Mahanagar Telephone Nigam Ltd vs Canara Bank

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 6202-6205 OF 2019 (Arising out of SLP (Civil) No. 13573-13576 of 2014)

Mahanagar Telephone Nigam Ltd. …Appellant

Versus

Canara Bank & Ors. …Respondents

JUDGMENT

INDU MALHOTRA, J.

Leave granted.

1. The present Special Leave Petitions have been filed to

challenge Order dated 16.09.2011 passed in W.P. (C) No. 560

of 1995, Order dated 21.10.2011 passed in C.M. No. 12230 of Signature Not Verified Digitally signed by ANITA MALHOTRA Date: 2019.08.08 17:17:02 IST Reason: 1 2011, Order dated 05.07.2013 passed in C.M. No. 8100 of

2012, and Order dated 10.01.2014 passed in C.M. No. 324

and 325 of 2014 by the Delhi High Court.

2. The background facts of the case are as follows :

2.1. In 1992, MTNL floated 17% Non-Cumulative Secured

Redeemable Bonds described as the VI Series (Private

Placement) worth Rs. 425 crores. On 10.02.1992, MTNL

placed bonds worth Rs.200 crores with Can Bank Financial

Services Ltd. (hereinafter referred to as “CANFINA”) under

an MOU agreement. The bond amount of Rs. 200 cores was

placed as fixed deposit by MTNL with CANFINA. CANFINA

paid back Rs. 50 crores of the fixed deposit in 1992. The

balance fixed deposit amount of Rs. 150 crores along with

interest was not paid by CANFINA to MTNL. As a

consequence, MTNL did not service the interest on bonds.

MTNL was of the view that since it did not receive the entire

bond amount of Rs. 200 crores, the entire deal did not go

through. Against payment of Rs. 50 crores received from

CANFINA, MTNL serviced the bonds of approximately Rs. 31

2 crores to the public. MTNL was of the view that only a sum

of Rs.5.41 crores was payable to CANFINA, which was not

accepted by CANFINA.

2.2. As per Canara Bank, soon after the bonds were subscribed,

there was an out-break of a security scam which led to a

collapse of the secondary market in shares, security and

bonds. There were very few buyers in the secondary market.

Even such buyers were offering very low prices for these

bonds. In these circumstances, CANFINA was faced with a

severe liquidity crunch.

2.3. In these circumstances, Respondent No. 1 – Canara Bank

purchased the Bonds issued by MTNL, of the face value of

Rs. 80 crores, from Respondent No. 2 – CANFINA which is

its wholly owned subsidiary.

2.4. Canara Bank requested for registration of these Bonds with

MTNL, and lodged letters of allotment for purchase of the

bonds from CANFINA.

2.5. MTNL vide letter dated 14.10.1992 addressed to Canara

Bank, refused to transfer the Bonds, on the various grounds

mentioned in the letter.

3 2.6. MTNL by a subsequent letter dated 16.02.1993, informed

Canara Bank that it had registered a part of the face value

of Rs. 40 crores, in favour of CANFINA. The bond

instruments were however retained on the ground that

CANFINA had failed to pay the deposit money of Rs. 150

crores, which was payable to MTNL with an accrued interest

of 12% p.a.

2.7. MTNL vide letter dated 20.10.1993, cancelled all the Bonds

inter alia on the ground that letters of consideration

remained with CANFINA.

2.8. Canara Bank vide its reply dated 13.01.1994 contended

that it is the holder in due course, and is entitled to have

the shares registered in its name, and receive the interest as

and when it fell due.

2.9. MTNL sent a statement of accounts by adjusting the

proceeds of the cancellation of bonds towards the dues of

CANFINA. It was stated that the bonds and interest accrued

thereon cannot be refunded. MTNL with its letter dated

4 13.01.1994, attached a cheque for Rs. 5,41,17,463 as the

amount payable to Canara Bank.

2.10. Canara Bank, however, returned the cheque vide letter

dated 10.02.1994, demanding the restoration and

registration of the bonds.

2.11. Canara Bank filed W.P. (Civil) No. 560 of 1995 before

the Delhi High Court to challenge the cancellation of the

Bonds, and a direction to pay the Interest accrued.

It is relevant to note that CANFINA was joined as a

proforma party in the Writ Petition filed by Canara Bank.

2.12. The Delhi High Court vide Order dated 09.09.1996

directed the Union of India to decide the issues between the

parties in light of this Court’s judgment in O.N.G.C. v.

Commissioner of Central Excise1.

The Writ Petition was dismissed on the ground of

availability of an alternative and efficacious remedy before

the Company Law Board under Section 111 of the

Companies Act, 1956.

1 (1995) Supp. 4 SCC 541.

5 2.13. The proceedings before the Company

Law Board came to be dismissed vide Order dated

26.02.1998, since the remedy was no longer available, as

per the amendment of Section 111 by the Depositories Act,

1996.

2.14. Canara Bank filed an application for

Restoration of the Writ Petition, which was restored vide

Order dated 12.05.1999.

2.15. Canara Bank made a representation

to the Cabinet Secretary.

On 27.03.2001, a meeting was convened by the

Cabinet Secretariat, Litigation Cell which was presided by

the Cabinet Secretary, and attended by the representatives

of MTNL, Canara Bank, and CANFINA.

The Committee directed Canara Bank, CANFINA and

MTNL to settle the disputes through arbitration by making

an appropriate reference to the Permanent Machinery of

Arbitration, functioning in the Department of Public

6 Enterprises. The Committee did not permit Canara Bank,

CANFINA and MTNL to pursue the litigation in Court.

2.16. The Delhi High Court vide Order

dated 30.05.2008 referred the disputes between the parties

to the Committee on Disputes. The Writ Petition was

adjourned sine die. Canara Bank was granted liberty to

revive the Petition in the event that the Committee on

Disputes was unable to resolve the disputes between the

parties.

2.17. The Committee of Disputes held a

meeting on 16.12.2008, which was attended by the

representatives of MTNL, Canara Bank and CANFINA. The

Committee, after hearing the parties, expressed the view

that all the three parties should take recourse to arbitration

in view of the different inter-linked transactions between

them.

The representatives of Canara Bank expressed the

apprehension that arbitration by the Permanent Machinery

7 of Arbitration would take much longer than judicial

recourse.

The Committee observed that to expedite arbitration,

the parties should expeditiously enter into an arbitration

agreement under the Arbitration and Conciliation Act, 1996.

2.18. Pursuant to the meeting held on

16.12.2008, Canara Bank vide its letter dated 05.03.2009

sent a draft arbitration agreement to the Chairman and

Managing Director of MTNL. The draft arbitration agreement

sent by Canara Bank was between Canara Bank and

CANFINA on the one side, with MTNL on the other.

2.19. By letter dated 17.03.2010, Canara

Bank requested the Deputy Secretary, Cabinet Secretariat

to advise MTNL to execute the arbitration agreement in

accordance with the direction of the Ministry of Law and

Justice.

2.20. The Delhi High Court vide Order

dated 01.10.2010 disposed of the pending Writ Petition with

the observation that the matter should be resolved by the

8 Committee on Disputes expeditiously so that the arbitration

agreement between the parties is signed as soon as possible.

2.21. The decision in O.N.G.C. v.

Commissioner of Central Excise (supra) came to be overruled

by a Constitution Bench in Electronics Corporation of India

Ltd. v. Union of India & Ors.2

Accordingly, Canara Bank moved the Delhi High Court

u/S. 151, CPC for restoration of the disposed of Writ

Petition.

2.22. The Delhi High Court restored the

Writ Petition, and vide Order dated 16.09.2011 noted that

the two principal issues which arise for consideration are:

(i) Whether Canara Bank is liable for the acts or

omissions of CANFINA; and

(ii) Whether Canara Bank should take over the liabilities

and admit them in the arbitration agreement itself.

During the course of the proceedings, the parties

before the Delhi High Court agreed that these issues may be

referred to arbitration. The parties were requested to 2 (2011) 3 SCC 404.

9 suggest the name of a sole arbitrator to be appointed on the

next date of hearing.

2.23. On 21.10.2011, the name of Mr.

Justice A.P. Shah (Retd.) was suggested by the Counsel for

Canara Bank, which was accepted by the Counsel for

MTNL.

Accordingly, Mr. Justice A.P. Shah (Retd.) came to be

appointed as the Sole Arbitrator.

2.24. On 05.01.2012, the Sole Arbitrator

issued notice to all the three parties i.e. MTNL, Canara

Bank, and CANFINA.

2.25. Canara Bank raised an objection to

joining CANFINA as a party to the arbitration. The

Arbitrator heard the parties on 27.03.2012, on the issue

whether CANFINA should be joined as a party to the

proceedings.

The learned Arbitrator passed an interim award

holding that CANFINA had not appeared on 16.09.2011

1 before the High Court, when the disputes were referred to

arbitration. CANFINA was not a party to the arbitration

agreement, and cannot be joined as a party to proceedings.

2.26. MTNL filed C.M. No. 8100 of 2012

before the Delhi High Court seeking clarification of Order

dated 16.09.2011, as to whether CANFINA ought to be

impleaded as a necessary party to the arbitration

agreement.

The Delhi Court vide order dated 05.07.2013

dismissed the application as “not pressed” on the statement

made by the Counsel of MTNL.

2.27. Canara Bank filed its Statement of

Claim before the learned Sole Arbitrator on 06.12.2013.

2.28. MTNL filed I.A. Nos. 324 – 325 of

2014 before the Delhi High Court for recall of the Orders

dated 16.09.2011, 21.10.2011 and 05.07.2013 passed in

W.P. (C) No. 560 of 1995.

1 2.29. The Delhi High Court vide Order

dated 10.01.2014, dismissed the Application for Recall on

the ground that the application was identical to the

application previously filed by MTNL being C.M. No. 8100 of

2012. Since MTNL had not pressed the earlier application,

the subsequent application being identical in nature, could

not be considered, and was dismissed.

2.30. In May 2014, MTNL filed its reply to

the Statement of Claim filed by Canara Bank, and also

made a Counter-Claim against Canara Bank.

3. Aggrieved by the Orders dated 16.09.2011, 21.10.2011,

05.07.2013, and 10.01.2014 passed by the Delhi High Court

in W.P. (C) No. 560 of 1995, C.M. No. 12230 of 2011, C.M. No.

8100 of 2012 and C.M. No. 324 and 325 of 2014 respectively,

the Appellant – MTNL filed the present Special Leave Petition.

This Court vide Order dated 08.05.2014 issued Notice to all

the Respondents, including CANFINA which has been joined as

Respondent No. 2.

1

4. Ms. Madhavi Divan, learned ASG appeared on behalf of MTNL,

Mr. Ameesh Dabass, learned Counsel appeared for Respondent

No. 1 – Canara Bank, and Ms. Saumya Sinha, along with Mr.

A.K. Sharma, learned Counsels appeared for Respondent No. 2

– CANFINA.

5. The Counsel for the Appellant – MTNL inter alia submitted as

under:

5.1. In the absence of a written agreement for arbitration

between the parties, as stipulated by Section 2(b) r.w. 2(h)

and 7(3) of the Arbitration and Conciliation Act, 1996, the

arbitration cannot proceed.

5.2. The disputes which were referred to arbitration pertaining to

transactions between the Appellant – MTNL on the one

hand, and Respondent No. 1 and 2 – Canara Bank and

CANFINA on the other hand.

5.3. The arbitration proceeding cannot proceed in the absence of

Respondent No. 2 – CANFINA as the Bonds in question were

subscribed by Respondent No, 2 – CANFINA, and were

1 subsequently transferred to its parent Company i.e.

Respondent No. 1 – Canara Bank.

In the absence of Respondent No. 2 – CANFINA being

made a party to the arbitration, the arbitral proceedings

may be rendered infructuous.

5.4. The only existing arbitration agreement between the parties,

is a draft tripartite agreement forwarded by Canara Bank

wherein MTNL and CANFINA were both made parties.

5.5. There is no legal relationship or privity of contract between

the Appellant – MTNL and Respondent No. 1 – Canara Bank

as the disputed Bonds were bought from the Appellant –

MTNL by Respondent No. 2 – CANFINA.

The Appellant – MTNL had consented to the disputes

being referred to arbitration on the understanding that the

arbitration would be amongst the three parties.

6. The Counsel for Respondent No. 1 Canara Bank inter alia

submitted that :

1

6.1. The present appeal is not maintainable as the Appellant –

MTNL filed the present Appeal after filing its reply to the

Statement of Claim and Counter-Claim before the learned

Sole Arbitrator, and has therefore submitted itself to the

jurisdiction of the learned Sole Arbitrator.

6.2. The only remedy available to Appellant – MTNL was to file

an application under Section 16 of the Arbitration and

Conciliation Act, 1996.

6.3. Respondent No. 2 – CANFINA was merely joined as a

proforma party in the Writ Petition before the Delhi High

Court, and therefore cannot be made a party before the

arbitral proceedings.

6.4. At the time of giving consent to arbitration and appointment

of the learned Sole Arbitrator, Respondent No. 2 – CANFINA

was not before the Court on 16.09.2011 and 21.10.2011.

6.5. The Appellant – MTNL has not filed any claim against

Respondent No. 2 – CANFINA, and therefore, cannot seek

any remedy or relief against Respondent No. 2 – CANFINA at

this belated stage. Further, it cannot be allowed to raise an

1 issue of impleadment without having any claim against the

party sought to be impleaded.

7. We have heard the learned Counsel for the parties, and

perused the pleadings and Written Submissions filed.

8. ISSUES There are two issues which have arisen for our

consideration : (i) the first issue raised by the Appellant –

MTNL with respect to the existence of a valid arbitration

agreement between the three parties; (ii) the second issue has

been raised by Respondent No. 1 – Canara Bank that the

Order dated 16.09.2011 and 21.10.2011 is between Canara

Bank and MTNL. Respondent No. 2 – CANFINA, is not a party

to the arbitration agreement, and hence cannot be impleaded

in the proceedings.

These issues will be dealt with seriatim.

9. THE EXISTENCE OF A VALID ARBITRATION AGREEMENT A valid arbitration agreement constitutes the heart of an

arbitration. An arbitration agreement is the written agreement

between the parties, to submit their existing, or future

disputes or differences, to arbitration. A valid arbitration

1 agreement is the foundation stone on which the entire edifice

of the arbitral process is structured. A binding agreement for

disputes to be resolved through arbitration is a sine-qua-non

for referring the parties to arbitration.

9.1. Section 7 defines “arbitration agreement” and reads as

follows :

7. Arbitration agreement. – (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing. (4) An arbitration agreement is in writing if it is contained in-

(a) A document signed by the parties;

(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) There reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

9.2. The arbitration agreement need not be in any particular

form. What is required to be ascertained is the intention of

the parties to settle their disputes through arbitration. The

1 essential elements or attributes of an arbitration agreement

is the agreement to refer their disputes or differences to

arbitration, which is expressly or impliedly spelt out from a

clause in an agreement, separate agreement, or

documents/correspondence exchanged between the parties.

9.3. Section 7(4)(b) of the 1996 Act, states that an arbitration

agreement can be derived from exchange of letters, telex,

telegram or other means of communication, including

through electronic means. The 2015 Amendment Act

inserted the words “including communication through

electronic means” in Section 7(4)(b). If it can prima facie be

shown that parties are ad idem, even though the other party

may not have signed a formal contract, it cannot absolve

him from the liability under the agreement 3. 9.4. Arbitration agreements are to be construed according to the

general principles of construction of statutes, statutory

instruments, and other contractual documents. The

intention of the parties must be inferred from the terms of

the contract, conduct of the parties, and correspondence 3 Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd., (2015) 13 SCC 477

1 exchanged, to ascertain the existence of a binding contract

between the parties. If the documents on record show that

the parties were ad idem, and had actually reached an

agreement upon all material terms, then it would be

construed to be a binding contract.

The meaning of a contract must be gathered by

adopting a common sense approach, and must not be

allowed to be thwarted by a pedantic and legalistic interpre-

tation.4

9.5. A commercial document has to be interpreted in such a

manner so as to give effect to the agreement, rather than to

invalidate it. An ‘arbitration agreement’ is a commercial

document inter partes, and must be interpreted so as to give

effect to the intention of the parties, rather than to

invalidate it on technicalities.

9.6. In Khardah Company Ltd. v. Raymon and Co. (India) Pvt.

Ltd.5, this Court while ascertaining the terms of an

arbitration agreement between the parties, held that:

4 Union of India v. DN Revry and Co., (1976) 4 SCC 147. 5 [1963] 3 SCR 183.

1

“If on a reading of the document as a whole, it can fairly be deduced from the words actually used herein, that the parties had agreed on a particular term, there is nothing in law which prevents them from setting up that term. The terms of a contract can be expressed or implied from what has been expressed. It is in the ultimate analysis, a question of construction of the contract.” (emphasis supplied)

9.7. In interpreting or construing an arbitration agreement or

arbitration clause, it would be the duty of the court to make

the same workable within the permissible limits of the law.

This Court in Enercon (India) Ltd. and Ors. v. Enercon

GMBH6, held that a common sense approach has to be

adopted to give effect to the intention of the parties to

arbitrate the disputes between them. Being a commercial

contract, the arbitration clause cannot be construed with a

purely legalistic mindset, as in the case of a statute. 9.8. In this case, MTNL raised a preliminary objection that there

was no arbitration agreement in writing between the parties,

at this stage of the proceedings.

We will first deal with this issue. The agreement

between MTNL and Canara Bank to refer the disputes to

6 (2014) 5 SCC 1.

2 arbitration is evidenced from the following documents

exchanged between the parties, and the proceedings :

(i) The Minutes of the Meeting dated 27.03.2001

convened by the Cabinet Secretariat, wherein all three

parties were present and participated in the

proceedings. The Committee on Disputes, in the

Meeting dated 16.12.2008 expressed the view that all

the three parties should take recourse to arbitration in

view of the different inter-liked transactions between

them. Canara Bank suggested that to expedite the

arbitration, it should be conducted under the

Arbitration & Conciliation Act, 1996. This was

accepted by MTNL, and no objection was raised.

(ii) Pursuant to the proceedings conducted by the Cabinet

Secretariat, Canara Bank addressed letters dated

05.03.2009 and 17.03.2010 to MTNL, wherein it

enclosed a draft Arbitration Agreements, wherein all

three parties i.e. Canara Bank, CANFINA and MTNL

would be joined in the arbitration proceedings.

2

(iii) In the Writ Petition filed by Canara Bank, the Delhi

High Court vide Order dated 16.09.2011 recorded the

consent of MTNL and Canara Bank to be referred to

arbitration by a Sole Arbitrator under the 1996 Act.

The relevant extract of the Order dated

16.09.2011 passed by the Delhi High Court reads as

follows :

“Unfortunately, although the parties had displayed their willingness for arbitration, the Committee on Disputes could not resolve the specific clauses of the arbitration agreement. Nor have the parties been able to arrive at a consensus with regard to the specific clauses of the arbitration agreement. As noted in the order dated 01.10.2010, according to the petitioner, it is a matter of arbitration as to whether the petitioner is liable for the acts or omissions of CANFINA. However, the respondents were insisting that the petitioners should agree to take over the liabilities and admit them in the arbitration agreement itself. It has now been agreed by the parties that both these issues could be made the subject matter of the arbitration, namely, whether the petitioner is liable for the acts or omissions of CANFINA and whether the petitioner is liable to take over the liabilities of CANFINA. There is no necessity now of requiring the petitioner to agree to take over the liabilities of CANFINA prior to the arbitration proceedings because that itself would not be one of the points to be decided in the course of arbitration. Even though the learned counsel for the petitioner has placed before us the subsequent decisions of the Supreme Court with regard to the scope and ambit of powers of the Committee on Disputes, we are making the present order because the parties themselves have agreed to go

2 in for arbitration as a mode for resolving their disputes. This is welcome because both the parties are PSUs. The counsel for the parties shall suggest names of the arbitrators.” (emphasis supplied)

(iv) Pursuant thereto, MTNL participated in the

proceedings conducted by the Sole Arbitrator, and filed

its Claim, and Counter-Claim. No objection was raised

before the Sole Arbitrator that there was no arbitration

agreement in writing between the parties. The only

objection raised was that CANFINA should be joined as

a necessary party in the proceedings.

9.9. The agreement between the parties as recorded in a judicial

Order, is final and conclusive of the agreement entered into

between the parties.7 The Appellant – MTNL after giving its

consent to refer the disputes to arbitration before the Delhi

High Court, is now estopped from contending that there was

no written agreement to refer the parties to arbitration.

9.10. An additional ground, for rejecting the preliminary objection

raised by MTNL is based on Section 7(4)(c) of the Arbitration

and Conciliation Act, 1996.

7 State of Maharashtra v. Ramdas Shrinivas Nayak (1982) 2 SCC 463.

See also Chitra Kumari v. Union of India (2001) 3 SCC 208.

2 Section 7(4)(c) provides that there can be an

arbitration agreement in the form of exchange of statement

of claims and defense, in which the existence of the

agreement is asserted by one party, and not denied by the

other.8

In the present case, Canara Bank had filed its

Statement of Claim before the Arbitrator, and MTNL filed its

Reply to the Statement of Claim, and also made a Counter

Claim against Canara Bank.

The statement of Claim and Defence filed before the

Arbitrator would constitute evidence of the existence of an

arbitration agreement, which was not denied by the other

party, under Section 7(4)(c) of the 1996 Act.

In view of the aforesaid discussion, the objection raised

by MTNL is devoid of any merit, and is hereby rejected.

10. JOINDER OF CANFINA IN THE ARBITRAL PROCEEDINGS

8 Savitri Goenka v. Kanti Bhai Damini & Ors., 2009 (1) Arb LR 320 (Del) (DB).

2 10.1. Canara Bank raised an objection to the joinder of

Respondent No. 2 – CANFINA as a party to the arbitration

proceedings.

10.2. As per the principles of contract law, an agreement entered

into by one of the companies in a group, cannot be binding

on the other members of the same group, as each company

is a separate legal entity which has separate legal rights and

liabilities.

The parent, or the subsidiary company, entering into

an agreement, unless acting in accord with the principles of

agency or representation, will be the only entity in a group,

to be bound by that agreement.

Similarly, an arbitration agreement is also governed by

the same principles, and normally, the company entering

into the agreement, would alone be bound by it.

10.3. A non-signatory can be bound by an arbitration agreement

on the basis of the “Group of Companies” doctrine, where

the conduct of the parties evidences a clear intention of the

2 parties to bind both the signatory as well as the

non-signatory parties.

Courts and tribunals have invoked this doctrine to join

a non-signatory member of the group, if they are satisfied

that the non-signatory company was by reference to the

common intention of the parties, a necessary party to the

contract.

10.4. The doctrine of ‘Group of Companies’ had its origins in the

1970’s from French arbitration practice. The ‘Group of

Companies’ doctrine indicates the implied consent to an

agreement to arbitrate, in the context of modern multi-party

business transactions.

It was first propounded in the case of Dow Chemical v.

Isover-Saint-Gobain,9 where the arbitral tribunal held that:

“… the arbitration clause expressly accepted by certain of the companies of the group should bind the other companies which, by virtue of their role in the conclusion, performance, or termination of the contracts containing said clauses, and in accordance with the mutual intention of all parties to the proceedings, appear to have been veritable parties to these contracts or to have been principally concerned by them and the disputes to which they may give rise”.

9 1984 Rev Arb 137; 110 JDI 899 (1983).

2

The ‘Group of Companies’ doctrine has been invoked by

courts and tribunals in arbitrations, where an arbitration

agreement is entered into by one of the companies in the

group; and the non-signatory affiliate, or sister, or parent

concern, is held to be bound by the arbitration agreement,

if the facts and circumstances of the case demonstrate that

it was the mutual intention of all parties to bind both the

signatories and the non-signatory affiliates in the group.

The doctrine provides that a non-signatory may be

bound by an arbitration agreement where the parent or

holding company, or a member of the group of companies is

a signatory to the arbitration agreement and the

non-signatory entity on the group has been engaged in the

negotiation or performance of the commercial contract, or

made statements indicating its intention to be bound by the

contract, the non-signatory will also be bound and

benefitted by the relevant contracts. 10

10 Interim Award in ICC Case No. 4131, IX YB Comm Arb 131 (1984);

Award in ICC Case No. 5103, 115 JDI (Clunet) 1206 (1988). See also Gary B. Born: International Commercial Arbitration, Vol. I, 2009, pp. 1170-1171.

2 The circumstances in which the ‘Group of Companies’

Doctrine could be invoked to bind the non-signatory affiliate

of a parent company, or inclusion of a third party to an

arbitration, if there is a direct relationship between the

party which is a signatory to the arbitration agreement;

direct commonality of the subject matter; the composite

nature of the transaction between the parties.

A ‘composite transaction’ refers to a transaction which

is inter-linked in nature; or, where the performance of the

agreement may not be feasible without the aid, execution,

and performance of the supplementary or the ancillary

agreement, for achieving the common object, and

collectively having a bearing on the dispute.

10.5. The Group of Companies Doctrine has also 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

2 particular when the funds of one company are used to

financially support or re-structure other members of the

group.11

10.6. The ‘Group of Companies’ doctrine has been invoked and

applied by this Court in Chloro Controls India (P) Ltd. v.

Severn Trent Water Purification Inc., 12 with respect to an

international commercial agreement. Recently, this Court

in Ameet Lal Chand Shah v. Rishabh Enterprises,13 invoked

the Group of Companies doctrine in a domestic arbitration

under Part I of the 1996 Act.

10.7. Coming to the facts of the present case, CANFINA was set

up as a wholly owned subsidiary of Canara Bank. This is

evident from the Report of the Joint Committee to Enquire

into Irregularities in Securities and Banking Transactions,

1993,14 which states as follows :

“Canbank Financial Services Ltd.

11 ICC Case No. 4131 of 1982, ICC Case No. 5103 of 1988. 12 (2013) 1 SCC 641.

The Madras High Court has invoked the Group of Companies Doctrine in a foreign seated arbitration in SEI Adhavan Power Pvt. Ltd. v. Jinneng Clean Energy Technology Ltd. & Ors.2018 (4) CTC 46. 13 (2018) 15 SCC 678.

14 Report, Presented to the Lok Sabha on 21st December, 1993.

2 6.14 CANFINA was set up as a wholly owned subsidiary of Canara Bank and it commenced its operation with its Head Office at Bangalore on 1 st June, 1987. Its authorized and paid up capital are Rs. 50 crores and Rs. 10 crores respectively. It was staffed mostly be personnel from Canara Bank and has branches at Ahmedabad, Bombay, Calcutta, Hyderabad, Madras and New Delhi besides Bangalore. As the Board comprised mostly of senior executives of Canara Bank and its Chief Executive is also a senior official of that bank (on deputation) the company functioned under the umbrella of the parent bank; besides it submits periodical returns on its functioning to the Board of Canara Bank for information.

6.15 The activities authorized to be conducted by the Company are equipment leasing, merchant-banking, venture capital and consultancy services. The Company, initially deployed a major portion of its owned funds and deposits in equipment leasing business and obtained the classification of an ‘Equipment leasing company’ from the Department of Finance Companies of RBI; this classification entitles the company to mobilize public deposits to the extent of ten time its owned funds.

… 6.25 The Committee hope that the nature and extent of the financial assistance being provided by Canara Bank to its subsidiaries are such as could be justified on prudent commercial norms. Further the parent bank cannot be absolved of the responsibility for various irregularities of its subsidiary. ” (emphasis supplied)

10.8. The disputes between the parties emanated out of the

transaction dated 10.02.1992, whereby CANFINA has

subscribed to the bonds floated by MTNL. CANFINA

subsequently transferred the Bonds to its holding Company

3 – Canara Bank. It is the contention of MTNL, that since

CANFINA did not pay the entire sale consideration for the

Bonds, MTNL eventually was constrained to cancel the

allotment of the Bonds.

10.9. It will be a futile effort to decide the disputes only between

MTNL and Canara Bank, in the absence of CANFINA, since

undisputedly, the original transaction emanated from a

transaction between MTNL and CANFINA – the original

purchaser of the Bonds. The disputes arose on the

cancellation of the Bonds by MTNL on the ground that the

entire consideration was not paid.

There is a clear and direct nexus between the issuance

of the Bonds, its subsequent transfer by CANFINA to

Canara Bank, and the cancellation by MTNL, which has led

to disputes between the three parties.

Therefore, CANFINA is undoubtedly a necessary and

proper party to the arbitration proceedings.

10.10. Given the tri-patite nature of the transaction, there

can be a final resolution of the disputes, only if all three

3 parties are joined in the arbitration proceedings, to finally

resolve the disputes which have been pending for over 26

years now.

It is of relevance to note that CANFINA has

participated in the proceedings before the High Court, and

the Committee on Disputes. CANFINA was also represented

by its separate Counsel before the Sole Arbitrator. Canara

Bank in CWP No. 560 of 1995 filed before the Delhi High

Court, had joined CANFINA as Respondent No. 2, even

though it was joined as a proforma party. CANFINA was

represented by Counsel in the Writ Proceedings before the

Delhi High Court. The Counsel for CANFINA was however

not present on two dates i.e. on 16.09.2011 and

21.10.2011, when the High Court recorded the agreement

between the parties for reference of disputes to arbitration.

MTNL had submitted before the Delhi High Court that

Canara Bank should agree to take over the liabilities of

CANFINA before the arbitration could commence. The High

Court recorded that there was no necessity of requiring

3 Canara Bank to agree to take over the liabilities of

CANFINA, prior to the arbitration proceedings. This issue

would be decided in the arbitration.

10.11. On the commencement of arbitration proceedings

before the Sole Arbitrator, notice was issued by the Sole

Arbitrator to all the three parties including CANFINA, which

was represented by its Counsel.

10.12. We find that the objection to CANFINA being impleaded

as a party to the arbitration proceedings was raised by

Canara Bank, and not CANFINA.

10.13. We do not find any merit in the objection raised by

Canara Bank opposing the joining of CANFINA as a party to

the dispute. Canara Bank vide letters dated 05.03.2009 and

17.03.2010 had enclosed a Draft Arbitration Agreement to

MTNL, wherein it has clearly stated that the arbitration

3 would be between three parties i.e. Canara Bank and

CANFINA as party of the first part, and MTNL as party of the

second part.

It is incomprehensible why Canara Bank is now

objecting to the impleadment of CANFINA in the arbitration

proceedings. There is no justifiable ground advanced by the

Counsel for Canara Bank to oppose the impleadment of

CANFINA in the arbitration proceedings.

10.14. The present case is one of implied or tacit consent by

Respondent No. 2 – CANFINA to being impleaded in the

arbitral proceedings, which is evident from the conduct of

the parties. We find that Respondent No. 2 – CANFINA has

throughout participated in the proceedings before the

Committee on Disputes, before the Delhi High Court, before

the Sole Arbitrator, and was represented by its separate

Counsel before this Court in the present appeal. There was

3 a clear intention of the parties to bind both Canara Bank,

and its subsidiary – CANFINA to the proceedings. In this

case, there can be no final resolution of the disputes, unless

all three parties are joined in the arbitration.

11. In view of the aforesaid discussion, the present appeals are

partly allowed. We invoke the Group of Companies doctrine, to

join Respondent No. 2 – CANFINA i.e. the wholly owned

subsidiary of Respondent No. 1 – Canara Bank, in the

arbitration proceedings pending before the Sole Arbitrator.

The matter is remitted to the Sole Arbitrator to

continue with the arbitral proceedings, and conclude the same

as expeditiously as possible. We have, however, expressed no

opinion on the merits of the dispute.

Pending applications, if any, are disposed of

accordingly.

…..……...........................J. (ABHAY MANOHAR SAPRE)

..….……..........................J.

3 (INDU MALHOTRA) New Delhi August 8, 2019.

3 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL Nos.6202-6205 OF 2019 (Arising out of S.L.P.(C) Nos.13573-13676 of 2014)

Mahanagar Telephone Nigam Ltd. ….Appellant(s)

VERSUS

Canara Bank & Ors. ….Respondent(s)

JUDGMENT

Abhay Manohar Sapre, J.

1. I have had the advantage of going through an

elaborate, well considered and scholarly drafted

judgment proposed by my esteemed Sister Justice

Indu Malhotra.

2. I entirely agree with the reasoning and the

conclusion, which my erudite Sister has drawn,

1 which are based on remarkably articulate process of

reasoning. However, having regard to the nature of

the controversy involved in these appeals, I wish to

add a few words of mine.

3. As rightly observed by my learned Sister in

para 8, following two questions arise for

consideration in these appeals:

4. One, whether the arbitration agreement in

question is a bi-party agreement between the

MTNL(appellant herein) and Canara Bank

(respondent No. 1) or it is a tri-partite agreement

between the MTNL, Canara Bank and CANFINA

(respondent No. 2) and, if so, whether the

agreement satisfies the conditions laid down in Section 7(4)(b) and (c) of the Arbitration and

Conciliation Act, 1996 (hereinafter referred to as

“the Act”) so as to enable the arbitral tribunal to

decide the dispute which has arisen between these

parties in relation to the agreement.

2

5. Second, if the answer to the first question is

that the agreement in question is a tri-partite

agreement, whether CANFINA is also a necessary

party to the arbitral proceedings for deciding the

rights of the parties inter se in relation to the

dispute.

6. In my considered opinion also, the agreement

in question is essentially a tri-partite agreement

between the parties, namely, MTNL, Canara Bank

and CANFINA. Indeed, this is clear from the

documents exchanged between the parties,

pleadings and orders of the Court.

7. It is also clear when one examines the nature

of the dispute. It is so inextricably linked between

the three parties that it can be effectively decided

only when all the three parties are made parties to

the arbitral proceedings.

8. Once we examine the issue on facts in the light

of requirements of Section 7(4)(b) and (c) of the Act,

3 we have no hesitation in coming to a conclusion

that the agreement in question is, in fact, a

tri-partite agreement between the three parties

mentioned above. In my view, it satisfies the

requirements of Section 7(4)(b) and (c) of the Act.

9. This issue is extensively dealt with by my

learned Sister in the light of law laid down by this

Court in several decisions and I agree with her

reasoning.

10. Somewhat similar question also arose in

international arbitrations as to when there are more

than two parties in a dispute then how such dispute

should be dealt with in the arbitral proceedings-

whether it should be dealt with in one arbitral

proceedings between one set of parties or it should

be dealt with in separate or parallel arbitration

proceedings.

11. This question was succinctly dealt with by the

learned Authors-Alan Redfern and Martin Hunter in

4 their book on “International Arbitration". (see -

Redfern and Hunter on International

Arbitration - sixth edition-under the heading ‘J’

“Multiparty Arbitrations” (a) to (e) 2.212 to

2.247 pages 141 to 153).

12. The learned authors examined the

aforementioned question in the context of ICC and

AAA Rules, decisions rendered by English Court of

appeal and the reports of ICC Commission on

multi-party arbitration. They opined that subject to

the terms of the agreement and any rules framed in

that behalf, it is desirable that such disputes should

be resolved as far as possible in one arbitral

proceedings to avoid any inconsistent findings and

parallel arbitral proceedings.

13. Since the main object of the arbitral

proceedings is to decide the disputes expeditiously

and within a time frame, this object can be achieved

only when the disputes are resolved as far as

5 possible in one arbitral proceedings. In this case,

this object can be achieved only when all the three

parties named above are made party in one arbitral

proceedings to enable the arbitral tribunal to finally

decide the dispute on merits in accordance with

law.

14. As rightly observed by my learned Sister, the

undisputed facts brought on record, in clear terms,

entitles this Court to invoke the well known doctrine

of “Group of Companies” and apply its principle to

the facts of this case so as to enable the arbitral

tribunal to determine the rights of three parties

named above. In my considered view, one cannot

dispute the legal proposition the doctrine “Group of

Companies” has its application to arbitral

proceedings and, in appropriate cases, it can be so

applied (See-Redfern and Hunter on International

Arbitration - Sixth Edition - 1.115 page 33, 2.42-

2.51 pages 85 to 88)

6

15. In view of what I have said above, I respectfully

agree with the reasoning and the conclusion of my

learned sister.

.………...................................J. [ABHAY MANOHAR SAPRE]

New Delhi;

August 08, 2019

7