Supreme Court of India: An Arbitration Agreement Entered Into By An Unauthorised Employee Of An Affiliate Will Not Bind Non-Signatory Affiliates Within A Group Of Corporate Entities

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In a recent case of Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited and Anr decided on 1 July, 2019, the Supreme Court of India while deciding an application to appoint an arbitrator under Sections 11(5), 11(9) and 11(12)(a) of the Arbitration and Conciliation Act, 1996 of India (‘Act‘), inter-alia held that pre-agreement negotiations by an unauthorised employee of an affiliate does not bind other affiliates of same group of companies. In deciding this case, the Court relied on the group of companies doctrine to determine whether the parties had mutually intended to bind the non-signatory affiliate to the arbitration agreement  under the group of companies doctrine. Detailed case analysis given below:

Factual Matrix and Parties Contentions

The Petitioner entered into an agreement with an Indian company, Reynders Label Printing India Pvt. Ltd. (R1) for providing packaging material to the Petitioner and its affiliates. During pre-negotiations stage, the Petitioner shared a draft of agreement along with its code of conduct and anti-­bribery policy with R 1. This email was reverted by one Mr Frederik Reynders who as per the Petitioner was the promotor of Reynders Etiketten NV (R2) which is one of the group companies of Reynders Label Printing Group and is established under the laws of Belgium.

In this email, Mr Frederik Reynders wrote “please find attached the contract with some comments of our HQ in Belgium”. As per the Petitioner, this made R2 a party to the agreement entered into between R1 and Petitioner and therefore, the Petitioner filed an application under Section Sections 11(5), 11(9) and 11(12)(a) of the Act before the Supreme Court for the appointment of an arbitrator and treating the said arbitration as “international commercial arbitration” on account of R2 being a foreign company.

The Petitioner relied heavily on doctrine of “group of companies” which was recognized by the Supreme Court of India in Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors (2013) 1 SCC 641 and cited with affirmation recently by Supreme Court in Cheran Properties Limited Vs. Kasturi and Sons Limited and Ors (2018) 16 SCC 413. (Read case analysis of Cheran Properties Limited Vs. Kasturi and Sons Limited and Ors at here)

The moot question before the Court was whether the indisputable circumstances go to show that the mutual intention of the parties was to bind both the signatory as well as the non-­signatory parties, namely, R1 and R2, respectively, qua the existence of an arbitration agreement between the Petitioner and the said Respondents.

Applicable Legal Principles

Chloro Controls India Private Limited vs. Severn Trent Water Purification Inc. and Ors. (supra)

In this case the Supreme Court had opined that ordinarily, an arbitration takes place between the persons who have been parties to both the arbitration agreement as well as the substantive contract underlying it. Invoking the doctrine of “group of companies”, it went on to observe that an arbitration agreement entered into by a company, being one within a group of corporate entities, can, in certain circumstances, bind its non-signatory affiliates.

Cheran Properties Limited Vs. Kasturi and Sons Limited and Ors. (supra)

In this case, the Supreme Court held that the circumstances in which the Agreements have been entered into may reflect an intention to bind both signatory and non-signatory entities within the same group. Therefore, factors such as relationship of a non-signatory to a party which is a signatory to the Agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory. In reaching the above conclusion, the Supreme Court placed reliance on Chloro Controls (supra).

Judgement

The Court relied on the averments made by both the parties and concluded as under:

  1. That since R2 has stated on affidavit that Mr Frederik Reynders was in no way associated with R2 and was only on employee of R1 who acted in that capacity during negotiations, R2 was neither the signatory to the arbitration agreement nor did it have any causal connection with the process of negotiations preceding .
  2. The burden of proof is on the Petitioner to establish that R2 had an intention to consent to the arbitration agreement and be party thereto maybe for the limited purpose of enforcing the indemnity clause 9 in the agreement. This burden was not been discharged by the Petitioner at all.

My Comments

As per the law settled in Cheran (supra), the mutual intention of the parties to bind both signatory as well as non-signatory is paramount in order to ascertain whether a non-signatory is bound by the arbitration agreement. In the present case, few facts might reflect such intentions of the parties which are given below

  • Clause 9 of the agreement specifically provides that the Respondent “Group” shall indemnify the Petitioner against any losses, damages and expenses. Said clause reads as under:

9. Indemnity 

9.1 The Supplier and the Supplier group shall indemnify RB against any claims, lossesdamages and expenses howsoever incurred or suffered by RB (and whether direct or consequential or economic loss) arising out of or in connection with

  • The above clause, in light of an email sent by Mr Frederik Reynders goes to show that it is possible that R2 had admitted its liability to indemnify the Petitioner on behalf of R1. The email reads as under:

Please find attached the contract with some comments of our HQ in Belgium. We will discuss & agree on a realistic and necessary lead time between the 3 of us. For 9.1. I will provide you with an document of our insurance to inform you about our maximum coverage

However, the above may not hold ground since the mutuality of intention to bind R2 is absent.

In the instant case, the backbone of the findings of the Supreme Court was the affidavit filed by R2 which states that Mr Frederik Reynders was in no way associated with R2 and was only an employee of R1, who acted in that capacity during the negotiations preceding the execution of agreement.

Interestingly, the judgement reproduces excerpts from the rejoinder affidavit filed by the Petitioner wherein it mentions of a meeting held in Amsterdam in which R2 had participated. Although as per the judgement, the Petitioner had not proved its case, it is surprising that the analytical portion of the judgement does not discuss about rejoinders affidavit of the Petitioner.

Moreover, it is also debatable that whether the Court should have considered the affidavits of the parties while deciding an application under Section 11(6) read with 11(6A) of the Act which clearly provides that enquiry by the Court under these sections is confined only and only to the examination of existence of an arbitration agreement.

In addition, another possible way to determine whether a non-signatory can be treated as a party to an arbitration agreement, is to first ascertain whether the award which will be culminating out of such arbitration would be binding upon such non-signatory. If the answer is in affirmative, then it infers that such arbitration agreement binds the non-signatory who will be then be seen as ‘persons claiming under’ the party. This is the reverse application of the principle settled in Cheran (supra) by the Supreme Court wherein it was held that a person who claims under a party is bound by the award. In the present case, R2 may not be bound by the award passed in an arbitration between the Petitioner and R1 unless R2 is providing any services to Petitioner or is entitled to any rights accruing out of the Service agreement entered into by the Petitioner and R1.

 

 

 

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