
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