Non-signatories can be compelled to arbitrate

By Sneha Jaisingh and Aniruddha Banerji, Bharucha & Partners
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In Shapoorji Pallonji and Co Pvt Ltd v Rattan India Power Ltd and Anr, the issue before the Delhi High Court was whether a non-signatory to an arbitration agreement can be compelled to arbitrate. Indiabulls, which subsequently changed its name to Rattan India Power Limited, invited bids for the development of a thermal power plant (project). Elena, a wholly-owned subsidiary of Indiabulls, issued Shapoorji with a letter of award (LoA) and subsequently executed a contract with Shapoorji for the construction of civil and structural work in a boiler turbine generator package (BTG contract). The LoA was signed on behalf of Elena, but the letterhead included the name Indiabulls. The LoA was included in the contract documents in the BTG contract. Subsequently, civil and structural work that had been contracted to a third party was offloaded to Shapoorji in a balance of plant work order (BoP contract). Shapoorji was also awarded work by Indiabulls for the arrangement of diesel generator sets (DG contract), and for the construction of reinforced concrete bridges by IIC Limited (RCC contract).

Sneha Jaisingh,Bharucha & Partners
Sneha Jaisingh
Partner
Bharucha & Partners

Disputes arose, and Shapoorji invoked arbitration against Elena and Indiabulls. Indiabulls contended that it was a signatory only to the DG contract, which did not contain an arbitration clause. Elena denied the existence of an arbitration clause under the BoP contract and claimed that it was not involved in the DG contract or the RCC contract. Shapoorji applied to the Delhi High Court to appoint an arbitrator, but confined its application to the BTG contract and the BoP contract.

Shapoorji contended that the LoA clearly implied that Elena was acting on behalf of Indiabulls. Shapoorji had issued the bank guarantees for performance of the BTG contract in favour of Indiabulls, not Elena, and the payments under the BTG contract were made directly by Indiabulls to Shapoorji. Additionally, Shapoorji claimed that the BoP contract comprised additional works under the BTG contract since the works were related to an integral part of the project and that terms in the BoP contract made reference to the BTG contract.

Relying on Chloro Controls (India) (P) Ltd v Severn Trent Water Purification Inc and Mahanagar Telephone Nigam Ltd v Canara Bank, the court recognised that the general rule was that a non-signatory cannot be compelled to arbitrate, but that this rule assumed that the non-signatory had not acceded to the arbitration and that there were no exemptions. The court held that non-signatories may be compelled to arbitrate based on implied consent, the alter-ego theory of agent-principal relations, the piercing of the corporate veil and estoppel. The court also relied on the group of companies doctrine, where the conduct of the parties evinced a clear intention to bind both signatories and non-signatories of a group.

In the present case, the court held that Indiabulls was a direct beneficiary under the BTG contract since it directly participated in its negotiation and execution, and secured itself against the performance of the contract. Indiabulls also made payments directly to Shapoorji under the BTG contract. Moreover, Elena was incorporated by Indiabulls specifically to carry out the BTG contract. The court, however, did not accept Shapoorji’s argument that the BoP contract supplemented the BTG contract since the BoP contract did not contain an arbitration clause and Shapoorji had raised a separate final bill for the BoP contract.

The decision is significant as it set out not only the circumstances in which the corporate veil may be pierced but also clarified that a party compelling a non-signatory to take part in arbitration must demonstrate that the non-signatory directly benefited from the contract. By taking such a pragmatic approach the court once again applied the principles of business efficacy to commercial contracts.

The decision is also significant as the court expressly stated that it carried out an “intensive yet summary prima facie review” of the issues involved, while permitting the parties to argue their cases before the arbitrators, keeping in mind the directions laid down by the Supreme Court in Vidya Drolia v Durga Trading Corporation.

Sneha Jaisingh is a partner and Aniruddha Banerji is an associate at Bharucha & Partners

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