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NON-SIGNATORY THIRD PARTIES BOUND BY THE ARBITRATION

September 5, 2018
AGREEMENT

A brief summary of the Judgment is given below:

Introduction
Facts of the Case:
Judiciaries and arbitrators are often asked to adjudicate a situation in which one
party claims that a valid arbitration agreement exists and the matter in dispute On July 19, 2004, an agreement (“Agreement”) was entered into between KC
should be referred to arbitration, while the other party contends the opposite. Palaniswamy (“KCP”), Kasturi and Sons Limited (“Kasturi Sons”), Sporting Pastime India
Though the law on the subject is quite clear i.e. a party that is not a signatory to an Limited (“SPIL”) (a wholly owned subsidiary of Kasturi Sons), and Hindcorp Resorts
arbitration agreement cannot be subjected to arbitration proceedings - there may be Private Limited. Under the Agreement:
situations where unless non-parties are joined in to the arbitration proceedings, the
dispute itself may not be fully resolved. (i) SPIL was required to allot 2,40,00,000 (two crore forty lakh) equity shares to Kasturi
Sons against the book debts due by SPIL to Kasturi Sons;
The judgment of the Hon’ble Supreme Court of India (“Supreme Court”) in
Cheran Properties Limited (“Appellant”) V/s. Kasturi and Sons Limited and (ii) Kasturi Sons offered to sell to KCP (or its nominees) 2,43,00,000 (two crore forty
Ors (“Respondents”)1 deals with a fact situation where, non-parties to the three lakh) equity shares held by it in SPIL representing 90% (ninety percent) of the
arbitration agreement were joined in the arbitration proceedings. The Supreme Court total paid up share capital of SPIL (“Sale Shares”). This was to enable KCP to take
was asked to consider whether the arbitration agreement should be allowed to have over the business, shares and liabilities of SPIL;
effect in relation to all parties before the court, or only with respect to the parties to
the arbitration agreement. (iii) KCP agreed to discharge the liabilities of SPIL within 180 (one hundred and eighty)
days from the date on which KCP took over the management of SPIL; and
The Supreme Court in its landmark judgment dated April 24, 2018 (“Judgment”)
held that third party non-signatories to an arbitration agreement may be bound by
arbitration. (iv) The parties to the Agreement agreed to resolve any dispute arising out of the
Agreement through arbitration.

1
Civil Appeal Nos 10025-10026 of 2017
As per the Agreement, Kasturi Sons transferred 95% (ninety five percent) of the Sale purchased a part of the Sale Shares (as a nominee of KCP), the arbitral award which had
Shares to Cheran Properties Limited (being the Appellant), and the remaining 5% been rendered in proceedings between the parties to the Agreement does not bind the
shares to KCP and other nominees of KCP. On August 17, 2004, a letter (“Letter”) Appellant. The Appellant also relied on Section 36 of the Arbitration Act to argue that an
addressed by KCP (acting as the authorized signatory of the Appellant) to Kasturi award being enforceable as a decree of a civil court could not be enforced by pursuing a
Sons acknowledging the purchase of Sale Shares by KCP and its nominees. "camouflaged petition" before the NCLT.

Disputes arose between the parties to the Agreement (i.e. which does not include Contentions of the Respondents:
the Appellant) since KCP did not perform its obligations which resulted in initiation of
the arbitration proceedings by Kasturi Sons. On December 19, 2009, the arbitral Kasturi Sons argued that the Agreement specifically stipulated that KCP's nominees which
tribunal passed an award inter alia directing KCP and SPIL to return to Kasturi Sons included the Appellant would be bound by it. The recognition of the right of KCP to sell or
documents of title and share certificates relating to the Sale Shares transfer its holdings in SPIL was expressly subject to the condition that the proposed
contemporaneously with Kasturi Sons paying an amount of INR 2,55,00,000/- transferee would accept the terms and conditions of the Agreement including the
(Indian Rupees two crore fifty five lakhs only) along with an interest of 12% (twelve arbitration agreement under the Agreement. The Letter categorically contains a reference
percent) per annum. to the Agreement and establishes that the Appellant assumed all the obligations under the
Agreement including remedy of arbitration. It was also argued that only the NCLT had
KCP challenged the aforesaid award under Section 34 of Arbitration and Conciliation
jurisdiction to effectively transfer shares.
Act, 1996 (“Arbitration Act”), which challenge was quashed by a Single Judge of
the Madras High Court by a judgment and order dated April 30, 2015. The appeal The findings of the Supreme Court:
filed by KCP against Kasturi Sons was dismissed by the Division Bench of the High
Court of Madras on January 24, 2017. Further, Supreme Court dismissed the Special The Supreme Court considered the rule of law of its judgment in Chloro Controls India
Leave Petition filed by KCP challenging the aforesaid judgement of Division Bench on Private Limited v. Severn Trent Water Purification Inc. 4 wherein it observed that ordinarily,
February 10, 2017. Accordingly, the award attained finality. an arbitration takes place between persons who have been parties to both the arbitration
Thereafter, Kasturi Sons initiated proceedings to execute the award before the NCLT agreement and the substantive contract underlying it. English Law has evolved the “group
by rectification of register of SPIL. The NCLT allowed the petition by its order dated of companies doctrine” under which an arbitration agreement entered into by a company
March 6, 2017. This decision was affirmed by NCLAT’s order dated May 3, 2017. with a group of corporate entities, can in certain circumstances, bind non-signatory
Hence, the Appellant preferred an appeal before Supreme Court. affiliates.

Grounds on which the Appellant challenged the order of NCLAT: The test as formulated by Supreme Court is that, an arbitration agreement entered into by
a company (being one within a group of companies), can bind its non-signatory affiliates
The Appellant relied upon the Supreme Court’s judgments in Indowind Energy or sister or parent concerns, if the circumstances demonstrate that the mutual intention of
Limited v Wescare (India) Limited 2and S.N.Prasad, Hitek Industries (Bihar) Limited v all the parties to the agreement was to bind both signatories and non-signatories
Monnet Finance Limited 3 to contend that it was not a signatory to the arbitration affiliates. In other words, “intention of parties” is a very significant feature which must be
agreement contained in the Agreement and therefore even though the Appellant established before the scope of arbitration can be said to include non-signatory parties.

2
(2010) 5 SCC 306
3
(2011) 1 SCC 320 4
(2013) 1 SCC 641
The Supreme Court held that it would examine the facts of the case on the touch- Court relied on Sundaram Finance Limited v Abdul Samad5 to conclude that execution
stone of the existence of a direct relationship with a party (which is a signatory to proceedings can be initiated anywhere in the country where the assets of the judgment
the arbitration agreement), a ‘direct commonality’ of the subject matter, and on debtor are located. The Court further held that in order to give effect to the transfer of
whether the agreement between the parties is a part of composite transaction. The shares, approaching the NCLT for registration of such transfer and rectification of the
Supreme Court further held that the effort is to find the true essence of the business register under Section 111 of the Companies Act, 2013 was the only remedy available to
arrangement and to unravel from a layered structure of commercial arrangements, Kasturi Sons and therefore its actions were not only appropriate but also necessary.
an intent to bind someone who is not formally a signatory, but has assumed the
obligation to be bound by the actions of a signatory. Conclusion:

The Supreme Court held that the transfer of Sale Shares to the nominees of KCP 1. The Supreme Court has taken into consideration the complexity of modern
(including the Appellant) was subject to the express condition that the nominees transactions and has passed the order keeping the commercial intent of the parties in
would abide by the terms of the Agreement. The Supreme Court observed that the mind. This approach of the Supreme Court is arbitration friendly and ensures that the
Letter contained a clear and categorical reference to the Agreement. Further, the arbitration award in the facts of this case was not rendered a mere paper decree.
parties in whose favor transfers were registered were described as group companies.
Therefore, the Appellant could not contend that it wouldn't be bound by the 2. This approach of the Supreme Court towards complex commercial transactions is a
arbitration agreement or the award. The Supreme Court thereafter laid special positive step and is likely to go a long way in protecting the enforceability of
emphasis on Section 35 of the Arbitration Act, which provides that an arbitration arbitration awards.
award binds parties and the persons claiming under them. The Supreme Court held
that:

“The expression “persons claiming under them” is a legislative recognition of the

doctrine that besides the parties, an arbitral award binds every person whose Authored by Siddhesh Iyer and Preeti Kumari
capacity or position is derived from and is the same as a party to the proceedings.
Having derived its capacity from a party and being in the same position as a party to
the proceedings binds a person who claims under it. The issue in every such case is
whether the person against whom the arbitral award is sought to be enforced is one
who claims under a party to the agreement.”

The Supreme Court observed that the Appellant, being a nominee of KCP, as well as
being bound by the Agreement was a party having the same position as KCP and
therefore bound by the award in terms of Section 35 of the Arbitration Act.

The Appellant’s contention that the award in view of Section 36 of the Arbitration Act
could not have been enforced before the NCLT was also rejected. The Supreme

5
(2018) 2 SCALE 467
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