INTRODUCTION
Today,
we will discuss the case of Oil and Natural Gas Corporation Ltd. (ONGC)
v. Discovery Enterprises Pvt. Limited (DEPL) & Another, 2022 SCC
OnLine SC 522. This case involved three important aspects relating to the Law of
Arbitration in India: -
1.
Can a Non-Signatory be bound by an Arbitration Agreement?
I
will divide these with these aspects in three posts, the links for which could
be accessed here (Post – I, Post – II and Post – III). But before adverting any
further, let us first understand the facts of the present case.
FACTS
IN BRIEF
In
the year 2006, ONGC awarded a contract to DEPL for operating a Floating
Production Storage Offloading Vessel, by the name of Crystal Sea. Such Contract
contained an Arbitration Clause. Pursuant to the Contract, Crystal Sea, the
vessel, was imported by ONGC by paying the customs duty for it, on the
understanding that Crystal Sea would be re-exported after the work is done
under Duty Drawback to be completed by the DEPL.
Duty Drawback is essentially a Scheme that provides
refund of custom duty paid to the exporters on unused imported goods or goods
that may be used for export.
However,
in the year 2008, the ONGC invoked the Arbitration Clause by contending
that DEPL failed to complete Duty Drawback Formalities as a result of
which ONGC claimed that that it had suffered massive losses.
The
ONGC also invoked the Arbitration Clause against a non-signatory, namely,
Jindal Drilling and Industries Limited (JDIL), on the ground that
the DEPL and JDIL belonged to the same group of companies
constituting a single economic entity and therefore, the corporate veil should
be lifted to compel the non-signatory JDIL to arbitrate. In the same
breath, to prove this assertion, ONGC also moved an Application before
the Arbitral Tribunal seeking Discovery and Inspection of the Documents that
would reveal that DEPL is an Alter Ego of JDIL.
The
JDIL contested this by moving an Application under Section 16 of the
Arbitration Act seeking deletion of its name from Arbitral Proceedings on the
ground that it is not a party to the Arbitration Agreement. The Arbitral
Tribunal decide to hear JDIL’s Application first since according to itself, without
deciding the jurisdiction of the Arbitral Tribunal, it cannot direct for any
discovery or inspection.
Thereafter
an Interim Award was passed by the Arbitral Tribunal holding that it lacked
jurisdiction to investigate JDIL since it was not a signatory to the Arbitration
Clause and the Arbitral Tribunal also held that unless it is held that it has
jurisdiction to investigate JDIL, it cannot adjudicate on the Application
moved by ONGC seeking Discovery and Inspection of the Documents that
would reveal that DEPL is an Alter Ego of JDIL.
This
Interim Award became a subject-matter of challenge in an appeal before the High
Court under Section 37 (Appealable Orders) of the Arbitration Act. However,
in another set of proceedings, ONGC also challenged in respect of some
other contracts it had with JDIL under Section 34 (Application for
Setting Aside Arbitral Award) of the Arbitration Act. Since such Appeals
and Petitions were dismissed by the High Court, the matter traversed to the
Supreme Court.
Keeping
this factual matrix in mind, let us first answer whether a non-Signatory can be
bound by an Arbitration Agreement?
CAN
A NON-SIGNATORY BE BOUND BY AN ARBITRATION AGREEMENT?
Basic
Doctrines and Principles
To
answer this question, the Court relied on the following doctrines and
principles: -
a.
Group of Companies Doctrine and Lifting of Corporate Veil –
“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.”
This
Doctrine could be invoked based on the following factors: -
“(i) The mutual intent of the parties;
(ii) The relationship of a non-signatory to a party which is a signatory
to the agreement;
(iii) The commonality of the subject matter;
(iv) The composite nature of the transaction; and
(v) The performance of the contract.”
It
can also be invoked “where there is a tight group
structure with strong organisational 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.”
b.
Alter Ego Principle in Arbitration–
According
to this rule or principle, “shareholders will be treated as owners of a
corporation’s property, or as the real parties in interest, whenever it is
necessary to do so to prevent fraud or to do justice.” Basically, ‘alter
ego’ is “a corporation used by an individual in conducting personal business,
the result being that a court may impose liability on the individual by
piercing the corporate veil when fraud has been perpetuated on someone dealing
with the corporation.” (Black’s Law Dictionary, Eighth Edition)
The
Court explained the application of the Alter Ego Principle in Arbitration by
noting that “a party who has not assented to a
contract containing an arbitration clause may nonetheless be bound by the
clause if that party is an ‘alter ego’ of an entity that did execute, or was
otherwise a party to, the agreement.”
View
of the Court
According
to the Court, though the general principles of contract stipulate that every
company or individual is a distinct legal entity, yet “a Signed Written Agreement to submit a
present or future dispute to arbitration does not exclude the possibility of an
arbitration agreement” and a non-signatory may very well be bound by an
Arbitration Agreement by invoking and applying the Group of Companies Doctrine
and the Alter Ego Principle.
In the present case, the Court held that though
the Group of Companies Doctrine and the Alter Ego Principle may
be applied in the present case; however, such chance was denied to ONGC
as its Application for Discovery and Inspection of Documents to prove the
necessity for impleading JDIL was not considered by the Arbitral Tribunal
and such fundamental failure on part of the Arbitral Tribunal led to a situation
where the Arbitral Tribunal was not able to properly decide whether it had the
jurisdiction to investigate JDIL or not.
Held by the Court
Hence, Supreme Court set aside the earlier Interim
Award and the Orders of the High Court and directed the Arbitral Tribunal to conduct
a fresh hearing on the issue of its jurisdiction to investigate JDIL. ONGC
was also given liberty to move appropriate applications seeking Discovery and Inspection
of Documents from JDIL and DEPL.
CONCLUDING REMARKS
Therefore, we see that a non-Signatory may indeed
be bound by an Arbitration Agreement. My own view after reading this case that the
law of corporations, the law of contract and the law of arbitration, seems to have
a Spaghetti Bowl Effect on the alternate dispute resolution mechanisms like
that of arbitration. The Spaghetti Bowl Effect is a phenomenon observed in the Trade
Law where the increasing number of Free Trade Agreements (FTAs) between various
countries seem to have decelerated and slowed down the trade relations and the
volume of trade between them. Drawing a similar analogy, the law of arbitration
has become so intricate that every now and then new interpretations keep coming
up that somehow intend to preserve the sanctity of the process of Arbitration.
With more laws and more interpretations like this, the parties seem to be
witnessing an endless litany of litigations, claims and counterclaims. I sincerely
feel that the entire of law of arbitration needs a revisit. It has not at all
remained accessible to the common populace and it has become a rich man’s
domain for all practical purposes.
As a lawyer, many times people approach me asking
if their disputes could be resolved by way of arbitration. When I tell them
about the general fee structure of the Arbitrators and the Counsels, they lose
all the motivation and simply ask for a mechanism where the Courts could
adjudicate their disputes. Had there been a solid foundation of institutional
arbitrations at local level in India, the burden of the Courts could be decreased.
If we look at the present case, we see that even after
a decade of litigation, the parties are back to square one. Due to the
complexity of laws, now again the Arbitral Tribunal will hear on the question
of jurisdiction. Big corporates can afford these expenses but are they worth
it?
With respect to issues relating to Section 34 and
Section 37, the posts can be accessed by clicking here (Post – II and Post – III).
POST – I - CAN A NON-SIGNATORY BE BOUND BY ANARBITRATION AGREEMENT?
POST – II – PUBLIC POLICY AND SECTION 34 OFARBITRATION ACT
POST – III – SECTION 37 OF THE ARBITRATION ACT ANDTHE ISSUE OF JURISDICTION
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