The Supreme Court, in the case of Mahanagar Telephone Nigam Ltd. (“MTNL”) v. Canara Bank  laid down the conditions for which a non-signatory affiliate of a parent company could be bound to an arbitration made by the parent company.  the Supreme Court also explained the ‘Group of Companies’ doctrine in this regard.

MTNL had approached the Supreme Court for joinder of Can Bank Financial Services Ltd. (“CANFINA”), a wholly-owned subsidiary of the Canara Bank, to an arbitration between MTNL and Canara Bank.

The transaction in question was initiated between MTNL and CANFINA in the year 1992 and they had executed an agreement in this regard. However, due to the financial crisis of 1992, CANFINA was unable to fulfil its obligations. In order to support CANFINA, Canara Bank agreed to act on CANFINA’s behalf and perform CANFINA’s obligations stipulated in the agreement executed with MTNL. However, MTNL did not agree to transfer CANFINA’s interests to Canara Bank, and cancelled the transaction.

In 2011, the Delhi High Court, directed MTNL and Canara Bank to resolve their dispute by way of arbitration. Canara Bank shared a draft arbitration clause with MTNL which had MTNL and Canara Bank as parties. However, the sole-arbitrator appointed by MTNL and Canara Bank sent notices to all the three parties and decided that CANFINA shall be a party to the arbitration.

The Supreme Court, on a review of the facts of the case, allowed CANFINA to be a party to the arbitration between MTNL and Canara Bank on the basis of the “Group of Companies Doctrine” (“Doctrine”). The Supreme Court outlined the following grounds under which the Doctrine can be invoked –

  (i)  The Doctrine will apply in cases of a ‘composite transaction’ between the parties. A ‘composite transaction’ refers to a transaction which is inter-linked in nature; or, where the performance of the agreement may not be feasible without the aid, execution and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.

 

  (ii)  The Doctrine will also apply when the funds of one company are used to financially support or re-structure other members of the group, so as to constitute a single economic reality to bind both signatory and non-signatories to arbitration.

The Supreme Court also noted that there was implied consent by CANFINA to be part of the arbitral proceedings as it had participated in previous proceedings before the (a) committee on disputes, before the Delhi High Court and before the Sole Arbitrator and that the original transaction emanated from a transaction between MTNL and CANFINA,

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The Doctrine binds a non-signatory entity by an arbitration agreement where the parent or holding company, or a member of the group companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been (a) engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract; (b) when the non-signatory will also be bound and benefitted by the relevant contracts; (c) the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties and (d) when the non-signatory(s) is a necessary party to the contract.

It is also defined as an implied consent by a party to arbitrate. This judgment has correctly elaborated on the Doctrine, the joinder of a party which was the initiator of a transaction is necessary, it brings more context and sets out the correct facts in a dispute. It also helps the arbitrator to set out the rights and liabilities of the parties involved.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.