Wednesday, January 7, 2015

Non-Signatories Bound By Arbitration Agreement

[The following post is contributed by Bhushan Shah at Mansukhlal Hiralal & Company, Mumbai]

The Bombay High Court in a recent judgment of Rakesh S Kathotia and Anr vs Milton Global Limited and Ors applied the ‘group of companies doctrine’ upheld by the Apex Court in Cholro Controls India Private Limited v. Severn Trent Water Purification Inc & Ors, (2013) 1 SCC 641 whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non­signatory affiliates or sister or parent concerns if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates.

Background

This case was an appeal before the division bench of the Bombay High Court from an order passed by the single judge in an arbitration petition (“Petition”) dismissing the application under Section 9 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act"). The primary ground for dismissal of the petition by the single bench was that there is no ‘identity’ of the parties to the arbitration agreement, as contained in the Joint Venture Agreement dated 14 July 2001 (“JVA”) and the parties to the application.

Under the JVA, the Subhkam Group and the Vaghani Group jointly constituted Milton Global Limited, a joint venture company (JVC) with each holding 49.99% and 50.01% respectively. The management of JVC was vested in a board of directors to be appointed by the Subhkam Group and the Vaghani Group. Under the JVA, the Subhkam Group and the Vaghani Group were defined as follows respectively:

- "The Subhkam Group shall mean Mr Rakesh S Kathotia and such other entities controlled by him or his immediate relatives or his group companies directly or indirectly."

- "The Vaghani Group shall mean Milton Plastics Limited Mr Dineshkumar Ishwarlal Vaghani, Mr Kanaiyalal Ishwarlal Vaghani, Mr Chirnajiv Ishwarlal Vaghani, Mr Nilesh Ishwarlal Vaghani and Mr Madhup Bansilal Vaghani and their immediate relatives taken together and such other entities controlled by them or their immediate relatives directly or indirectly."

A dispute arose between the parties under the JVA, wherein the Subhkam Group alleged that the Vaghani Group set up a competitive company and siphoned the business of JVC to the competitive company. The Subhkam Group filed a Section 9 Arbitration Petition before the single bench of the Bombay High Court. The single judge dismissed the said Arbitration Petition solely on the ground that there was no identity of the parties to the JVA and parties against whom the interim measured were sought. This order of single bench was challenged before the division bench.

Division Bench Decision                      

The Bombay High Court in its judgment observed that the parties to the JVA were not merely the named individuals or entities. After a perusal of various clauses of the JVC, it came to the conclusion that the JVA was executed between the ‘Vaghani Group’ and the ‘Subhkam Group’ as defined under the JVA.

The Court further observed that that the terms and phraseology contained in the agreement cannot be ignored so as to render it meaningless. A commercial document should be interpreted having regard to words and phraseology therein and no term / phrase should be treated as meaningless, especially if they are consistent with the other parts of the agreement. In case of ambiguity, the ‘intention’ of the parties should be determined and honoured to the extent possible.

The Court in the light of the aforesaid reasons held that the said arbitration petition could not have been dismissed on the ground that there was ‘no identity between the parties’. Hence, the non – signatories will be bound by the JVA.

However, after determining the maintainability of the said arbitration application on the identity of the parties, the Court rejected the appeal on the merits of the case.

Comment

The Supreme Court has in the past upheld the aforesaid theory and has applied it in a number of arbitrations so as to justify the tribunal assuming jurisdiction over a party who is not a signatory to the   contract   containing   the   arbitration agreement. By following the Supreme Court’s judgment, the Bombay High Court has demonstrated that it is open to interpreting an arbitration agreement in a broad manner and is willing to look into the intention of the parties to analyse as to whether non-signatories to the agreement will be bound by the agreement in terms of the words and phraseology of the agreement.  While this is an interesting judgment, in my view parties must be very cautious while drafting their agreements. While this doctrine is being promoted by the courts to further the intentions of the parties, there is also a possibility of abuse of the doctrine. A draftsman has to be more responsible and use correct and watertight language in agreements. One has to be very cautious with the words in which it couches the party references when casting any duties, obligations or granting rights under an agreement as the courts are showing willingness to look beyond the technicalities.

- Bhushan Shah


1 comment:

vswami said...

OFFHAND

:....as the courts are showing willingness to look beyond the technicalities."

To put the message/caution in a better light, the trend of the view of courts in the given area of controversy does not simply stop short of looking beyond 'the technicalities', but travels far beyond.To say it differently, courts appear to be inclined to resolve such disputes by going into the vexing and dubious facet of all, being so dubbed 'intention', as opposed to basic principles of 'legality' or legitimacy'; that is,in preference to 'substance', rather than to the pure 'form'. As experience has shown, if so, then,any amount of care or caution, howsoever diligently taken in drafting or structuring (the language / phraseology) the contract agreement in order to bring out the real 'intention',the possibility of an adverse view cannot be ruled out. In short, preference to 'substance', ignoring the 'form', is bound to continue to prove a treacherous path to adopt, because of the obvious pitfalls that entails.