Impleading Alter Egos in Arbitration – Questioning the Jurisdiction of Tribunal

By: Divyanshu Sharma (National Law University, Delhi)


INTRODUCTION

Arbitration is essentially an alternate dispute resolution mechanism, which is accessible based on a prior agreement between the parties to the dispute. This mechanism can only be resorted to if the existence of a valid arbitration agreement is established, as per Section 8, and cannot be extended to include non-signatories in the arbitration proceedings. However, an exception to this general rule is the impleadment of non-signatory alter egos or group companies, linked directly or indirectly to the subject matter of the dispute.

On 18th March 2021, the Delhi High Court, through the case of Amazon.com NV Investment Holdings LLC v Future Coupons Pvt Ltd & Ors, upheld the decision of the Emergency Arbitrator to implead Future Retail Limited, a non-signatory to the arbitration agreement, by using the Group Company doctrine. This judgment of the Hon’ble Court has brought in a new position of law, qua the power of an arbitral tribunal, under Section 17 of the Arbitration and Conciliation Act. Till now, while the law recognized the impleadment of alter egos and group companies to arbitration proceedings, there was uncertainty regarding the jurisdiction of an arbitral tribunal to do the same.

ALTER EGO ENTITIES CAN BE IMPLEADED

An alter ego is an entity that exercises real control over the management of a company, even if it is not a direct part of the Company. This entity represents the true mind of the company, and hence, is directly or indirectly liable for the acts or omissions of the Company. Based on the alter ego doctrine is the concept of Group Company. Group Company refers to the relationship of a parent, subsidiary or a sister company, wherein the actions and transactions of the numerous companies are interlinked.

In the case of Chloro Controls India Pvt Ltd v Severn Trent Water Purification Inc. & Ors, the Hon’ble Supreme Court also recognized the said fact and held that at times a non-signatory alter ego can also be impleaded to an arbitration proceeding, even without their consent. However, placing the threshold high enough, the Court explicitly held that the same shall only be done in an exceptional situation wherein the subject matter of the dispute is intricately linked to the non-signatory, and without the involvement of the non-signatory the transaction in consideration could not have been completed.

Adding to this, the Delhi High Court added an extra element of intention. In the Amazon case, the Court stated that the group company doctrine can be raised to implead alter egos, only if any intention can be established on part of the non-signatory companies to be bound by the arbitration clause. This intention can be drawn from the conduct of the company (like playing an indispensable role in the transaction under consideration, and thereby becoming indirectly associated with the terms of the agreement) or any statement made by it in good faith.

While the Courts have laid down the threshold for impleading a non-signatory alter ego, they haven’t clarified whether the same would come within the ambit of Section 17 of the Arbitration and Conciliation Act, 1996 or is an exceptional remedy which can only be sought under Section 9.

QUESTIONING THE JURISDICTION OF ARBITRAL TRIBUNAL

While the Delhi High Court, through the Amazon case, has upheld the fact that an arbitrator too can implead a non-signatory alter ego, the Madras High Court stands into a completely different position. In the case of V.G. Santhosam & Ors v Shanthi Gnanasekaran & Ors, the Madras High Court upheld the fact that even non-signatory alter egos can be impleaded in an arbitration proceeding, using the group company doctrine. But the Court explicitly cautioned that this impleadment was solely within the jurisdiction of a Court. The reasoning of the court was based on the fact that an arbitral tribunal emanates and draws its powers from the Arbitration Agreement. Hence, the scope of its jurisdiction, under Section 17, is merely restricted to the parties to the dispute. Thus, passing an order to implead a non-signatory entity would be a violation of its limited jurisdiction.

With the increasing scope of an Arbitral Tribunal’s jurisdiction, the intention of the legislature is quite clear that the arbitration mechanism must be strengthened further. The legislature has, in fact, made Section 17 tantamount to Section 9, giving arbitral tribunals virtually the same power as that of a court, qua the issuance of interim orders. However, one must not lose sight of the fact that an arbitral tribunal is essentially subordinate to a court. This is discernible from the fact that while a court has the authority to implead any person or organization in a commercial dispute under Order 1 Rule 10 of Civil Procedure Code 1908, the same has not been explicitly given to an arbitral tribunal.

Further, the powers given to an arbitral tribunal, under Section 17, are exercisable only against the parties to the dispute. Thus, an arbitral tribunal cannot pass an order against an entity not associated with the dispute in consideration. However, because of its powers under the Civil Procedure Code, 1908, a civil court has the jurisdiction to pass any order relating to the dispute in consideration, including against entities that are not at that time a part of the dispute.

ANALYSING THE CONTRASTING POSITIONS

While the reasoning of the Madras High Court is not erroneous, the same is not completely consonant with the true idea behind the group company doctrine. As has previously been mentioned, an alter ego can only be impleaded wherein the alter ego is in some way associated with the subject matter of the dispute and has acquiesced to be bound by the arbitration clause, either directly or indirectly. Hence, categorizing the same as a completely unknown party to the dispute would be erroneous.

Further, a third party is impleaded under Civil Procedure Code, 1908 only in a situation wherein the dispute cannot be justly settled without the involvement of the third party. This power to pass any interim order, for justice and convenience, has been given to an arbitral tribunal under Section 17(1)(e). Thus, impleading a non-signatory alter ego, in order to ensure complete justice, cannot be categorized as a violation of the limits of Section 17. Thus, till the time the Hon’ble Supreme Court does not clarify the real position of law on the jurisdiction of an arbitral tribunal to implead an alter ego or a group company, we cannot assume that an arbitral tribunal would be unjustified in doing the same. At the end of the day, an alter ego or a group company is linked to the subject matter, in some manner, because of which it is being impleaded in the arbitration. Further, even the legislative intent appears to be in favor of the tribunal’s jurisdiction. This is evident from the fact that the scope of Section 17 has been increased multifold over time, through the Amendments of 2015 and 2019. If an arbitral tribunal is passing an interim order related to the subject matter, the same cannot be held to be a violation of the contours of Section 17.


(The author is a second-year student at National Law University, Delhi. He takes keen interest in corporate law and its interplay with other relevant areas of law. He welcomes any feedback at divyanshu.sharma19@nludelhi.ac.in.)

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