This case is a part of our Annual Arbitration Review 2019.

Judgment Name: Mahanagar Telephone Nigam Limited v. Canara Bank & Ors.

Citation: (2020) 12 SCC 767

Coram: Abhay Manohar Sapre & Indu Malhotra, JJ.

Court: Supreme Court of India

Date: 8th August 2019

Keywords: Group of Companies Doctrine, Arbitration Agreement.

Facts

Mahanagar Telephone Nigam Limited (“MTNL”) had floated non-cumulative secured redeemable bonds worth Rs. 425 crores. after executing a Memorandum of Understanding with Can Bank Financial Services Limited (“CANFINA“), MTNL placed bonds worth Rs.200 crores with CANFINA through the form of a fixed deposit (“Bonds“). Later there was a security scam and the CANFINA faced a liquidity crunch. Canara Bank being the parent company of CANFINA, it purchased bonds worth 80 crores issued by MTNL from CANFINA. MTNL refused to issue bonds in the name of Canara Bank on behalf of CANFINA. Later, MTNL informed Canara Bank that it had registered a part of the Bonds having a face value of Rs. 40 crores in favor of CANFINA, however, MTNL had retained the bond instruments due to a failure on part of CANFINA to deposit the balance money. Subsequently, they cancelled the 40 crore worth bonds on the ground that the letters of consideration were CANFINA. As Canara Bank was aggrieved by such an action, Canara Bank filed a writ petition against cancellation of bonds and impleaded CANFINA as proforma party.

Issues

1. Whether there exists a valid arbitration agreement between the three parties, i.e., MTNL, Canara Bank, and CANFINA?
2. Whether CANFINA can be impleaded in the arbitral proceedings?

Analysis

Regarding the first issue, MTNL contended that a valid arbitration agreement did not exist between the parties. The Court noted that the relevant factor is the presence of an intention to arbitrate between the parties which can manifest through agreements, documents, or even correspondences exchanged between them. It relied on Enercon India v. Enercon GmbH wherein, it was held that an arbitration agreement must be interpreted using a common sensical approach to give effect to the intention of the parties, and not in a legalistic manner. In the present facts, the three parties had agreed to arbitrate during their meeting before the Committee of Disputes and had exchanged draft arbitration agreements in pursuance of the same. The Delhi High Court referred the parties to arbitration based on this and their consent. MTNL also participated before the arbitral tribunal and had not raised any objection regarding the absence of an agreement, thereby being estopped from doing so at this stage. It also noted that MTNL had not denied the existence of the arbitration agreement in its statement of defense before the arbitrator. This would constitute evidence of the existence of an arbitration agreement as per S.7(4)(c) of the Arbitration and Conciliation Act, 1996.

The second issue was based on an objection raised by Canara Bank on the joined of CANFINA to the arbitration proceedings. While normally an arbitration agreement would only bind signatories to it, non-signatories may also be bound through the “group of companies” doctrine. Under this, a non-signatory can be included if the conduct of the parties shows a common intention to consider them as a necessary party to the contract. This would include when there exists a direct relationship between a signatory and non-signatory, direct commonality of subject matter, or a composite transaction. In the present facts, the original transaction was between CANFINA and MTNL, after which CANFINA transferred the bonds to Canara Bank. This showed a direct nexus between the three parties and evidenced the tripartite nature of transaction. Moreover, CANFINA had appeared in the proceedings before the Arbitral Tribunal, Delhi High Court, and Committee of Disputes. In fact, the objection to CANFINA being impleaded was taken by Canara Bank and not CANFINA. It also noted that there could not be a final resolution without CANFINA’s presence.

Conclusion

Therefore, on these grounds, the Supreme Court held that the parties implicitly intended to have CANFINA as a party and applied the “group of companies” doctrine to implead them as a party.