Mahanagar Telephone Nigam Ltd. vs Canara Bank & Ors.

Factual Background

Background of Dispute

In February 1992, Mahanagar Telephone Nigam Ltd. (“Appellant”) placed Bonds worth Rs. 200 crores with Can Bank Financial Services Ltd. (“Respondent No. 2”) as fixed deposit. However, Respondent No. 2 partially repaid the fixed deposit amount to the tune of Rs. 50 cores. Consequently, the Appellant did not service the interest on Bonds citing the reason that the full payment along with interest had not been received. As Respondent No. 2 faced a severe liquidity crunch, Canara Bank (“Respondent No. 1”), the holding company of Respondent No. 2, purchased the Bonds issued by the Appellant and requested the registration. However, the Appellant refused and instead registered a part of the face value in favour of Respondent No. 2 in February 1993. Later in October 1993, the Appellant cancelled all the bonds. Thereafter, in the year 1995, Respondent No.1 filed a writ petition before the Delhi High Court making Respondent No. 2, a proforma party.

Route to Arbitration

The Court directed the Union of India to decide the issues in the light of O.N.G.C. v Commissioner of Central Excise[1] and dismissed the writ petition on the grounds of the availability of an alternative remedy before the company law board. However, an application for restoring the writ petition was accepted as due to an amendment of the Depositories Act, the remedy was no longer available.

The Cabinet Secretariat convened a meeting attended by all three parties and directed them to settle the dispute through arbitration. Subsequently, the Delhi High Court referred the matter to the Committee on Disputes and adjourned the writ petition sine die. The committee of disputes also expressed that the parties should take recourse to arbitration. Respondent No. 1 sent a draft arbitration agreement between the three parties to the Appellant. Meanwhile, the pending writ petiton was disposed of. As the decision in the ONGC vs Commissioner of Central Excise came to be overruled, the writ petition was again restored. However, during the proceedings, the parties agreed before the Court to refer the issues to arbitration.

Filing of the SLP

The parties subsequently suggested the name of a sole arbitrator to be appointed for the proceedings. On an objection raised by Respondent No. 1, the Arbitrator passed an interim award that Respondent No. 2 cannot be joined as a party to the arbitral proceedings. The Appellant filed two applications to seek clarification from the Delhi High Court, on whether Respondent No. 2 is to be impleaded as a necessary party to the arbitration agreement, which stood dismissed by the Court on the ground of “not pressed’. Meanwhile, Respondent No. 1 had filed their Statement of Claim and the reply along with the Counterclaim came to be filed by the Appellant. Aggrieved by the orders of the High court, the Appellant filed the present Special Leave Petition. The notice of which was sent to both the Respondents.

Issues

Whether there existed a valid arbitration agreement between the three parties.

Whether Respondent No. 2 should be impleaded in the arbitration proceedings, given that it was not a party to the order of the High Court wherein consent for arbitration was given by Appellant and Respondent No. 1.

Appellant’s Position

The Appellant forwarded two major contentions. Firstly, there existed no written arbitration agreement as stipulated by Section 2(1)(b) read with Section 2(1)(h) and Section 7(3) of the Arbitration and Conciliation Act, 1996 (“The Act”), hence, the arbitration cannot proceed. Secondly, the only existing arbitration agreement between the parties is a draft tripartite agreement wherein Respondent No. 2 was made a party, to which the Appellant consented based on the understanding that the arbitration would be between the three parties.

Further, there is no privity of contract between the Appellant and Respondent No. 1, as the disputed Bonds were bought by Respondent No. 2, hence, if they are not being made a party to the proceedings, it may be rendered infructuous.

Respondent’s Position

Respondent No. 1 contended that the present appeal was not maintainable because the Appellant submitted itself to the jurisdiction of the Sole Arbitrator as it had already filed its reply to the Statement of Claim and Counter-Claim. Therefore, the only remedy available was to file an application under Section 16 of the Act.

On the issue of Respondent No. 2 being made a party, they contended that Respondent No. 2 was merely joined as a proforma party in the writ petition, and at the time of giving consent to arbitration and appointment of the Sole Arbitrator, it was not present before the Delhi High Court. Further, it cannot be allowed to raise an issue of impleadment without having any claim against the party sought to be impleaded, hence, Respondent No. 2 should not be made party to the arbitral proceedings.

Decision And Reasoning

On Issue 1

The first objection raised by the Appellant regarding the non-existence of a valid arbitration agreement between the three parties was found to be lacking any merit and was thus rejected by the Court. The Court observed that the parties’ intention to resolve the dispute through arbitration needs to be ascertained, which can be expressed or inferred from the terms of the contract, the conduct of the parties, or correspondence exchanged. The court noted that the parties must be ad-idem and reach an agreement upon all material terms for a binding contract. Moreover, the court highlighted that while ascertaining the intention, the court has to adopt a common-sensical approach rather than a purely legalistic mindset.

The court noted that in the present case, the Appellant did not raise any objections regarding taking the recourse to arbitration. They accepted Respondent No.1’s suggestion to expedite the arbitration under the Act. They participated in the proceedings conducted by the Sole Arbitrator and filed their defence and counter-claim without objecting to the fact that there was no such agreement in writing. Moreover, the Appellant consented to refer the disputes to arbitration before the Delhi High Court, thus, the Court estopped them from contending that there was no written arbitration agreement.

Further, the Court invoked Section 7(4)(c) of the Act to hold that, in the present case, the Statement of Claim and Counter-claim filed by the Appellant before the Sole Arbitrator would act as evidence of the existence of an arbitration agreement, and concluded that there existed a valid arbitration agreement between the parties.

One Issue 2

Regarding the second objection raised by Respondent No. 1, the Court held that Respondent No. 2 is a necessary and proper party to the arbitration proceedings. To decide this issue, the Court invoked the Group of Companies Doctrine. It was observed that this doctrine is applicable when the conduct of the parties clearly demonstrates an intention to bind the signatory as well as non-signatory parties. It also binds the non-signatory party if there is a direct relationship with the signatory party or a direct commonality of the subject matter or the composite nature of the transaction between the parties i.e. interlinked in nature.

In this case, Respondent No. 2 participated in the proceedings before the Delhi High Court and Committee of Disputes and was also represented by its Counsel before the Sole Arbitrator. Moreover, Respondent No. 1 themselves had served a draft arbitration agreement to the Appellant stating that the proceedings would be between three parties. The court also noted that the original transaction of bonds took place between the Appellant and Respondent No. 2, which were subsequently transferred to Respondent No. 1, and there existed a clear and direct nexus in the transactions.

Further, the Court noted that there existed a tacit or implied consent by Respondent No. 2 to being impleaded in the arbitral proceedings evident from its participation in the proceedings before the Committee, Arbitrator and the Courts.

Therefore, the Court held that there was a clear intention of the parties to bind Respondent No. 2 and there can be no final resolution without all three parties joining the proceedings. In conclusion, the Court found no merit in the objection raised by Respondent No. 1 as there was no justifiable ground to oppose the impleadment.

The Court partly allowed the appeals.

[1] O.N.G.C. v Commissioner of Central Excise (1995) Supp. 4 SCC 541.

Author(s)

Gunjeeta Jangra

Student at NLIU, Bhopal

Anurag Mishra