Supreme Court Upholds Arbitral Award Against Non-Signatory: Cheran Properties vs. Kasturi & Sons (2018)

Date of the Judgment: 24 April 2018

Citation: [2018] INSC 340

Judges: Dipak Misra, CJI, A.M. Khanwilkar, J, Dr. D.Y. Chandrachud, J (authored the judgment)

Can an arbitral award bind a company that was not a direct signatory to the original arbitration agreement? The Supreme Court of India, in this case, addressed this crucial question, examining the scope of arbitration agreements and their implications for third parties. The core issue revolved around whether a nominee company, which acquired shares based on an agreement containing an arbitration clause, could be bound by an arbitral award even though it was not a signatory to the original agreement. The Supreme Court, in a judgment authored by Dr. D.Y. Chandrachud, J, upheld the decision of the National Company Law Appellate Tribunal (NCLAT), ruling that the nominee company was indeed bound by the arbitral award.

Case Background

The case involves a dispute arising from a share purchase agreement. Kasturi & Sons Limited (KSL), the first respondent, had a subsidiary called Sporting Pastime India Limited (SPIL), the second respondent. In 2004, KSL entered into an agreement with KC Palanisamy (KCP), the third respondent, and Hindcorp Resorts Pvt. Ltd. Under this agreement, SPIL was to allot shares to KSL against existing debts, and KSL would then sell a majority stake to KCP or his nominees. The agreement also stipulated that KCP would take over SPIL’s business, shares, and liabilities. A key clause in the agreement allowed KCP to transfer his shares to others, provided the transferees accepted the terms of the original agreement. This agreement also included an arbitration clause for dispute resolution.

KCP paid part of the consideration, and KSL transferred 90% of SPIL’s shares to KCP and his nominees. A significant portion of these shares, specifically 242,99,994, went to Cheran Properties Limited, the appellant. Subsequently, disputes arose, leading to arbitration. The arbitral tribunal ruled in favor of KSL, directing KCP and SPIL to return the shares and related documents to KSL, with KSL to pay a specified amount. KCP’s challenge to the award was unsuccessful, and the award attained finality.

Timeline

Course of Proceedings

Following the finality of the arbitral award, KSL initiated proceedings before the National Company Law Tribunal (NCLT) for rectification of SPIL’s register, seeking to have the shares transferred back to them. The NCLT allowed KSL’s petition, and this decision was affirmed by the National Company Law Appellate Tribunal (NCLAT). The NCLAT held that Cheran Properties Limited, the appellant, was a nominee of KCP and thus bound by the arbitral award. The NCLAT relied on a previous order of the Madras High Court, which had also concluded that Cheran Properties was a nominee of KCP and not an independent purchaser of the shares.

Legal Framework

The judgment primarily revolves around the interpretation and application of the following legal provisions:

• Section 7 of the Arbitration and Conciliation Act, 1996: This section defines an “arbitration agreement” and specifies that it must be in writing. The Court examined whether a non-signatory could be bound by an arbitration agreement.
  
  “7. Arbitration agreement. —(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”
• Section 35 of the Arbitration and Conciliation Act, 1996: This section states that an arbitral award is final and binding on the parties and persons claiming under them. The Court considered whether the appellant, Cheran Properties, could be considered a person claiming under KCP.
  
  “35. Finality of arbitral awards. —Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.”
• Section 36 of the Arbitration and Conciliation Act, 1996: This section provides that an arbitral award is enforced as if it were a decree of the court. The Court examined the implications of this provision in the context of the case.
  
  “36. Enforcement. —Where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the court.”
• Section 111 of the Companies Act, 1956: This section deals with the power of the Company Law Board (now NCLT) to rectify the register of members of a company. The Court considered whether the NCLT had the jurisdiction to order rectification of the register in this case.
  
  “111. Power of Tribunal to refuse registration and appeal against such refusal. (1) If a company refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, the company, the transferor or the transferee or the person who claims to be entitled to such transmission, as the case may be, may appeal to the Tribunal against the refusal.”

Arguments

Appellant’s Arguments (Cheran Properties Limited):

• The appellant was not a party to the arbitration agreement and therefore not bound by the arbitral award.
• The appellant had paid valuable consideration for the shares and could not be bound by an award against KCP.
• The arbitral award could not be enforced through proceedings before the NCLT.
• The principle in Indowind Energy Limited v. Wescare (India) Limited [(2010) 5 SCC 306], which states that an arbitration agreement binds only the parties to it, should apply.
• The “group of companies” doctrine, as laid down in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. [(2013) 1 SCC 641], does not apply as this was not an international arbitration and the appellant was not part of a joint venture.
• The appellant’s letter dated 17 August 2004, which referenced the original agreement, did not imply acceptance of the arbitration clause.

Respondents’ Arguments (Kasturi & Sons Limited):

• Clause 14 of the agreement dated 19 July 2004, stipulated that KCP’s nominees would be bound by the agreement, including the arbitration clause.
• The appellant was a nominee of KCP and not an independent purchaser of shares.
• The Madras High Court had already held the appellant to be a nominee of KCP in proceedings under Section 9 of the Arbitration and Conciliation Act, 1996.
• The arbitral award, having the status of a decree under Section 36, could be enforced by seeking rectification of the share register at NCLT.
• The principle in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. [(2013) 1 SCC 641] is applicable, allowing the arbitral award to bind a group company.
• The appellant was claiming under KCP, making it bound by the award as per Section 35 of the Arbitration and Conciliation Act, 1996.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues that the Court addressed were:

1. Whether the appellant, being a non-signatory to the arbitration agreement, is bound by the arbitral award.
2. Whether the NCLT had the jurisdiction to order rectification of the register of members to enforce the arbitral award.
3. Whether the “group of companies” doctrine applies to the facts of this case.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court analyzed the authorities cited by both parties. The Court distinguished Indowind Energy Limited v. Wescare (India) Limited [(2010) 5 SCC 306] and S.N. Prasad, Hitek Industries (Bihar) Limited v. Monnet Finance Limited [(2011) 1 SCC 320], stating that these cases dealt with the appointment of an arbitrator and not with the enforcement of an award. The Court relied on Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. [(2013) 1 SCC 641] to emphasize the “group of companies” doctrine, which allows an arbitration agreement to bind non-signatory affiliates. The Court also relied on Sundaram Finance Limited v. Abdul Samad [(2018) 2 SCALE 467] to clarify that an arbitral award can be enforced anywhere in the country where the decree can be executed. The court also relied on Satish Kumar v. Surinder Kumar [(1969) 2 SCR 244] and Uttam Singh Duggal & Co v Union of India [Civil Appeal No 162 of 1962] to reiterate the principle that an award has some legal force and is not a mere waste paper.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Intention of the Parties: The Court emphasized that the intent of the parties, as evidenced by the agreement and the conduct of the parties, was to bind both signatories and non-signatories.
• Group of Companies Doctrine: The Court applied the “group of companies” doctrine, noting that the appellant was part of KCP’s group and had accepted the terms of the original agreement.
• Section 35 of the Arbitration and Conciliation Act, 1996: The Court interpreted the phrase “persons claiming under them” in Section 35 broadly, to include the appellant as a nominee of KCP.
• Finality of the Arbitral Award: The Court emphasized that the arbitral award had attained finality and was binding on the parties and those claiming under them.
• Need for Rectification: The Court recognized that the NCLT had the jurisdiction to order rectification of the register to give effect to the arbitral award.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s reasoning was a blend of factual analysis (examining the specific circumstances of the agreement and the parties’ conduct) and legal interpretation (applying the relevant provisions of the Arbitration and Conciliation Act, 1996 and the Companies Act, 1956). The legal considerations slightly outweighed the factual aspects, reflecting the Court’s focus on the legal implications of arbitration agreements and the “group of companies” doctrine.

Logical Reasoning

The Court considered alternative interpretations, particularly the appellant’s argument that it was not a party to the arbitration agreement and therefore not bound by the award. However, the Court rejected this interpretation, emphasizing that the appellant was a nominee of KCP and that its conduct indicated an acceptance of the terms of the original agreement. The Court also rejected the argument that the NCLT did not have the jurisdiction to enforce the award, holding that the NCLT had the power to order rectification of the register under Section 111 of the Companies Act, 1956.

The Court’s reasoning was based on a holistic interpretation of the facts and the law. The Court emphasized that the appellant was not an independent purchaser of shares but a nominee of KCP, and its conduct indicated an acceptance of the terms of the original agreement, including the arbitration clause. The Court also emphasized the finality of the arbitral award and the need to give effect to it.

The Supreme Court held that the appellant, Cheran Properties Limited, was bound by the arbitral award, despite not being a signatory to the original arbitration agreement. This decision was based on the finding that Cheran Properties was a nominee of KCP and was therefore a person “claiming under” KCP as per Section 35 of the Arbitration and Conciliation Act, 1996. The Court also held that the NCLT had the jurisdiction to order rectification of the register of members to enforce the award. The Court relied on the “group of companies” doctrine to justify binding a non-signatory to an arbitration agreement.

“The expression ‘claiming under’ , in its ordinary meaning , directs attention to the source of the right. The expression includes cases of devolution and assignment of interest.”

“The group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.”

“The arbitral award, as we have noticed, attained finality after all attempts to raise objections to it failed before the High Court and , later, before this Court.”

There was no minority opinion in this case. The judgment was authored by Dr. D.Y. Chandrachud, J, and concurred by Dipak Misra, CJI and A.M. Khanwilkar, J.

Key Takeaways

• An arbitral award can bind non-signatories to an arbitration agreement if they are found to be “claiming under” a party to the agreement.
• The “group of companies” doctrine can be applied to bind non-signatory affiliates within a group of companies if the circumstances demonstrate an intention to bind both signatories and non-signatories.
• The NCLT has the jurisdiction to order rectification of the register of members to enforce an arbitral award.
• The conduct of parties can be used to determine whether they intended to be bound by an arbitration agreement.
• The Supreme Court has emphasized the importance of enforcing arbitral awards and giving effect to the intention of the parties.

Directions

The Supreme Court dismissed the appeals, upholding the decision of the NCLAT. The effect of this direction was to allow the rectification of the register of SPIL, transferring the shares back to KSL.

Development of Law

The ratio decidendi of this case is that an arbitral award can bind non-signatories who are “claiming under” a party to the agreement, especially within a group of companies, and that the NCLT has jurisdiction to enforce such awards by ordering rectification of the register of members. This case clarifies the application of the “group of companies” doctrine in domestic arbitration and emphasizes the importance of the intention of the parties in determining the scope of an arbitration agreement. This decision expands the scope of who can be bound by an arbitration award, moving beyond just signatories to include those who derive their rights or obligations from a party to the agreement. This position is a development of law from the position in Indowind Energy Limited v. Wescare (India) Limited [(2010) 5 SCC 306] by applying the group of companies doctrine.

Conclusion

The Supreme Court’s judgment in Cheran Properties Limited vs. Kasturi and Sons Limited is a significant ruling that clarifies the scope of arbitration agreements and their implications for non-signatories. The Court’s application of the “group of companies” doctrine and its interpretation of Section 35 of the Arbitration and Conciliation Act, 1996, provide important guidance for future cases. The decision underscores the principle that the intention of the parties and the realities of modern business transactions must be considered when determining who is bound by an arbitration agreement. The Court’s emphasis on the finality of arbitral awards and the need to give effect to them is also a significant aspect of this ruling.