Case: MAHANAGAR TELEPHONE NIGAM LTD Vs. CANARA BANK

v. Rishabh Enterprises ( (2018) 15 SCC 678 ) invoked the Group of Companies doctrine in a domestic arbitration under Part I of the 1996 Act. 10.7. Coming to the facts of the present case, CANFINA was set up as a wholly owned subsidiary of Canara Bank. This is evident from the Report of the Joint Committee to Enquire into Irregularities in Securities and Banking Transactions, 1993, Report, Presented to the Lok Sabha on 21 st December, 1993 which states as follows :?Canbank Financial Services Ltd. 6.14 CANFINA was set up as a wholly owned subsidiary of Canara Bank and it commenced its operation with its Head Office at Bangalore on 1 st June, 1987. Its authorized and paid up capital are Rs. 50 crores and Rs. 10 crores respectively. It was staffed mostly be personnel from Canara Bank and has branches at Ahmedabad, Bombay, Calcutta, Hyderabad, Madras and New Delhi besides Bangalore. As the Board comprised mostly of senior executives of Canara Bank and its Chief Executive is also a senior official of that bank (on deputation) the company functioned under the umbrella of the parent bank; besides it submits periodical returns on its functioning to the Board of Canara Bank for information. 6.15 The activities authorized to be conducted by the Company are equipment leasing, merchant-banking, venture capital and consultancy services. The Company, initially deployed a major portion of its owned funds and deposits in equipment leasing business and obtained the classification of an ‘Equipment leasing company? from the Department of Finance Companies of RBI; this classification entitles the company to mobilize public deposits to the extent of ten time its owned funds. … 6.25 The Committee hope that the nature and extent of the financial assistance being provided by Canara Bank to its subsidiaries are such as could be justified on prudent commercial norms. Further the parent bank cannot be absolved of the responsibility for various irregularities of its subsidiary. ? (emphasis supplied) 10.8. The disputes between the parties emanated out of the transaction dated 10.02.1992, whereby CANFINA has subscribed to the bonds floated by MTNL. CANFINA subsequently transferred the Bonds to its holding Company 3– Canara Bank. It is the contention of MTNL, that since CANFINA did not pay the entire sale consideration for the Bonds, MTNL eventually was constrained to cancel the allotment of the Bonds. 10.9. It will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds. The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration was not paid. There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings. 10.10. Given the tri-patite nature of the transaction, there can be a final resolution of the disputes, only if all three parties are joined in the arbitration proceedings, to finally resolve the disputes which have been pending for over 26 years now. It is of relevance to note that CANFINA has participated in the proceedings before the High Court, and the Committee on Disputes. CANFINA was also represented by its separate Counsel before the Sole Arbitrator. Canara Bank in CWP No. 560 of 1995 filed before the Delhi High Court, had joined CANFINA as Respondent No. 2, even though it was joined as a proforma party. CANFINA was represented by Counsel in the Writ Proceedings before the Delhi High Court. The Counsel for CANFINA was however not present on two dates i.e. on 16.09.2011 and 21.10.2011, when the High Court recorded the agreement between the parties for reference of disputes to arbitration. MTNL had submitted before the Delhi High Court that Canara Bank should agree to take over the liabilities of CANFINA before the arbitration could commence. The High Court recorded that there was no necessity of requiring Canara Bank to agree to take over the liabilities of CANFINA, prior to the arbitration proceedings. This issue would be decided in the arbitration. 10.11. On the commencement of arbitration proceedings before the Sole Arbitrator, notice was issued by the Sole Arbitrator to all the three parties including CANFINA, which was represented by its Counsel. 10.12. We find that the objection to CANFINA being impleaded as a party to the arbitration proceedings was raised by Canara Bank, and not CANFINA. 10.13. We do not find any merit in the objection raised by Canara Bank opposing the joining of CANFINA as a party to the dispute. Canara Bank vide letters dated 05.03.2009 and 17.03.2010 had enclosed a Draft Arbitration Agreement to MTNL, wherein it has clearly stated that the arbitration would be between three parties i.e. Canara Bank and CANFINA as party of the first part, and MTNL as party of the second part. It is incomprehensible why Canara Bank is now objecting to the impleadment of CANFINA in the arbitration proceedings. There is no justifiable ground advanced by the Counsel for Canara Bank to oppose the impleadment of CANFINA in the arbitration proceedings. 10.14. The present case is one of implied or tacit consent by Respondent No. 2 – CANFINA to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties. We find that Respondent No. 2 – CANFINA has throughout participated in the proceedings before the Committee on Disputes, before the Delhi High Court, before the Sole Arbitrator, and was represented by its separate Counsel before this Court in the present appeal. There was a clear intention of the parties to bind both Canara Bank, and its subsidiary – CANFINA to the proceedings. In this case, there can be no final resolution of the disputes, unless all three parties are joined in the arbitration.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. THE EXISTENCE OF A VALID ARBITRATION AGREEMENTA valid arbitration agreement constitutes the heart of an arbitration. An arbitration agreement is the written agreement between the parties, to submit their existing, or future disputes or differences, to arbitration. A valid arbitration agreement is the foundation stone on which the entire edifice of the arbitral process is structured. A binding agreement for disputes to be resolved through arbitration is a sine-qua-non for referring the parties to arbitration9.2. The arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The essential elements or attributes of an arbitration agreement is the agreement to refer their disputes or differences to arbitration, which is expressly or impliedly spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the partiesThe agreement between MTNL and Canara Bank to refer the disputes to arbitration is evidenced from the following documents exchanged between the parties, and the proceedings :(i) The Minutes of the Meeting dated 27.03.2001 convened by the Cabinet Secretariat, wherein all three parties were present and participated in the proceedings. The Committee on Disputes, in the Meeting dated 16.12.2008 expressed the view that all the three parties should take recourse to arbitration in view of the different inter-liked transactions between them. Canara Bank suggested that to expedite the arbitration, it should be conducted under the Arbitration & Conciliation Act, 1996. This was accepted by MTNL, and no objection was raised(ii) Pursuant to the proceedings conducted by the Cabinet Secretariat, Canara Bank addressed letters dated 05.03.2009 and 17.03.2010 to MTNL, wherein it enclosed a draft Arbitration Agreements, wherein all three parties i.e. Canara Bank, CANFINA and MTNL would be joined in the arbitration proceedings.(iv) Pursuant thereto, MTNL participated in the proceedings conducted by the Sole Arbitrator, and filed its Claim, and Counter-Claim. No objection was raised before the Sole Arbitrator that there was no arbitration agreement in writing between the parties. The only objection raised was that CANFINA should be joined as a necessary party in the proceedingsIn the present case, Canara Bank had filed its Statement of Claim before the Arbitrator, and MTNL filed its Reply to the Statement of Claim, and also made a Counter Claim against Canara BankThe statement of Claim and Defence filed before the Arbitrator would constitute evidence of the existence of an arbitration agreement, which was not denied by the other party, under Section 7(4)(c) of the 1996 ActIn view of the aforesaid discussion, the objection raised by MTNL is devoid of any merit, and is hereby rejected10. JOINDER OF CANFINA IN THE ARBITRAL PROCEEDINGS10.1. Canara Bank raised an objection to the joinder of Respondent No. 2 – CANFINA as a party to the arbitration proceedings10.2. 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 liabilitiesThe parent, or the subsidiary company, entering into an agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group, to be bound by that agreementSimilarly, an arbitration agreement is also governed by the same principles, and normally, the company entering into the agreement, would alone be bound by it10.3. A non-signatory can be bound by an arbitration agreement on the basis of the ?Group of Companies? doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory partiesCourts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract10.7. Coming to the facts of the present case, CANFINA was set up as a wholly owned subsidiary of Canara Bank. This is evident from the Report of the Joint Committee to Enquire into Irregularities in Securities and Banking Transactions, 1993, Report, Presented to the Lok Sabha on 21 st December, 199310.8. The disputes between the parties emanated out of the transaction dated 10.02.1992, whereby CANFINA has subscribed to the bonds floated by MTNL. CANFINA subsequently transferred the Bonds to its holding Company 3– Canara Bank10.9. It will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds. The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration was not paidThere is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three partiesTherefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings10.10. Given the tri-patite nature of the transaction, there can be a final resolution of the disputes, only if all three parties are joined in the arbitration proceedings, to finally resolve the disputes which have been pending for over 26 years nowIt is of relevance to note that CANFINA has participated in the proceedings before the High Court, and the Committee on Disputes. CANFINA was also represented by its separate Counsel before the Sole Arbitrator. Canara Bank in CWP No. 560 of 1995 filed before the Delhi High Court, had joined CANFINA as Respondent No. 2, even though it was joined as a proforma party. CANFINA was represented by Counsel in the Writ Proceedings before the Delhi High Court. The Counsel for CANFINA was however not present on two dates i.e. on 16.09.2011 and 21.10.2011, when the High Court recorded the agreement between the parties for reference of disputes to arbitration. MTNL had submitted before the Delhi High Court that Canara Bank should agree to take over the liabilities of CANFINA before the arbitration could commence. The High Court recorded that there was no necessity of requiring Canara Bank to agree to take over the liabilities of CANFINA, prior to the arbitration proceedings. This issue would be decided in the arbitration10.11. On the commencement of arbitration proceedings before the Sole Arbitrator, notice was issued by the Sole Arbitrator to all the three parties including CANFINA, which was represented by its Counsel10.12. We find that the objection to CANFINA being impleaded as a party to the arbitration proceedings was raised by Canara Bank, and not CANFINA10.13. We do not find any merit in the objection raised by Canara Bank opposing the joining of CANFINA as a party to the dispute. Canara Bank vide letters dated 05.03.2009 and17.03.2010 had enclosed a Draft Arbitration Agreement to MTNL, wherein it has clearly stated that the arbitration would be between three parties i.e. Canara Bank and CANFINA as party of the first part, and MTNL as party of the second partIt is incomprehensible why Canara Bank is now objecting to the impleadment of CANFINA in the arbitration proceedings. There is no justifiable ground advanced by the Counsel for Canara Bank to oppose the impleadment of CANFINA in the arbitration proceedings10.14. The present case is one of implied or tacit consent by Respondent No. 2 – CANFINA to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties. We find that Respondent No. 2 – CANFINA has throughout participated in the proceedings before the Committee on Disputes, before the Delhi High Court, before the Sole Arbitrator, and was represented by its separate Counsel before this Court in the present appeal. There was a clear intention of the parties to bind both Canara Bank, and its subsidiary – CANFINA to the proceedings. In this case, there can be no final resolution of the disputes, unless all three parties are joined in the arbitration9.9. The agreement between the parties as recorded in a judicial Order, is final and conclusive of the agreement entered into between the parties.(State of Maharashtra v. Ramdas Shrinivas Nayak (1982) 2 SCC 463.   See also Chitra Kumari v. Union of India (2001) 3 SCC 208  ) The Appellant – MTNL after giving its consent to refer the disputes to arbitration before the Delhi High Court, is now estopped from contending that there was no written agreement to refer the parties to arbitration9.10. An additional ground, for rejecting the preliminary objection raised by MTNL is based on Section 7(4)(c) of the Arbitration and Conciliation Act, 199610.4. The doctrine of ‘Group of Companies? had its origins in the 1970?s from French arbitration practice. The ‘Group of Companies? doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi-party business transactionsThe ‘Group of Companies? doctrine has been invoked by courts and tribunals in arbitrations, where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the groupThe circumstances in which the ‘Group of Companies? Doctrine could be invoked to bind the non-signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the partiesA ‘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.