In this case, CANFINA, a subsidiary company wholly owned by Canara Bank was made bound to the arbitration between Canara Bank and Mahanagar Telephone Nigam Ltd. (MTNL) in their resolution of dispute. However, CANFINA raised the question that it was not a signatory to the arbitration agreement between the parties and hence shouldn’t be considered bound by it.
Justice Abhay Manohar Sapre and Justice Indu Malhotra observed in MTNL vs. Canara Bank, that the doctrine of Group of Companies can be invoked to make a non-signatory affiliate or subsidiary of the parent company bound to an arbitration proceeding, or add a third party to it when there exists a direct relationship with the party who is a signatory to the arbitration agreement, a direct commonality of the subject matter, and the transactions must be of a composite nature.
“The Group of Companies Doctrine has also been invoked in cases 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. This will apply in particular when the funds of one company are used to financially support or re-structure other members of the group”
The bench also observed that a “composite transaction” is such that the performance of one is dependent on the completion of the other supplementary or ancillary transaction and the non-performance of the ancillary and supplementary transaction will result into non-execution of the main transaction subject to the arbitration agreement. These transactions have a collective bearing on the dispute.
There arose another dispute questioning the existence of an arbitration agreement among the parties. The bench decided that since there was exchange of Statement of Claim and Defence between the MTNL and Canara Bank, section 7(4)(c) of the Arbitration and conciliation Act, 1996 shall apply. The statement of Claim and Defence filed before the Arbitrator would constitute evidence of the existence of an arbitration agreement, which was not denied by the other Party under Section 7(4)(c) of the Act, the bench explained.
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