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There has been a sudden growth of group companies in India over the last couple of years, consequently it common for commercial transactions to be routed through layers of several entities of a company group. These groups have entered into an agreement in many cases, which consists of an arbitration clause, and subsequently agree to the other objects of that same group. The question arises is whether the arbitration clause binds the non-signatories? The Supreme Court has answered this question in the case on Indowind Energy Limited v. Wescare (India) Ltd. & Ors on 27th April 2010.
The given judgment is considered important mainly because it provides the reader with an understanding of balance of intention of the parties with freedom of the arbitral tribunal to rule its jurisdiction.
Facts of the case
In the present case, the Respondents and Appellant are companies incorporated under The Companies Act, 1956. The parties to the dispute are Wescare Care (India) Ltd. (referred to as Wescare) and Subuthi Finance Ltd (referred to as Subuthi), which are the first and the second Respondent respectively and Indowind Energy Ltd (referred as Indowind) is the Appellant.
Wescare is a company that is involved in the business of setting up and operating and managing windfarms and generation of power from Wind Electric Generators. Subuthi Finance is a company that is the promoter of the appellant company. There was an agreement of sale entered between Respondent 1 and 2, which is Wescare and Subuthi on 24.02.2006. According to the given arrangement, the seller was Wescare including its subsidiary RCI Power Ltd. the buyer was Subuthi and its nominee. In this agreement, the seller had to transfer certain assets of the business to the buyer for a consideration of Rs. 98.19 crores, payable as Rs. 24.19 crores cash and Rs. Seventy-four crores by 74 lakh shares, the face value of each is Rs. 10 at a premium of Rs. 90 per share.
The agreement included clause ten , which related to arbitration and clause 11 that related to approval. The board of directors of both Wescare and Subuthi signed and approved the agreement on 28th February 2006 and 1st March 2006, respectively. However, there was no such sign of approval from the side of Indowind’s board of directors.
Consequently, there was a situation of contention amongst Wescare and Subuthi along with Indowind. Wescare had filed three petitions under Section 9 of The Arbitration and Conciliation Act, 1996 in the Madras High Court seeking interim measure. The interim measure asked by Wescare were as follows:
- OA No. 641/2007 to restrain Subuthi and Indowind from alienating, encumbering or otherwise disposing of the 31 WEGs and the land appurtenant thereto.
- OA No. 642/2007 to restrain Subuthi and Indowind from operating or running the WEGs pending completion of arbitration proceedings.
- OA No. 975/2007 to restrain Indowind from proceeding with the issue of initial public offer, proposed under the Red Herring Prospectus issued by it, pending final disposal of the arbitration proceedings.
The two main issues dealt in this case are as follows:
- Whether an arbitration clause between two parties can be binding on an arbitration agreement on a person that has not signed or ratified the agreement?
- Whether a company can be considered a party to a contract containing an arbitration agreement, even though it did not sign the arbitration agreement, on account of its subsequent conduct?
In relation to the petition filed under Section 11(6) of The Arbitration and Conciliation Act, 1996, Subuthi resisted the application and argued that as no transaction had taken place between Wescare and Subuthi under the given agreement, there was no reason for a dispute and claimed that the appointment of an arbitrator was not required as there was neither a cause of action nor any arbitrable dispute amongst them.
Consequently, Indowind argued that it was not a party to the agreement dated 24.02.2006 as it had neither signed nor ratified the agreement nor acted upon it. There was no arbitration agreement entered on behalf of Indowind and, as a result, no arbitrational dispute as well.
The decision of the Madras High Court
The Hon’ble Madras High Court had dismissed the petition on 21.08.2007 on the grounds that Indowind was not a party to the agreement as it has not signed the agreement. The second reasoning given by the High Court was that the WEGs were purchased after paying the entire consideration and therefore it was not entitled to restrain Indowind from alienation the WEGs.
However, another petition was filed by Wescare Under Section 11(6) of The Arbitration and Conciliation Act, 1996 seeking appointment of a sole arbitrator to arbitrate the disputes among the parties on the agreement. On 1st August 2008, the Madras High Court, the Chief Justice of Madras High Court had allowed the appointment of a sole arbitrator to resolve and arbitrate the disputes between the parties. He held that Indowind was a party to the agreement despite it not signing or ratifying the agreement. However, Indowind was not satisfied with the decision of the High Court and decided to appeal a special leave and approach the Supreme Court of India.
Judgement of Supreme Court
In this case, the Hon’ble Supreme Court of India held that such an agreement would not bind a third party that was not a signatory to an arbitration agreement. The court while giving this judgment took in reference Section 7 of the Arbitration and Conciliation Act, 1996, and held that the third party cannot be bound by the agreement, even if there exists some relation in between the third part and the questioned transaction.
The Hon’ble Supreme Court of India relied on Section 7 of The Arbitration and Conciliation Act, 1996, to give this judgment on 27th April 2010. The judgment given by Justice R V Raveendran and Justice K S Radhakrishnan while answering the first issue held that Section 7 of The Arbitration and Conciliation Act, 1996 required two conditions to be fulfilled. These conditions are:
- The agreement should be in between the parties to the dispute.
- The agreement should be relatable or apply to the dispute.
By applying these two conditions on the given case, it was held by the Hon’ble Supreme Court that Indowind had not entered the given agreement dated 24.02.2006 and had not expressed any intention to enter into the arbitration agreement. As provided under Section 7, there was no exchange of letters, telegrams, or any other means of telecommunication. Therefore, there was no arbitration agreement between Wescare and Indowind and hence no claim could have been the subject matter of reference to an arbitrator.
While addressing the second issue, the court held that Subuthi And Indowind were two separate companies that were formed separately under The Companies Act 1956. Even though they had the same board of directors or same shareholders, they were two separate artificial persons. Therefore, it was observed that mere existence of common shareholders or directors could not lead to an interference that one company was bound by the acts of other.
In addition to this an important point that was taken into consideration by the Hon’ble Supreme Court was that Clause 11of the agreement dated 24th February 2006 clearly stated that the agreement would be null and void and of no effect whatsoever unless it was expressly approved by the respective boards of directors or shareholders of Wescare, Subuthi and Indowind. Indowind’s board of directors had not approved the agreement by 30th June 2006.
Therefore, the court held that if an arbitration clause is present in an agreement between two parties, cannot be considered as a binding arbitration agreement on a person who is not a signatory to the original agreement.
Analysis of the Judgment
The judgment given by Justice Raveendran in this case is a well-reasoned judgment given in reference to Section 7 of The Arbitration and Conciliation Act, 1996. At the same time, it is ambiguous wherein a third-party benefit from a commercial transaction can avoid arbitration proceedings when it commits a default.
It is also in this judgment that it was held that an oral agreement to arbitration is invalid and is not binding on the parties. As compared to a contractual agreement, it can be observed that in a contract an explicitly written agreement is not necessary, and agreement can be entered orally. Hence an oral agreement will suffice. However, a contractual agreement is different from an arbitration agreement. An arbitration agreement can come into existence only as prescribed in Section 7 of The Arbitration and Conciliation Act, 1996.
The court further denies any decisions in the foreign judgments a party benefiting need not sign the arbitration agreement for it to be bound by the same. It also held that these decisions would not be considered and considered in the given scenario.
Therefore, in my opinion, the Hon’ble Supreme Court of India was right in passing this judgement as it cleared the stance of the third party in an arbitration agreement and made it clear in reference to Section 7 of The Arbitration and Conciliation Act, 1996.
One point of critique that drew attention was that even though this case cleared the stance of Section 7, at the same time it created a certain ambiguity relating to the third-party rights, which may differ and depend upon individual clauses in an agreement.
The case of Indowind Energy Limited v. Wescare (India) Ltd. & Orsinvolved interpretation of Section 7 of The Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court in this case differentiated between a ‘party’ to an arbitration agreement and a nominee of a party. The court addressed both the issues in depth and gave a reasonable and logical explanation for them. It rejected the contention that an arbitration clause may bound a non-signatory by virtue of its ‘conduct’, the reasoning of this was based on Section 7. It was also held that the Chief Justice or his designate under Section 11(6) had not appropriately considered the arbitration agreement to be bound by the third party in the Madras High Court judgment and hence it was overruled by this given judgment.
It can be rightly concluded that this judgment can be appreciated as it had cleared the stance of the third-party benefit in an arbitration agreement to an extent. However, it can be critiqued as there is still scope left for making the law clearer and uniformly applicable to all cases irrespective of variation in their arbitration clauses.
(2010) 5 Supreme Court Cases 306.
 The Companies Act 1956, No. 1, (India).
 The Arbitration and Conciliation Act, 1996, No. 26, 1996 (India) Section 9.
 The Arbitration and Conciliation Act, 1996, No. 26, 1996 (India) Section 11(6)
 The Arbitration and Conciliation Act, 1996, No. 26, 1996 (India).
 The Arbitration and Conciliation Act, 1996, No. 26, 1996 (India) Section 7
 Yogi Agrawal v. Inspiration Clothes & U and Ors. MANU/SC/8443/2008: 2009 (1) SCC 372.
 Ibid at 4.
 Ibid at 6.
 Ibid at 2.
 Ibid at 10.