10 January 2022, Monday

1 year ago

Group of companies doctrine applied to bind non-signatory, the preclusive effect of Section 16 and effect of pleadings in Section 11 considered: Kerala High Court

17 December 2021 | PK Kamala v. PK Manoharan and others & connected cases | Arb. A. No. 11/2016 | PB Suresh Kumar & CS Sudha JJ | Kerala High Court

Authoring for a 2-judge bench, CS Sudha J has made several important observations in the context of binding non-signatory to arbitration and the arbitral award.

A sole arbitrator appointed by the court passed an award for dissolution and rendition of account of three partnership firms: for convenience, Raja Mills, Kamala International (or Kamala Hotel), and Raja City. One Mr Nair had organized these firms. However, after his demise, the remaining partners, his wife Mrs Kamala and their daughters on the one side and the son Manoharan on the other, had several disputes. The arbitral tribunal made an award.

The set-aside court partially set aside the award in re Kamala International on the ground that the arbitrator exceeded the scope of reference. It reasoned that the claimant Mrs Kamala’s application for the appointment under Section 11 ACA made no mention of Kamala International. Thus, it was never the subject matter of the reference.

The court restored the award and ruled as follows.

On the effect of the pleadings in the prior Section 11 ACA application:

  1. Exhaustive pleadings are not required in an application under Section 11 ACA [citing Supreme Court’s IOC v. SPS Engineering (2011) 3 SCC 507. Moreover, there were clear pleadings relating to Kamala International.
  2. The statement of claim referred to it and prayed for its dissolution.

On the preclusive effect of Section 16 ACA, i.e., whether the respondent Manoharan, who did not raise the argument before the tribunal under Section 16 ACA, could raise it in the set-aside stage:

  1. The Supreme Court’s Lion Engineering (2018) 16 SCC 758 holds that there is no bar to raising the plea of jurisdiction for the first time in the set-aside proceedings.
  2. But here, the question is “slightly different” because the respondent did not object to adjudication on Kamala International at any point in time.

On whether Kamala International---a partnership firm--could be “brought within the scope of the arbitration proceedings” by applying the group of companies’ doctrine: -

  1. The Supreme Court’s MTNL has said that the group of companies’ doctrine can be invoked if the case demonstrates that it was the mutual intention of all the parties to bind the non-signatory affiliate, or sister, or parent concern. It could also be applied in a tight group structure with strong organizational and financial links to constitute a single economic unit or a single economic reality.
  2. If the doctrine can be applied to companies, “we do not see why it cannot be applied to partnerships, provided the … conditions (set out in MTNL) are satisfied.
  3. Here, Kamala International is the sister concern of the (main) firm Raja Mills. The partners are the same. Profits from one were being used for the other. It was a family business with a tight group structure with strong organizational and financial links.

Could the tribunal make another non-signatory individual (the respondent Manoharan’s son, Amarjith) a party to the arbitration? He was impleaded in the Raja City arbitration, his preliminary challenges had failed, and the courts had reserved his rights for the set-aside stage. Concluding, yes, the court said:

  1. The arbitrator found that a decision could not be arrived at without Amarjith. He had obtained a substantial interest in the assets of Raja City, which was constituted to construct a shopping complex. The complex was built and leased out to Amarjith. Therefore, the lion’s share of the firm’s assets was in possession and control of Amarjith. He meddled in the assets and finances of Raj City, knowing fully well about the partnership deed. His business was intermingled and inseparable from the business of the other three firms, and it was practically impossible to adjudicate on the dispute and pass an award effectively.
  2. The set aside “cannot sit in appeal” and go behind the merits of the award or appreciate the evidence or substitute its findings with those of the arbitrator.
  3. Further, Amarjith can claim rights only through the lessor--his father--who is the partner in Raj City. Therefore, even if Amarjith had not been a party, the award would bind him considering Section 35 ACA, which says that an award shall be final and binding on the parties as well as on the persons claiming under them.

Lastly, the court said that the set-aside court erred in interfering with the tribunal’s finding of Manoharan’s malfeasance concerning the third firm.

Read the decision here.


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