Arbitration Proceedings and third party defaulters!

Arbitration Proceedings and third party defaulters!

arbitrate

 

What is arbitration?

Arbitration is a form of alternative dispute resolution in which aggrieved parties approaches an arbitrator under mutual understanding and not the courts to reach a settlement in their dispute.

Who is an Arbitrator?                  

An unbiased third party who will listen to each party in dispute impartially and on merit of arguments to the parties and then grant an award based on the merit of arguments to the parties. The said award given by an arbitrator is analogous to court judgments and orders. The parties are bound by it. However they can approach the High Court if not satisfied.

When can Arbitration be used as a mode of redressal?

According to the Indian Arbitration and Conciliation Act 1996, there are certain essentials for the application of the arbitration as dispute resolution. These essentials are enumerated as follows:

  1. Arbitration Agreement must exist.

There should be an arbitration agreement which either exist as a clause in a contract or as a separate agreement. If a contractual clause makes reference to another document containing an arbitration clause, then it will form an arbitration agreement if the intent of the parties is to make the arbitration clause a part of the contract.

  1. All Penned Down.

The arbitration agreement has to be in writing. Logic being  a tangible proof of the agreement. It cannot be oral. The agreement can be deemed to be in writing in several ways:

  1. Parties must sign it;

An exchange of communication which can provide a record to the agreement; or

An exchange of communication where one party made a reference to the agreement and the other refused to deny it. Simple reading shows that a document in writing on paper is not required, if an agreement is shown to exist through modes of communication between parties. Thus, intent of parties holds important meaning in arbitration dealings.

Can non-signatories be made to submit disputes to an arbitrator?

This is a question yet to be answered. There are many concepts and doctrines which have tried to regulate this glaring hole in company disputes, but all have failed to apply uniformly, worldwide. Company and contractual disputes usually see non-signatories being attached as parties to disputes because many more parties are involved in the completion of a contract and liability is not always restricted to the opposite party.

There are various legal theories which allow non signatories to be part of the arbitration agreement depending on the prevailing judicial notion. To name a few, ‘group of companies’ doctrine and the ‘piercing of the corporate veil’ doctrine, allows non signatories to be part of an arbitration agreement.

The ‘group of companies’ theory states that several companies forming a part of a larger corporate entity may be regarded as a single legal entity. However, consensus must be present between parties. If the third party non-signatory is a parent company, then it may come under arbitration proceedings if it was in a position to know and approve of the arbitration agreement between the parties. This doctrine will not apply only if a mere affiliation between the parties is present.

The ‘piercing of the corporate veil’ doctrine is a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations. The Supreme Court in the case of Indowind Energy Ltd. v. Wescare Ltd. noted that s. 7 of the Act requires the arbitration clause is contained in a document “signed by the parties”, or in an exchange of letters, telex etc. Alternatively, the clause must be “incorporated by reference”. The Court firmly rejected the possibility of lifting the corporate veil, in the following terms:

It is not in dispute that Subuthi and Indowind are two independent companies incorporated under the Companies Act, 1956. Each company is a separate and distinct legal entity and the mere fact that two companies have common shareholders or common Board of Directors, will not make the two companies a single entity. Nor will existence of common shareholders or Directors lead to an inference that one company will be bound by the acts of the other. If the Director who signed on behalf of Subuthi was also a Director of Indowind and if the intention of the parties was that Indowind should be bound by the agreement, nothing prevented Wescare insisting that Indowind should be made a party to the agreement and requesting the Director who signed for Subuthi also to sign on behalf of Indowind. The very fact that parties carefully avoided making Indowind a party and the fact that the Director of Subuthi though a Director of Indowind, was careful not to sign the agreement as on behalf of Indowind, shows that the parties did not intend that Indowind should be a party to the agreement.

The Court rejected the contention that a non-signatory may be bound by an arbitration clause by virtue of its “conduct”, holding that the requirement in s. 7 that the agreement be in “writing” is mandatory. In addition, the Court held that the Chief Justice or his designate under s. 11(6) is not the appropriate forum to inquire into the conduct of the parties, and must merely consider whether there is an arbitration agreement or not.

 

The Court did not entirely foreclose the possibility that a non-signatory in India may bind himself to an arbitration clause through conduct, but noted that this would have to be through “incorporation by reference” or under the provisions of s. 7(4)(b) of the Arbitration Act. It declined to follow American decisions binding non-signatories for the reason that the underlying statutory provision in question was substantially different to s. 7.

This principle has been used by Indian courts in judgments regarding taxation, company and contract laws. It follows that when non-signatories of a contract can be bound by the rights and liabilities under it, then non-signatories of the arbitration agreement can also be bound by the rights and liabilities under the arbitration clause. However, the arbitrators are deeply hesitant to use this doctrine because national policy calls for this rule to be an exception rather than a norm.

Further, it has been laid down by umpteen number of decisions including LIC vs Escorts that corporate veil would not be ordinarily lifted. Element of fraud has to be shown and that corporate personality is utilized for perpetrating such fraud. Only in such circumstances the Courts would be inclined to see the real persons behind the corporate personality. In this case there does not seem to be any allegation or proof to that effect. Mere failure to fulfill contractual obligations cannot result in the lifting of the corporate veil.

The Indian courts have adjudicated on the matter time and again. Though many judgments may show opposing views, a common thread runs through all. The courts, on reading of the Act, have held the rule that arbitration should be held only between parties to the arbitration agreement is not an absolute rule. Even a non-signatory may be attached as part of the arbitration proceedings depending on the facts and circumstances of each case with more weight given to the implied consent given by parties, relationship between all the parties, the content of relevant agreements, the intent of the parties and the conduct of the parties in this regard.

Conclusion:

India, being a country upholding the common law system, holds a lot of weight over the judiciary’s interpretation of the Arbitration and Conciliation Act. Till now, the judiciary has maintained its stand that non-signatories may be brought in the ambit of arbitration proceedings on a case-by-case basis. What is needed, not only in India but also worldwide, is a uniform method of figuring out where to draw the line on bringing non-signatories as parties to arbitration proceedings.

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