SC: Arbitration clauses cannot be construed with a purely legalistic mindset

The Hon’ble Supreme Court, on 8thAugust 2019, in the matter of Mahanagar Telephone Nigam Ltd. v. Canara Bank & Ors. pronounced that an arbitration clause cannot be construed with a purely legalistic mindset, as in the case of a statute. In interpreting or construing an arbitration agreement or  arbitration clause, it would be the duty of the court to make the same workable within the permissible limits of the law.

The Hon’ble Supreme Court observed that:

A valid arbitration agreement constitutes the heart of an arbitration. An arbitration agreement is the written agreement between the parties, to submit their existing, or future disputes or differences, to arbitration. A valid arbitration agreement is the foundation stone on which the entire edifice of the arbitral process is structured. A binding agreement for disputes to be resolved through arbitration is a sine-­qua-­non for referring the parties to arbitration. (Para 9)

The arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The essential elements or attributes of an arbitration agreement is the agreement to refer their disputes or differences to arbitration, which is expressly or impliedly spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the parties. (Para 9.2)

Arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract. (Para 9.4)

A commercial document has to be interpreted in such a manner so as to give effect to the agreement, rather than to invalidate it. An ‘arbitration agreement’ is a commercial document inter partes, and must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities. (Para 9.5)

In interpreting or construing an arbitration agreement or  arbitration clause, it would be the duty of the court to make the same workable within the permissible limits of the law. (Para 9.7)

Being a commercial contract, the arbitration clause cannot be construed with a purely legalistic mindset, as in the case of a statute. (Para 9.7)

An arbitration agreement entered into by one of the companies in a group cannot be binding on the other members of the same group, as each company is a separate legal entity which has separate legal rights and liabilities. The parent, or the subsidiary company, entering into such arbitration agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group, to be bound by such agreement. (This inference has been drawn on the basis of Para 10.2)

A non­signatory can be bound by an arbitration agreement on the basis of the “Group of Companies” doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non­ signatory parties. (Para 10.3)

The doctrine of ‘Group of Companies’ had its origins in the 1970’s from French arbitration practice. The ‘Group of Companies’ doctrine indicates the implied consent to an agreement to arbitrate, in the context of modern multi­party business transactions. (Para 10.4)

The doctrine of ‘Group of Companies’ provides that a non­signatory 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 non­signatory will also be bound and benefitted by the relevant contracts. (Para 10.4)

The circumstances in which the ‘Group of Companies’ Doctrine could be invoked to bind the non­signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties. (Para 10.4)

A ‘composite transaction’ refers to a transaction which is inter­linked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute. (Para 10.4)

Copy of judgement: Judgement_08-Aug-2019

-Adv. Tushar Kaushik

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