In a well reasoned judgment dated 24 April 2018, a full bench of the Supreme Court (SC) in Cheran Properties Limited v Kasturi and Sons Limited (Cheran Properties Ltd.) has observed that arbitral awards are binding on and enforceable even against persons who are neither party to the arbitration agreement nor the arbitration, when such non-party is a person claiming under a party to the arbitration.
One KCP entered into an agreement with the Respondent and its wholly owned subsidiary SPIL along with Hindcorp Resorts Pvt. Ltd. (the Agreement). The Respondent agreed to sell certain SPIL shares to KCP or his nominees for a lump sum amount (the SPIL Shares) and recognised the right of KCP/his nominees to transfer the SPIL shares, provided the proposed transferee accepted the terms and conditions of the Agreement. Thereafter, KCP in his capacity as the Appellant’s authorized signatory called upon the Respondent to allot the SPIL Shares to KCP, the Appellant, and other group companies.
The Respondent initiated arbitration against KCP after he failed to uphold his end of the bargain. Eventually, the arbitral tribunal held in the Respondent’s favour anddirected KCP to return to the Respondent all title documents in relation to the SIPL shares; including those purchased by the Appellant (the Award). The Award was challenged by KCP under Section 34 of the Arbitration and Conciliation Act 1996 (the Act), but emerged unscathed and attained finality.
Even though KCP was directed by the Tribunal to handover the SPIL Shares, the Respondent still needed to seek a rectification of SPIL’s register under Section 111 of the Companies Act, 2013 (the Companies Act) in order to perfect its title in the SIPL Shares. Accordingly, the Respondent obtained the aforesaid rectification from the NCLT, Chennai; even in respect of the SPIL shares held by the Appellant. This decision was confirmed by the NCLAT on appeal. Pertinently, the NCLAT observed that the Appellant had purchased the shares as KCP’s nominee in the manner contemplated under the Agreement.
The Supreme Court’s Analysis
The SC was faced with two main issues on appeal: (i) whether the Award is enforceable against the Appellant, who was neither signatory to the arbitration agreement nor party to the arbitral proceedings; and (ii) whether the Award can be enforceable by way of proceedings under the Companies Act before the NCLT in light of section 42 of the Act.
Dealing with the first issue, the SC noted that the law has evolved in its recognition and treatment of multi-layered business transactions, which may involve several group companies. These transactions may be intended by the parties to bind non-signatories as well. When it comes to binding such non-signatories to the arbitration clause in the transaction agreement(s), the SC emphasised that “theCourt will approach the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them’. It was further noted that commonality of the subject matter and the composite nature of the transaction will be crucial factors in the aforesaid analysis.
Justice D. Y. Chandrachud’s observations in this regard are noteworthy:
“… 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.”
It was observed that Section 35 of the Act widens the net of those whom the arbitral award binds. This is because the aforesaid provision categorically provides that an award is binding on the parties and ‘persons claiming under them’; which expression was construed to include all such persons whose capacity or position is derived from and is the same as a party to the award. While discussing the contours of the group doctrine, the Court adverted to its formative principles in Chloro Controls v. Severn Trent (2012) and remarked that the law in such cases seeks to enforce the common intentions of the parties when circumstances indicate that non-signatories were intended to be bound as well.
Eventually, on a careful consideration of the nature of the transaction in the present dispute, the SC was left without a doubt that the Appellant had acted as KCP’s nominee while purchasing the SPIL shares. Pertinently, the Madras High Court had reached a similar finding in the Respondent’s request for interim relief against the Appellant under Section 9 of the Act. The Award was therefore held to be binding and enforceable against the Appellant.
In the second issue, the Appellant sought to establish that only courts specified under Section 42 of the Act will have jurisdiction over arbitral proceedings; and therefore over the enforcement of the Award. Since the NCLT was not included within the scope of Section 42, the Appellant argued the Respondent cannot obtain any measures akin to enforcement from the NCLT.
The SC found that the complete and formal transmission of the Appellant’s shares in SPIL to the Respondent could only be effectuated by rectification of SPIL’s register. This relief, in turn, could be obtained only from the NCLT by way of an application under Section 111 of the Companies Act. The SC then adverted to its recent decision in Sundaram Finance v. Abdul Samad(2018) to analyse the applicability of Section 42. In Sundaram Finance, it was clarified that arbitral proceedings are deemed terminated by a final award within the meaning of Section 32 of the Act. It was held that Section 42 of the Act will be irrelevant in post-award proceedings and that an award can be executed anywhere in the country in the same manner as a decree of the court. Accordingly, the SC rejected all objections against the enforcement of the Award against the Appellant and upheld the NCLAT’s decision on rectification.
India’s treatment of arbitration enforcement has a direct impact on the ease of business offered by the country. In a few recent decisions, the Indian judiciary has employed a pro-arbitration approach specifically in the context of enforcing arbitral awards.
In Kandla Export v OCI & Anr. (2018), for instance, an award passed in London was sought to be enforced in India by an application to the Gujarat HC. When allowed, the award debtor sought to appeal this decision before the Commercial Appellate Division of the Gujarat HC under Section 13(1) of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015. However, the SC disallowed such an appeal and held in Kandla Export that the provisions of Section 13(1) cannot be construed in a manner as to defeat the construct and objectives of the Arbitration Act, which would prevail as lex specialis. The SC also laid emphasis on the fact that “enforcement of foreign awards should take place as soon as possible if India is to remain as an equal partner, commercially speaking, in the international community”.
Similarly, in BCCI v. Kochi Cricket(2018) the SC finally decided that the 2015 amendments to the Act will apply even to challenges to awards under Section 34 which were pending as of 23 October 2015, i.e. when the 2015 amendments came into effect. Therefore, there would be no automatic stay on the enforcement of an award.
Cheran Properties Ltd. is an addition to this chain of encouraging decisions. The SC has adopted a pro-arbitration and liberal approach in its interpretation of the Act, as well as the overall transaction, in order to ascertain the parties’ intention to bind the Appellant by the Award. By adopting a purposive construction of Sections 35 and 42 of the Act, the SC ensured that the ends of justice are met. The SC’s decision in Cheran Properties Ltd. thus may well be a true epilogue to Chloro Controls.