Enforcement of Arbitral Awards Against Non-signatories: Supreme Court.
Ankit Shrivastava is a 2nd year B.A.LLB(Hons.) student from National Law Institute University, Bhopal.
The Supreme Court has at last, answered two increasingly pertinent questions regarding the implications accompanying an outsider to the arbitration proceedings, and the magnitude of the NCLT’s say in arbitral awards and their valid enforcement. The judgment under analysis is Cheran Properties Limited v. Kasturi and Sons Limited and Ors.[i], wherein the apex court upheld the award by the NCLT and enforced the same against the appellants who were not a party to the
arbitration proceedings. The judgment has reinstated the Supreme Court’s arbitration-friendly outlook and is being widely seen as a progressive step by the legal community. This post aims to analyse the judgment which has cleared the cloud over a number of recurring issues.
“K.C. Palanisami” (KCP), “Cheran Properties Limited” (Cheran) and other entities entered into an agreement with respondents “Sporting Pastime India Limited” (SPIL), a wholly-owned subsidiary of “Kasturi & Sons Limited” (KSL), for transfer of shares. According to the agreement the stipulated transaction was such that SPIL would transfer a certain amount of shares to KSL, out of which 90% of which would then be sold to KCP and its nominees which included Cherian and subsequently, Cherian would receive 95% of KCP’s 90% share. Thereafter, disputes regarding the transfer of shares and title arose between the transacting parties and the matter was settled by way of arbitration.
Cheran was not a party to the arbitration proceedings despite being a nominee and the recipient of 95% of the concerned shares. The arbitral award directed KCP and SPIL to return the documents of title and share certificates to KSL and Hindcorp. KCP challenged the award of the arbitral tribunal in the Madras High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (henceforth, the Act).The challenge was dismissed first by single judge and on appeal by division bench of Madras High Court. Even the appeal against the said order of Division Bench of Madras High Court was dismissed by the Supreme Court. The High Court had made an observation that the shares had not been purchased by the CPL as a matter of an independent right but as a nominee of KCP.
Meanwhile KSL commenced proceedings, inter alia, for the rectification of the register of SPIL before the National Company Law Tribunal (‘NCLT’) to give effect to the Award. This was vehemently opposed by Cherian. Consequently, NCLT allowed the petition and later the appellate body i.e. the National Company Law Appellate Tribunal (NCLAT) dismissed the appeal leading to the filing of proceedings before the Supreme Court of India.
It was contended on behalf of Cherian (“the Appellants”) that KSL compounded proceedings on wrong legal basis in the first place, therefore, its approach was untenable and that, the appellant ought to have been a party to the arbitral proceedings. Emphasis was placed with regard to Section 36 of the Act to assert that that an arbitral award has to be enforced as a decree of a civil court. The case of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc.[ii] was distinguished by contending that the concerned case dealt with the provisions of international arbitration while the case at hand dealt with domestic arbitration. Reliance was placed on Indowind Energy Limited v Wescare (India) Limited[iii] and S.N.Prasad, Hitek Industries (Bihar) Limited v Monnet Finance Limited[iv] to contend that Cherian cannot be made to be a party to the arbitration agreement and the subsequent award as it wasn’t a signatory to the proceedings. Another principal contention put forth by the appellants was that the arbitral award couldn’t be executed by a tribunal such as the NCLT/NCLAT in a “camouflaged petition” under sections of the Companies Act, 1956 which would then be prohibited by the Act.
Counsel for the respondents contended that the exclusive share transfer agreement between the parties stipulated Cherian to be bound by it. The Indowind case, as relied upon by the appellants is not applicable here as it involves a completely different set of laws. The counsels also argued that Section 35 of the Act, indicates that an arbitral award binds parties to an arbitration and persons claiming under them. They have, at all material times, been aware of the fact that they were claiming under KCP in pursuance of the original agreement. It was also argued that the NCLT possessed the exclusive jurisdiction to direct a rectification of the register of the company while trying to retain the authority of Chloro Controls whose judgment explicitly said that an arbitration agreement entered into by a company within a group of companies could bind non-signatory affiliates, if the circumstances could demonstrate a mutual intention of the parties to bind both signatories and non-signatories.
The court upheld the validity of Chloro Controls and declared along the same lines that Cherian was bound by the agreement even though it wasn’t a signatory and observed that the transfer of shares to nominees was also subsequent to the express condition requiring the nominees to be bound by the share transfer agreement. Relying on the very recent judgment of Sundaram Finance Limited v Abdul Samad[v], the court also concluded that execution proceedings can be initiated anywhere in the country where the assets of the judgment debtor are located and decisively held that award could be enforced by the NCLT. The Court further deemed approaching the NCLT necessary for registration of transfer and rectification of the register, and the only remedy available to KSL, thereby dismissing the appeal.
The case highlights and reminds us of some important concepts of arbitration law that have evolved over time. To establish Cherian’s inclusivity in the award meted out, the Supreme Court aptly relied on Indowind, in which it was held,
“It is fundamental that a provision for arbitration to constitute an arbitration agreement for the purpose of Section 7 should satisfy two conditions: (i) it should be between the parties to the dispute; and (ii) it should relate to or be applicable to the dispute.”
To set a precedent, the Court construed the second condition mentioned above in strict terms and broadened the Act’s applicability, thereby unclogging many pending issues. The Court also paid heed to the “Group of Companies” doctrine which evolved out of English laws. It denotes that an arbitration agreement entered into by a company within a group of corporate entities can in certain circumstances bind non-signatory affiliates. The court, in the present case made use of this doctrine along the lines of the test established in Chloro, in which the court held,
“This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.”
In the present case, the intention of the parties including Cherian was well established. The Court made extensive use of this doctrine in forming its ratio decidendi. Also, the decisive authority conferred upon the NCLT can be seen to be a result of the intention of the courts to give the arbitral decisions legal finality, as can be seen with the implicative conclusions from Section 42 of the Act and Abdul Samad. The court relied on extensive international jurisprudence to arrive at its conclusion.
Much like English law, the Indian judiciary is opening up new domains to facilitate arbitration mechanisms. By giving substantive power to the NCLT and rendering the outsider to the proceeding, ample relevance, the Court has made it clear that India should be considered as a global arbitration hub with the environment being so conducive and accepting. The Supreme Court’s well-informed perusal over the intricate nature of modern transactions and mindfulness of the commercial interests of the party emits hope for the future of arbitration in India. This judgment, in the backdrop of significant measures such as the government’s introduction of the New Delhi International Arbitration Centre (NDIAC) Bill, 2018 along with the decision in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd.[vi] can be considered to be one of many in line.
[i] Judgment dated 24 April, 2018 in Civil Appeal No. 10025-10026 of 2017.
[ii] (2013) 1 SCC 641.
[iii] 2010 (5) SCC 306
[iv] (2011) 1 SCC 320
[v] Judgment dated 15 February, 2018 in Civil Appeal No. 1650 of 2018.
[vi] Judgment dated 15 March, 2018 in Civil Appeal Nos. 2879-2880 OF 2018