MAHANAGAR TELEPHONE NIGAM LIMITED V CANARA BANK AND ORS.
Citation : AIR 2019 SC 4449
Bench Strength: Abhay Manohar Sapre & Indu Malhotra JJ (2)
Ratio : The intention of the parties and the circumstances giving rise to the dispute which is the subject of the arbitration proceedings must be taken into consideration for determining the existence of an arbitration agreement and the parties thereto.
Relevant Facts: In the present case, dispute arose amongst the parties with respect to issuance of bonds worth Rs. 200 Crore by the petitioner with Can Bank Financial Services Ltd. or CANFINA (Respondent No.2) via a Memorandum of Understanding entered into between the two parties. Eventually, due to CANFINA’s inability to redeem the bonds, Canara Bank (Respondent No.1) citing the former’s liquidity crunch owing to the collapse of the secondary security market. Disagreements arose between the parties with respect to the registration and restoration of bonds and Respondent No. 1 filed a petition before the Delhi High Court challenging the cancellation of bonds by MTNL and demanding that MTNL pay the interest accrued thereon. Initially, Delhi HC referred the matter to Union of India to provide for realisation of conflict in the light of the recent decision in the case of ONGC v Commissioner of Central Excise. Canara Bank made a representation to the Cabinet Secretary whereby the matter was referred to Committee of Disputes which recommended arbitration via Permanent Machinery for Arbitration for settlement of dispute. The parties agreed to the same in a joint meeting held on 16.12.2008. Considering the different transactions involved therein being inter-linked amongst all of them, Respondent no. 2 sent a draft tripartite arbitration agreement to the petitioner wherein Canara Bank and CANAFIN were parties on one side against MTNL. Before this draft could be executed by MTNL, the Supreme Court overruled the ONGC judgment in the case of Electronics Corporation of India Ltd v Union of India as a result of which Canara Bank restored the writ petition before Delhi HC. During these proceedings the parties agreed to arbitration for resolving the dispute and Delhi HC appointed Mr. Justice A.P.Shah as the sole arbitrator who issued notice to all the three parties and on Canara Bank’s request passed an interim reward removing CANAFIN as a party to the arbitration. The petitioner opposed the said award and filed CM before Delhi HC requesting CANAFIN be made a necessary party to the arbitration agreement. While on one hand Delhi HC dismissed the petition made by the petitioner, the arbitration proceedings continued wherein Canara Bank filed a statement of claims and in its reply, MTNL filed statement of defense as well as statement of counter claim. Aggrieved by the dismissal of Delhi HC, the petitioner filed this Special Leave Petition (SLP) before SC.
Issue(s): The Supreme Court culminated the appeal into the following two issues:
a) Whether there exists a valid arbitration agreement amongst the three parties to the dispute including MTNL,Canara Bank and CANFINA?
b) Whether CANFINA should become a party to the arbitration proceedings despite it merely being a Proforma Party in the Writ Petition before the Delhi High Court and consequent absence during when the order for arbitration was passed?
Existence of Arbitration Agreement
The petitioner argued before SC that since the tripartite agreement sent by Canara Bank was never signed and executed by the petitioner there exists no written arbitration agreement under Section 7(3) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the Act’). The Court refuted the argument of the petitioner highlighting Section 7(4) of the Act wherein it is clearly provided that a written arbitration agreement is said to exist if it is comprised in:-
a) an exchange of letter, telex, telegrams or other means of telecommunication which provide a record of the agreement, or;
b) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by another party.
Citing the aforementioned reasons being factually present in the present set of facts, SC further stated that to establish the existence of an arbitration agreement or an arbitration clause, what is required to be proven is the parties’ ‘intention’ to enter into an arbitration agreement. If such intention exists, a formal contract along with an arbitration clause is not mandatorily required to be entered into. In order to determine whether such intention exists , the Court need not follow a purely legalistic approach rather a common sense approach. The rule of interpretation/construction for commercial contracts must be undertaken in a manner to enforce the intention of the parties involved rather than invalidate it. Thus, irrespective of the fact as to whether a formal agreement has been entered into and concluded between the parties, the arbitration agreement or a contract must be interpreted in line with the terms of the contract, the conduct of the parties and the intention of the parties (through correspondence or exchange) and if the intention. In the present case, the intention of the party can be ascertained from the factual matrix in the case. The correspondence between Canara Bank and MTNL, the draft of tripartite agreement enclosing the names of all the three parties, agreement of MTNL to the arbitration proceedings at various meeting before Cabinet Secretariat on 27.03.2001 and later before the Delhi HC wherein the parties, including MTNL, agreed to arbitration proceedings on 16.09.2011 pursuant to which not only was the arbitrator appointed but the petitioner went ahed and filed defence against the statement of claims filed by the respondent no. 1 and also statement of counter claim before the arbitrator. The Court held that the aforesaid circumstances clearly indicate the petitioner’s desire to enter into an arbitration agreement hence, just because the agreement was not formally signed and executed, this does not imply that the petitioner did not enter into an arbitration agreement in the present case.
CANAFINA must be a party to arbitration proceedings
The petitioner essentially filed the present SLP against the dismissal of their request by the Delhi HC for making CANAFINA a party to the arbitration proceedings who was removed by the Learned Sole Arbitrator as in interim award. While SC stated that according to principles of contract, one company cannot be held liable for the defaults of another company as a company under the Companies Act is a separate legal entity and hence cannot transfer liabilities unless one company is acting as an agent of the other. However in the present case, SC ruled that CANAFINA must be a party to the arbitration proceedings as per the ‘Group of Companies’ principle in commercial law. Borrowed from the French arbitration practice and recognised in the case of Dow Chemical v Isover-Sanit-Gobain which states that by virtue of the intention of the companies as well as their the role played by them in the commercial transaction which is the subject of the dispute, under the Group of Companies theory, a non-signatory company to the arbitration agreement can be made a party to the arbitration proceedings. Indian Courts have evoked the doctrine in some cases which has bottled down to establishing a direct commonality of the subject matter and a composite transaction between/amongst the parties in question. In the present case firstly, CANAFINA was wholly owned subsidiary of Canara Bank and the latter acted as an umbrella organisation for the former.
Secondly, it was CANAFINA with which the bonds were initially placed by the petitioner and in the due course of the transaction and due to circumstantial change, Respondent no.1 bought the bonds from CANAFINA. The Court ruled that the said doctrine is applicable on both the respondents as it was only after the failure of the respondent no.1 to repay the amount of bonds that the respondent no.1 had intervened.
Thirdly, the consequent circumstances after dispute arose amongst the parties, including the draft tripartite agreement sent by Respondent No.1 to the petitioner for execution, the meetings before the Cabinet Secretariat and the proceedings before the Delhi High Court where the Court directed the parties to arbitration for resolution of the dispute which was agreed upon amongst them including CANAFINA clearly highlight that respondent no.3 is must be made a party to the ongoing arbitration proceedings. Mere absence of CANAFINA on the two dates does not diminish the importance of it being a party to the dispute for the SC clearly stated that the circumstances indicate implied consent on behalf of CANAFINA and that no final resolution of disputes can take place until all the three parties participate in the arbitration agreements. It was further highlighted by Abhay Manohar Sapre, J. that expeditious resolution of disputes is the main aim of arbitral proceedings within a fixed time which can only be achieved if all the three parties are made party to one single proceedings to decide the matter.
Supreme Court finally allowed the appeal partially holding:-
a) that there exists a valid arbitration agreement in the present case and that
b) the respondent no.2 (CANAFINA) would be made a party to the arbitration proceeding.
It was in the famous case of Enercon wherein the Supreme Court had held that it was the intention of the parties involved in a transaction which would determine the existence of an arbitration agreement between/amongst the parties. While the Court in this case had highlighted the separability of the arbitration clause of the arbitration agreement so that a valid arbitration agreement exists even if the contract becomes non-binding in nature, the precedent for criteria for a valid arbitration agreement in the form of ‘intention’ of the parties was set. The adoption and application of ‘Group of Companies’ theory to the dispute in the present case, shows a pro-arbitration stance taken by the Supreme Court. The Supreme Court had earlier taken similar stances in cases such as Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc., wherein it brought into the purview of the arbitration proceedings all the parties which had been a party to the intermittent agreements arising from the main Shareholder Agreement which carried the arbitration clause under which the proceedings had been initiated for a proper resolution of the disputes. Overall, Supreme Court has essentially highlighted a common sense approach through this judgement whereby it has relied heavily on the facts of the case including the acts of the parties involved which led to the said dispute and the judicial process engaged thereafter. On a closer analysis of these facts, it becomes quite clear that there is a clear intention of all the parties to enter into an arbitration agreement.
 Govind Rubber Limited v Louis Dreyfus Commodities Asia (P) Ltd (2015) 13 SCC 477  Enercon (India) Ltd and Ors v Enercon GMBH (2014) 5 SCC 1  1984 Rev Arb 137:110 JDI 899 (1983)  Chloro Controls India (P) Ltd. v Severn Trent Water Purification Inc., (2013) 1 SCC 641; Ameet Lal Chand v RIshabh Enterprises, Enercon (India) Ltd and Ors v Enercon GMBH (2014) 5 SCC 1  ibid at 4.  (2013) 1 SCC 641