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India – Bombay High Court Holds That Arbitration Agreements Can Bind Non-Signatory Affiliates.

23 December, 2014

 


The High Court of Bombay has recently held in the case of Rakesh S. Kathotia & Anr. v Milton Global Ltd. & Ors, that an arbitration agreement, on its proper construction, extended to non-signatories within the corporate and family groups of the signatories, in circumstances where the non-signatory affiliates were specifically referred to in the contract. This case further clarifies the principles identified by the Indian Supreme Court in Chloro Controls v Severn Trent previously reported here, although recognising that the facts in Chloro Controls were different and those principles did not fully apply to the present case.


In reaching its decision, the Court noted that the terms of an arbitration agreement have to be construed in a “broad and common sense manner”, bearing in mind that the Act has the “object and intent … to encourage arbitration”. The Court also gave a potentially helpful steer on the application of the “Group of Companies” doctrine in Indian law, following the decision in Chloro Controls.

 

Background


A joint venture agreement (“JVA“) was entered into between various parties, for the operation of a company named ‘Milton Global Limited‘ as a joint venture company (“Milton Global“). Apart from Milton Global, the other signatories to the JVA were five named individuals of the Vaghani family, a company named Milton Plastics Limited which was owned and controlled by the Vaghani family, and a Mr Kathotia. However, the JVA also included a definition of the “Vaghani Group” which went beyond the named Vaghani signatories and Milton Plastics, and included the Vaghani signatories’ “immediate relatives taken together and such other entities controlled by them or their immediate relatives directly or indirectly“. Similarly, the “Subhkam Group” was defined to mean Mr Kathotia and “other entities controlled by him or his immediate relatives or his group companies directly or indirectly.” The JVA then purported to set out the terms of a joint venture between not merely the signatories, but the “Vaghani Group” and the “Subhkam Group” as defined.


Disputes arose between the parties when the Subhkam Group alleged that, in breach of the terms of the JVA, the Vaghani Group had set up a competing business (“Hamilton”), allegedly siphoning business away from Milton Global. The Subhkam Group, through Mr Kathotia and a company controlled by him (“Subhkam Ventures”) sought interim relief measures from the Court under section 9 of the Act asking for, amongst other things, an injunction restraining Hamilton from manufacturing and marketing the disputed goods.


At first instance, Subhkam Group’s petition for interim relief was dismissed, including on the ground that several parties to the section 9 application (including Subhkam Ventures and Hamilton) were not even parties to the arbitration agreement in the JVA.


Judgment of the Bombay High Court


The Bombay High Court held that the terms of an arbitration agreement have to be construed in a “broad and common sense manner“. The Court further held that the legislative object and the intent of the Act is to encourage arbitration, and therefore, in case of any ambiguity, the Court will strive to ascertain and honour the intention of the parties to refer a dispute to arbitration.

The Court held that the terms of the JVA made it clear that the parties to the JVA (and to the arbitration agreement therein) were not only the named signatories to the JVA, but were (i) the Vaghani Group; and (ii) the Subhkam Group; as (broadly) defined in the JVA. On that basis, both Subhkam Ventures and Hamilton were parties to the arbitration agreement. That said, the Court noted that its decision was arrived at in light of the “peculiar facts and circumstances of the present case“.


The Court also noted the 2013 Supreme Court decision in Chloro Controls, citing it as authority for the acceptance of the “Group of Companies” doctrine in Indian law, to the effect that when companies enter into arbitration agreements, they may be held to be doing so for themselves as well as other members of their corporate groups in certain circumstances. (For our report on the Chloro Controls decision, click here.) The Court recognized that this doctrine was to be used only in “exceptional cases“, but held that in the present case, it was not necessary to rely on this doctrine, because on a proper construction of the JVA, the entire Vaghani Group and Subhkam Group were parties to the arbitration agreement.


Analysis


Whilst this case does not represent an application of the Group of Companies doctrine, it achieves a similar effect by relying on the unusual wording of the JVA to bring in as parties to the arbitration agreement various non-signatory individuals and companies, without extensive consideration of whether those entities had consented (or should be deemed to have consented) to be bound by it in any way. Whilst the sentiments expressed in the judgment are to be welcomed, such as the need for arbitration agreements to be read in a broad and common sense manner, the inclusion of parties in an arbitral process without a careful study of whether or not they had agreed to any such process is a matter of potential concern.


It may well be that the matter is taken to the Supreme Court of India. Watch this space.

 

herbert smith Freehills

 

For further information, please contact:

 

Nicholas Peacock, Partner, Herbert Smith Freehills

nicholas.peacock@hsf.com

 

Alistair Henderson, Partner, Herbert Smith Freehills

alastair.henderson@hsf.com

 

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