Non-signatory being a direct beneficiary and involved in the contract, can be compelled to arbitrate: High Court of New Delhi

Whether a non-signatory is a direct beneficiary of the contract containing the arbitration clause is material in determining whether the said beneficiary can be compelled to arbitrate even though it is not a signatory to the Agreement. However, this is coupled with the condition that such benefit should be direct and not indirect. This was held in SHAPOORJI PALLONJI AND CO. PVT. LTD v. RATTAN INDIA POWER LTD & ANR.[TARB .P. 716/2019] in the High Court of New Delhi by single bench consisting of JUSTICE VIBHU BAKHRU.

Facts are that the petitioner and respondent had entered into four contracts, wherein disputes arose and issue of controversy being whether prima facie an arbitration agreement exists between parties. The petitioner under the Companies Act, 1956, has filed petition under Section 11 of the Arbitration and Conciliation Act, 1996.

The counsel for the petitioner submitted that the parties conducted themselves in a manner so as to accept arbitration as a one-step method of resolving disputes. It did not make commercial sense for parties to agree to refer disputes regarding the main contract to arbitration and not include disputes regarding the supplemental and connected contracts.

The counsel for respondent contended that the notice invoking arbitration was a composite notice in respect of four separate contracts and thus, the same was invalid.

The court discussed cases where third party beneficiaries of a contract may be compelled to arbitrate and made reference to the Apex court judgment in Chloro Controls (India) Ltd. v. Severn Trent Water Purification, where in, the court had referred to the Group of Companies doctrine and applied the same for compelling certain parties to arbitrate in that case.

The court  also referred to the judgement of  Mahanagar Telephone Nigam ltd. v. Canara Bank, wherein the following observations were made, “The circumstances in which the “group of companies”doctrine could be invoked to bind the non-signatory 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. 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.”

Considering the facts of the case and the earlier precedents the court held that, the Respondent was directly involved in the contract. Thus should also be referred to arbitration for adjudication of the subject disputes relating to or arising from the supplemental and connected contracts wherein it was directly involved.

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