Read Judgment: OIL AND NATURAL GAS CORPORATION LTD. Vs. M/S DISCOVERY ENTERPRISES PVT. LTD. & ANR

Mansimran Kaur

New Delhi, April 28, 2022: Holding that there was a fundamental failure of the first Arbitral Tribunal to address the plea raised by ONGC for attracting the group of companies doctrine, the Supreme Court has opined that a non-signatory may be bound by the arbitration agreement where there exists a group of companies and parties have engaged in conduct or made statements indicating an intention to bind a non-signatory.

The Larger Bench of Justice Dhananjay Y Chandrachud, Justice Surya Kant, Justice Vikram Nath said, “ A non-signatory may be bound by the operation of the group of companies doctrine as well as by the operation of the principles of assignment, agency and succession (Redfern and Hunter on International Arbitration, 5th Ed. – 2.13, pp. 89-90). A party, which is not a signatory to a contract containing an arbitration clause, may be bound by the agreement to arbitrate if it is an alter ego of a party which executed the agreement. This constitutes a departure from the ordinary principle of contract law that every company in a group of companies is a distinct legal entity.”

The present appeal was filed against a judgment dated June 27, 2012 of the Bombay High Court whereby an appeal instituted under Section 37 of the Arbitration Act  and Conciliation Act, 1996 was dismissed. Herein, Oil & Natural Gas Corporation Limited (ONGC) instituted an appeal against an  interim award  of the Arbitral Tribunal dated October 27, 2010, wherein it was held  that the second respondent Jindal Drilling and Industries Limited was not a party to the arbitration agreement and therefore must be deleted as one of the impleaded party . The same was dismissed by the impugned judgment

On March 22, 2006 ONGC awarded a contract to Discovery Enterprises Private Limited(DEPL), which is a company belonging to the DP Jindal Group for operating a floating, production, storage and offloading vessel. As per clause 25.7.11 of the contract a vessel was imported and ONGC paid the custom duty on presumption that the vessel would be re-exported after work was complete. However, the vessel left Indian territorial waters and did not return. 

It was the case of ONGC that DEPL failed to complete the formalities concerning duty drawback and also did not compensate ONGC for customs duty and other expenses incurred in the amount of Rs. 63. 88 crores.  According to Clause 37 of the contract, the parties were to resolve their dispute through arbitration. ONGC presented its case by submitting that DEPL and JDIL belong to the DP Jindal Group of Companies and since they constitute a single economic entity, therefore the corporate veil should be lifted to compel  the non- signatory, JDP to participate in the arbitration proceedings. 

In pursuance of the same, JDL instituted an application under Section 16 of the Act, 1996 seeking its deletion from the arbitral proceedings on the ground that it was not a party to the arbitration agreement. Thereafter, during the arbitration proceedings, ONGC filed an application seeking discovery and inspection to support his case  and stated that the documentary evidence reflected “close corporate unity” between the aforesaid companies and therefore in view of the same demanded  for inspection of the documents as mentioned in the schedule of the application. 

Eventually, by its interim award dated 27 October 2010, the Arbitral Tribunal held that it lacked the jurisdiction to arbitrate on the claim against JDIL, which was not a party to the arbitration agreement. The tribunal relied on the judgment of this Court in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. The conclusion of the Tribunal was that JDIL is not a signatory of the arbitration agreement and hence could not be impleaded as a party to the proceedings.  Pursuant to this interim award, ONGC filed an application under Section 37 before the Bombay High Court which was dismissed. 

Thereafter, the judgment of the High Court was yet again assailed by ONGC under Article 136 of the Indian Constitution. The Arbitral Tribunal, in view of the same, delivered  its final award dated June 6, 2013 and allowed the claim of ONGC. It is pertinent to note, that the application of ONGC pertaining to discovery and inspection was deferred by the Tribunal  until the matter of jurisdiction was decided. After a long marathon of cases arising out of the arbitration, the issue that was left hanging was whether JDIL, being a non- signatory to the arbitration agreement, could be compelled to participate in the arbitration proceedings concerning the case in hand.  

The Counsel for the ONGC relied on the “ group of companies doctrine” and cited the judgments of the Top Court in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & OrsCheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors;  and  MTNL v. Canara Bank & Ors. It was further contended that the Arbitral Tribunal should have given an opportunity to parties to produce evidence, since the application of group of companies doctrine and lifting of the corporate veil involve mixed questions of law and fact. It was also added that the question of jurisdiction and merits are co- dependent and passing a ruling by solely relying on Section 7 of the Act, 1996 was improper. 

The Counsel for JDIL submitted that JDIL was not a party to the arbitration agreement as required under Section 7 of the Act of 1996 and couldot be held liable for claims against DEPL since there was no evidence that JDIL was a beneficiary of the contract between ONGC and DEPL. No letter of guarantee or of comfort was issued by JDIL on behalf of DEPL in favour of ONGC. The arbitral award had discussed ONGC’s claim that DEPL and JDIL belong to the same group of companies and came to the conclusion that there was not “a tickle of evidence” that JDIL played any role in the negotiations leading up to the contract or that thereafter JDIL participated in the execution of the part of the contract on behalf of the DEPL. Hence, the “group of companies” doctrine couldnot be invoked to indict JDIL for the alleged acts and omissions of DEPL. 

The Apex Court analyzed the doctrine of “group of companies” and referred to its judgment in  Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr wherein the subject matter was that a party not being a signatory in the arbitration agreement had raised objection on the ground that the arbitration agreement did not operate in relation to it. The Court in this case refused to lift the corporate veil and relied on a strict interpretation of Section 7.It was held therein that if Indowind had acknowledged or confirmed in any correspondence or other agreement or document, that it is a party to the arbitration agreement or that it is bound by the arbitration agreement contained therein, it could have been possible to say that Indowind is a party to the arbitration agreement. But that would not be under Section 7(4)(a) but under Section 7(4)(b) or Section 7(5). Be that as it may. That was not the case of Wescare

Further in Chloro Controls’ case (supra) it was highlighted 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 another judgment of the Top Court in Cheran Properties’s case (supra), a three-judge Bench of this Court interpreted and applied the group of companies doctrine in the context of the enforcement of a domestic arbitration award against a non-signatory to the arbitration agreement.

Further in the case of MTNL (supra) it was held that the group of companies doctrine has been invoked in cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality. In such a situation, signatory and non-signatories have been bound together under the arbitration agreement. This will apply in particular when the funds of one company are used to financially support or restructure other members of the group.

 The Court also considered John Fella’s observations on the principle of binding the non- signatory to an arbitration agreement wherein “the direct benefits” estoppel theory and the “intertwined” estoppel theory was discussed. 

Thereafter the Court reviewed the  interim arbitral award and observed that ONGC was right in its approach by submitting that its application of discovery and inspection should be heard first and disposed of  on merits in order to determine the question with respect to joinder of parties. By not entertaining the application, the Tribunal failed to even try if the application of “group of companies of doctrine” was plausible in the instant case or not. 

The Court further referred to its judgment in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India wherein it was opined that a  finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterized as perverse.

The Court, thus observed that the Arbitral Tribunal failed fundamentally by not addressing the plea raised by the ONGC and non-consideration of  the application by  the Tribunal led to non-appreciation of the evidence which would have helped to decide the question regarding the application of “group of companies doctrine” in the instant case and this could have aided in concluding whether JDL was on such a parlance  that it could be said to have  an economic unity with DEPL, and could be therefore impleaded as a party in the arbitration proceedings.  

 Thus, in view of the above observations, the Court rejected the interim award of the First Arbitral Tribunal. Accordingly, the judgment of the Single-Judge of the Bombay High Court whereby the ONGC’s appeal filed under Section 37 of the Act was dismissed was also set aside. A fresh Arbitral Tribunal was ordered to be constituted which shall decide the issue of jurisdiction. The transferred cases were remitted back to the Bombay High Court. 

0 CommentsClose Comments

Leave a comment