India: Bombay High Court - Non-Signatories Bound By Arbitration Agreement

The Bombay High Court (BHC) 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 the Cholro Controls India Private Limited vs 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 non-signatory 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:

1. This case was an appeal before the division bench of BHC from an order passed by the single judge of the BHC in arbitration petition (Petition) dismissing the application under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The primarily 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.

2. Under the JVA, Subhkam Group and Vaghani Group jointly constituted Milton Global Limited, a joint venture company (JVC) 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 Vaghani Group. Under the JVA, the Subhkam Group and 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.

3. Dispute arose between the parties under the JVA, wherein the Subhkam Group alleged that Vaghani Group set up a competitive company and siphoned the business of JVC to the competitive company. Subhkam Group filed a Section 9 Arbitration Petition before the single bench of the BHC. Single Judge of the BHC 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 of the BHC.

DIVISION BENCH ANALYSES

4. BHC in its judgment observed that the parties to the JVA were not merely the named individuals or entitles. After perusal of various clauses of the JVC, BHC came to the conclusion the JVA was executed between `Vaghani Group` and `Subhkam Group` as defined under the JVA.

5. BHC further observed that that the terms and phraseology contained in the agreement cannot be ignored rendering 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 honored to the extent possible.

6. BHC 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` to the arbitration agreement and the parties to the arbitration petition. Hence, the non-signatories will be bound by the JVA.

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

MHCO COMMENT

The Supreme Court has in the past upheld this theory and has applied it in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement. By following the Supreme Court`s judgement, the BHC has shown 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. This, in our view while this is an interesting judgment 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 a high chance of abuse of the doctrine. A draftsman has to be more responsible and use correct and watertight language in agreements. He 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. We expect that there will be endeavour to stretch the application of this principle beyond arbitration proceedings, to civil suits and criminal actions.

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