Home » Between The Lines » Supreme Court: Non-signatory to an arbitration agreement cannot be impleaded in arbitration unless a clear intention can be gathered from the correspondences, even if the non-signatory falls under ‘group of companies’ doctrine

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The Supreme Court in the case of Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited and Another (decided on July 01, 2019), refused to apply ‘group of companies’ doctrine to implead a non-signatory party in arbitration on the ground that a clear intention to such effect was not manifest from the correspondences between the parties.

Facts
Reynders Label Printing India Private Limited (“Respondent”) approached Reckitt Benckiser (India) Private Limited (“Petitioner”) with an offer to print labels for its products. Pursuant to the offer, exhaustive negotiations were held leading to various correspondences. Post negotiation, an agreement was executed which inter-alia included an arbitration clause. The Respondent and Reynders Ttiketten NV (“Foreign Affiliate”) are group companies of “Reynders Label Printing Group”. Under indemnity clause of the agreement, the supplier group (which includes the Foreign Affiliate) had assumed the liability to indemnify the Petitioner in case of any loss, damage, etc., caused to it on account of acts and omissions of the Respondent. Disputes arose between the parties and a petition was filed under Section 11 of the Arbitration and Conciliation Act, 1996 before the Supreme Court for the appointment of sole arbitrator. The Petitioner also made the Foreign Affiliate a party to the petition. The Foreign Affiliate objected to be made a party as it was not a signatory to the agreement.

Issue
Whether the Foreign Affiliate could be impleaded as a party to the arbitration proceedings despite being nonsignatory to the arbitration agreement merely because it is a part of the same ‘group of companies’ as Respondents?

Arguments
Firstly, the Petitioner argued that the Foreign Affiliate has been impleaded because it was the holding company of the Respondents. Secondly, it mentioned that the Foreign Affiliate had assumed the liability by the indemnity clause of the agreement. It made the Foreign Affiliate an integral party to the agreement. Lastly, it argued that on multiple occasions during the course of negotiations, the Respondent had replied through Mr. Frederik Reynders, who is a promoter of the Foreign Affiliate. In one of the e-mails, he had made a counter proposal concerning the indemnity clause. According to the Petitioner, it meant that the Foreign Affiliate had knowledge of the extension of the indemnity and it was the disclosed principal on whose behalf the Respondent had executed the agreement. It was also argued that the Foreign Affiliate had participated in the escalation meeting after the dispute arose which further goes to prove that the Foreign Affiliate despite being a non-signatory had assented to the arbitration agreement. Therefore, the Foreign Affiliate should be impleaded in the arbitration proceedings.

The Respondent refuted the arguments of the Petitioner by stating that the Foreign Affiliate was not the holding company at all. The Respondent and the Foreign Affiliate in fact form a part of the same group and there was no holding-subsidiary relationship. There was no privity of contract between the Petitioner and the Foreign Affiliate. The Respondent also stated that Mr. Frederik Reynders was not the promoter of the Foreign Affiliate, but was merely an employee of the Respondent.

Observations of the Supreme Court
The Supreme Court basis its earlier decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and Others [(2013) 1 SCC 641], observed that the arbitration agreement can bind even nonsignatory parties, if they are a part of same ‘group of companies’, provided the circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group. The Supreme Court examined the correspondences exchanged between the Petitioner, Respondent and Mr. Frederik Reynders. It read these correspondences in light of the arguments advanced by the parties and observed that the basis of Petitioner’s claim was the assent of the Foreign Affiliate to the arbitration agreement attributed by the communications made by Mr. Frederik Reynders. Hence, once it became clear that Mr. Frederik Reynders was merely an employee of the Respondent and not related to the Foreign Affiliate in any manner; the argument of Petitioner became irrelevant.

The Supreme Court observed that neither the Foreign Affiliate was a party to the arbitration agreement nor did it have any causal connection with the process of negotiations preceding the arbitration agreement or its execution. The fact that the Respondent and the Foreign Affiliate are a part of the same group, holds no consequence in this instance. Further, the Supreme Court held that the reliance of the Petitioner on the post contractual correspondences (relating to the escalation meeting after the dispute arose) would also not be useful in this instance, by relying on its earlier decision in case of Godhra Electricity Company Limited and another v. State of Gujarat [(1975) 1 SCC 199], where it was held that post-negotiations in law would not bind the foreign affiliate qua the arbitration agreement limited between the petitioner and the respondent.

Decision of the Supreme Court
The Supreme Court held that burden of establishing a clear intention of the Foreign Affiliate to assent and be a party to the arbitration agreement was not discharged by the Petitioner. Therefore, the Foreign Affiliate cannot be impleaded to the arbitration proceedings. The Supreme Court held that the Petitioner can pursue remedy against the Respondent for appointment of sole arbitrator to conduct the arbitration proceedings as ‘domestic commercial arbitration’. However, in this particular case, upon request of both the parties, Supreme Court appointed former chief justice of Jammu and Kashmir High Court as the sole arbitrator.

Vaish Associates View
In Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and Others (supra) and Cheran Properties Limited v. Kasturi and Sons Limited and Others (2018) 16 SCC 413, the Supreme Court allowed nonsignatories of arbitration agreements to be made parties to arbitration proceedings. The legal basis to connect an arbitration agreement entered by a company within a group of companies with its non-signatory affiliates would be mutual intention, that is, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties. This meant that the parties which were holding the strings of the transaction behind the curtains would be brought to the forefront to face the music and simply by refusing to be a signatory to an arbitration agreement, they could not take the benefit of exclusion from arbitration proceedings.

However, in order to apply the ‘group company doctrine’ to implead non-signatories, the court ought to be satisfied that the non-signatory was actually involved and played a significant role in the transaction at hand. The burden of proof would lie on the party who would want the non-signatory to be impleaded. Circumstances and correspondences before signing the arbitration agreement can be the primary tools to satisfy this burden. In this case, in light of the pre-contractual facts and correspondences, as this burden was not adequately satisfied, the Supreme Court refused to unnecessarily involve the non-signatory Foreign Affiliate at the initial stage of the arbitration proceedings.

Contributors: Mr. Arpit Sinhal, Ms. Batul Barodawala, Mr. Mahim Sharma, Mr. Drushan Engineer and Ms. Ishita Mishra

For more information please write to Mr. Bomi Daruwala at bomi@vaishlaw.com

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