(Prayer: This Petition has been filed under Sections 11(5) and 11(6) of the Arbitration and Conciliation Act 1996 praying to appoint an Arbitrator to adjudicate the disputes between the petitioner and the respondents in terms of Clause 15 of the Facility Agreement dated 29.03.2019.)
1. A lender, Northern ARC Capital Limited, has filed this petition against the borrower, Feedback Infra Private Limited, and the guarantor, Mission Holdings Private Limited, for the appointment of a sole arbitrator.
2. The borrower, who is the first Respondent herein, approached the Petitioner seeking loan facilities. Thereafter, the Petitioner and the first Respondent entered into a Facility Agreement dated 29.03.2019(the FA) by which the Petitioner agreed to extend a loan of Rs.2,50,00,000/- to the first Respondent. Such loan was repayable with interest thereon at 13% per annum in 24 equated monthly installments. The FA admittedly contains an arbitration clause in Clause 15 thereof. In connection with the grant of loan facilities, several other documents and agreements were executed contemporaneously. These documents or agreements included a deed of hypothecation, demand promissory note, special power of attorney, deed of guarantee, facility letter, etc. Of particular relevance to this case is the Deed of Guarantee dated 29.03.2019 (the Guarantee Deed), which was executed by the second Respondent in favour of the Petitioner. The Guarantee Deed, which is both unconditional and irrevocable, does not contain an arbitration clause.
3. On 08.12.2020, the Petitioner issued a loan recall notice on the ground that the first Respondent had failed to discharge its obligations under the FA. Upon issuance of the loan recall notice, the entire amount due and payable under the FA became repayable immediately. On the same date, the Petitioner also issued a notice to the second Respondent under the Guarantee Deed calling upon the second Respondent to pay a sum of Rs.1,74,53,291/- by 14.12.2020. Since payments were not made either by the borrower or the guarantor, a dispute arose. The Petitioner issued a notice under Section 21 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act) on 11.05.2021 and proposed the name of a sole arbitrator. In spite of receipt of such notice, the Respondents did not accept the person proposed by the Petitioner. The present petition is filed in the above facts and circumstances.
4. The Petitioner contended that the FA is the mother agreement and that the other documents executed contemporaneously therewith are ancillary thereto. Therefore, it is contended that these documents are closely inter-connected and constitute an integrated whole. The second contention of the Petitioner is that the arbitration clause in the FA is wide and, therefore, any dispute arising out of the Guarantee Deed is also within the scope of the said arbitration clause. The third contention of the Petitioner is that the signatory to the FA on behalf of the first Respondent was also the signatory to the Guarantee Deed on behalf of the second Respondent. This underscores the inter-connected nature of the parties. The last contention of the Petitioner was that the second Respondent is the the largest shareholder of the first Respondent as evidenced by the list of shareholders of the first Respondent as on 31.03.2020. In specific, the Petitioner pointed out that the second Respondent holds 67,34,500 shares in the first Respondent aggregating to 41.16% of the total paid-up share capital. Thus, according to the Petitioner, the first and second Respondents are definitely companies constituting a group of companies. Keeping in mind the inter-connected nature of the FA and the Guarantee Deed and the fact that both the Respondents are part of a group of companies with the second Respondent being effectively in control of the first Respondent, the dispute between the Petitioner, on the one hand, and the two Respondents, on the other, may be referred to arbitration notwithstanding the fact that the second Respondent did not sign the FA.
5. The Petitioner referred to the following judgments either in support of the above contentions or to place and distinguish the same:
(i) Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and others, (2013) 1 SCC 641(Chloro Controls), wherein, at paragraph 71 to 73, the Hon’ble Supreme Court formulated the group of companies doctrine and held that when there are several inter-connected agreements executed by a group of companies, the ends of justice may require that the dispute arising under all the agreements be referred for arbitration although some parties may not be signatories to the agreement containing the arbitration clause.
(ii) Ameet Lalchand Shah and others v. Rishabh Enterprises and Another 2018 SCC Online 7865(Ameet Lalchand Shah), wherein the Delhi High Court extended the principles laid down in Chloro Controls to domestic arbitration.
(iii) Cheran Properties Limited v. Kasturi and Sons Limited and others (2018) 16 SCC 413 (Cheran Properties Limited), wherein, at paragraph 23, the Hon’ble Supreme Court referred to and relied upon the group of companies doctrine and concluded that a non-signatory may be bound by the arbitration clause if such intention is evident from the agreements between a group of companies.
(iv) Fiona Trust & Holding Corporation and Others v. Yuri Privalov and others (2007) 1 AII ER (Comm) 891.
(v) S.N.Prasad, Hitek Industries (Bihar) Limited v. Monnet Finance Limited and others (2011) 1 SCC 320(S.N.Prasad), wherein the Hon’ble Supreme Court held that the convenience and expediency of the Petitioner is not the primary consideration and that a non-signatory guarantor cannot be joined as a party to arbitral proceedings if such guarantor had not executed the loan agreement containing the arbitration clause.
(vi) STCI Finance Limited v. Sukhmani Technologies Pvt. Ltd. and others 2016 SCC Online Del 6650 (STCI Finance Limited), wherein the Hon’ble Delhi High Court followed S.N.Prasad and concluded that the relevant deed of guarantee is a separate contract. Moreover, the Court held that a non-signatory claiming through or under a signatory could seek reference of a dispute to arbitration, but a signatory could not take recourse to the group of companies doctrine to extend an arbitration agreement to a non- signatory.
6. The first Respondent cited force majeure (COVID 19) as the reason for non payment and denies the existence of a dispute. However, without prejudice, the first Respondent agreed that the arbitration clause in the FA is binding on it and that the dispute between the Petitioner and the first Respondent is clearly referable to arbitration.
7. The second Respondent, however, contested the applicability of the arbitration clause to disputes arising out of the Guarantee Deed. The first contention of the second Respondent was that the arbitration clause is not referred to in the Guarantee Deed. Therefore, the second Respondent contended that the arbitration clause is certainly not incorporated by reference into the Guarantee Deed. The second contention of the second Respondent was that the Guarantee Deed is distinct and separate, and that cause of action would arise under the Guarantee Deed only if notice is issued in terms of the Guarantee Deed. The third contention of the second Respondent was that the Guarantee Deed contains a distinct and separate dispute resolution clause, which does not even refer to the FA or the arbitration clause contained therein.
8. The second Respondent further submitted that the judgment in Chloro Controls is distinguishable because all the agreements therein were intended for one purpose and were in furtherance of the shareholders agreement. The said contention was made by drawing reference to paragraphs 63,73,74 and 105 of the judgment. For the same reason, the second Respondent contended that Ameet Lalchand Shah is also distinguishable by drawing reference to paragraph 12.5 thereof. The second Respondent relied extensively on the judgment in STCI Finance Limited and, in particular, paragraphs 29 to 31 thereof to contend that disputes under the Guarantee Deed cannot be referred for arbitration. The second Respondent, however, brought to the notice of this Court the judgment in Fernas Construction Co. Inc. v. ONGC Petro Additions Ltd., 2019 SCC Online Del 8580 (Fernas Construction), wherein, at paragraphs 21 to 23, the Delhi High Court held that the guarantor could be bound by the arbitration clause in the facility agreement. However, learned counsel for the second Respondent pointed out that the Court recorded an express finding that the guarantor was more than a guarantor and had provided full financial and technical support to the borrower for the performance of the contract. For that reason, the second Respondent contended that the judgment is distinguishable. The second Respondent also referred to and relied upon the judgment in STCI Finance Limited v. Shreyas Kirti Lal Doshi and Others, 2020 SCC Online Del 100, wherein, at paragraphs 20 and 26, the Delhi High Court held that the non-signatory was not bound by the arbitration clause in the facility agreement because there was nothing in the deed of guarantee which disclosed the intention to incorporate the arbitration clause in the facility agreement into the deed of guarantee.
9. By way of rejoinder, the Petitioner pointed out that it was not relying on incorporation by reference. The judgment in Chloro Controls does not deal with incorporation by reference; instead, it provides for the reference of a dispute for arbitration if the agreements are composite and inter-connected, the parties are part of a group of companies, even though some parties may not be signatories to the principal agreement. A specific reference was made to paragraphs 13.7 and 34 of Cheran Properties to emphasize the change in judicial approach to the question of referring a dispute even as regards non-signatories. The Petitioner also contended that the law laid down in S.N.Prasad is therefore no longer applicable. The last contention of the Petitioner was that the first Respondent had expressly agreed to waive any objection to jurisdiction. Therefore, the Petitioner is on a stronger wicket than the requesting party in the cited precedents and the request for reference cannot be refused by the second Respondent.
10. In view of the above contentions, the arbitration clause in the FA should be subjected to close scrutiny. The said clause is set out below:
“Jurisdiction and Governing Law:
15.1 This Agreement shall be governed and construed in accordance with the laws of India and subject to the provisions of Clause 15.2, the parties hereby submit to the exclusive jurisdiction of courts and tribunals at Chennai. The submission to the jurisdiction of the courts and tribunals of Chennai is for the benefit of the Lender only and shall not (and shall not be construed so as to limit the right of the Lender to take proceedings in any other court of competent jurisdiction, nor shall the taking of proceedings by the Lender in any one or more jurisdictions preclude the taking of proceedings by the Lender in any other jurisdiction (whether concurrently or not) if and to the extent permitted by law.
15.2 If any dispute arises between the parties hereto during the subsistence of this Agreement or thereafter, in connection with the validity, interpretation, implementation or alleged breach of any provision of this Agreement, the dispute shall be referred to a sole arbitrator who shall be a neutral and suitably qualified third party appointed by the Lender.
15.3 The place of arbitration shall be at Chennai. The arbitration proceedings shall be governed by the Indian Arbitration and Conciliation Act, 1996. The arbitration proceedings shall be conducted in English and the arbitral award shall be recorded in writing.”
11. The above arbitration clause applies to disputes arising between the parties. The expression “parties” is a defined term, which refers to the Lender and Borrower, as defined in the FA. The definition of borrower in the FA does not extend to the second Respondent. Thus, on a textual reading, the arbitration clause in the FA is restricted to disputes between the Petitioner and the first Respondent. However, Sub-clause (2) of Clause 15 indicates that the arbitration clause would apply to a dispute between the parties in connection with the validity, interpretation, implementation or alleged breach of any provision of the FA. The FA contains a definition of the expression “Facility Documents”. The said expression is defined to include the FA, the facility letter, the security documents and any other agreement, document or deed executed pursuant thereto or in connection therewith and designated as such by the lender from time to time. The expression “Security Document” is also defined and “means the Agreement of Hypothecation and any other instrument or document as may be executed by the Borrower to secure the Facility or as may be designated as such by the Lender from time to time.”Given the expansive language of the definitions of Facility Agreement and Security Documents, the Guarantee Deed would qualify as both a Facility Document and Security Document. Clause 9 of the FA, which deals with events of default, makes the failure to perform a covenant or undertaking under any of the Facility Documents an event of default. Thus, there is basis to conclude prima facie that the FA and the Guarantee Deed are inter-connected and may be construed as composite agreements. Even otherwise, the second Respondent does not deny that the Guarantee Deed was executed in order to guarantee fulfilment of obligations under the FA.
12. In order to ascertain whether the parties intended to extend the arbitration clause to the guarantor, the Guarantee Deed should also be examined. Clause 2.3 of the Guarantee Deed provides that the obligations of the guarantor are separate and distinct and are imposed as a primary obligor and not merely as a surety, on a full indemnity basis. After stating that the obligations are as a primary obligor, Clause 2.3 proceeds to record that the obligations of the guarantor as an indemnifier are triggered if the obligations of the borrower become void, voidable, unenforceable or ineffective for any reason. Thus, when read as a whole, the obligations of the guarantor are contingent on the default of the borrower or principal debtor. The Guarantee Deed contains a dispute resolution clause in Clause 19 thereof. Clause 19 is as under:
19.1 The Guarantor agrees that the courts and tribunals in Chennai shall have jurisdiction to settle any disputes which may arise out of or in connection with this Guarantee and that accordingly any suit, action or proceedings (together referred to as Proceedings) arising out of or in connection with this Guarantee may be brought in such courts or the tribunals and the Guarantor irrevocably submits to and accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of those courts or tribunals.
19.2 Nothing contained in this Clause shall limit any right of the Lender to take Proceedings in any other court or tribunals of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction whether concurrently or not and the Guarantor irrevocably submits to and accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of such court or tribunals and the Guarantor irrevocably waives any objection it may have now or in the future to the laying of or the venue of any Proceedings and any claim that any such Proceedings have been brought in an inconvenient forum.
19.3 To the extent that Guarantor may in any jurisdiction claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before judgment or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Guarantor hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity.”
Upon perusal of the above clause, it is indisputably wide in scope and covers all disputes arising out of or in connection with the guarantee. Besides, by Sub-clauses 2 and 3 of Clause 19, the guarantor has waived its right to raise objections to jurisdiction even if proceedings are instituted by the lender in any courts or tribunals other than the courts or tribunals specified in sub-clause 1 thereof.
13. Before examining whether the non-signatory guarantor is bound by the arbitration clause in the FA, a preliminary issue should be addressed. The said issue relates to the scope of Section 11 proceedings. In Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1(Vidya Drolia), the Hon’ble Supreme Court dealt with the scope of inquiry under Section 11 extensively. While exercising jurisdiction under Section 11, the Hon’ble Supreme Court concluded that a prima facie review of the existence, including validity, of the arbitration agreement is justified. Indeed, in paragraph 147.6, the Hon’ble Supreme Court concluded that an absolute “hands off” approach would be counter productive qua arbitration. The merits of this dispute should be viewed in light of the principles laid down in Vidya Drolia.
14. In Chloro Controls, the Hon’ble Supreme Court formulated tests to decide whether a non-signatory is bound by the arbitration agreement in the primary contract. The first criterion specified by the Hon’ble Supreme Court is that the relevant contracts should be closely inter connected and constitute a composite contract. In this case, the two contracts in question are the FA between the lender and borrower and the Guarantee Deed between the lender and guarantor. Although a deed of guarantee may constitute a separate contract for certain purposes, the liability of the guarantor is triggered only if the borrower or principal debtor defaults. Therefore, it is a secondary obligation which cannot be looked at in isolation from the primary obligation of the borrower or principal debtor. Thus, the first test formulated in Chloro Controls is certainly satisfied in this case. The second test formulated in Chloro Controls is that the non signatory should be a part of a group of companies to which the signatory belongs. A perusal of the FA and the Guarantee Deed evidence that the signatory to the two agreements on behalf of the first and second Respondents, respectively, is the same individual. Moreover, the Petitioner has placed the share holding pattern of the first Respondent as on 31.03.2020. The said share holding pattern discloses that the second Respondent is the single largest shareholder of the first Respondent holding 67,34,500 shares, which constitutes about 41.16% of the paid-up share capital of the first Respondent. Hence, there is little doubt that the two companies are part of a group of companies. The last aspect to be considered is whether the agreements disclose the intention to bind the non-signatory/ second Respondent to the arbitration clause in the FA. As set out earlier, the arbitration clause in the FA, on a textual reading, applies only to parties as defined therein. However, as dilated upon in paragraph 11 abov
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e, sub-clause 15.2 expands the scope of the arbitration clause and extends the same to disputes arising out of defaults under the Facility Documents, including the Guarantee Deed. Besides, the jurisdiction clause in the Guarantee Deed is wide and applies to any dispute arising out of or in connection with the guarantee. Significantly, the jurisdiction clause in the Guarantee Deed contains an express waiver by the guarantor of any objections to jurisdiction if the lender approaches any court or tribunal, thereby indicating its intention to submit itself to the jurisdiction of any court or tribunal, including arbitral tribunal, which is approached by the lender. When viewed collectively, there is sufficient basis to conclude that the mother agreement is the FA and the Guarantee Deed is ancillary thereto; the guarantor under the Guarantee Deed is more than a guarantor inasmuch as it is the single largest and controlling shareholder of the first Respondent. Besides, the guarantor agreed to accept the jurisdiction of any court or tribunal if the lender raises a dispute with the guarantor. Thus, the principle underlying the Fernas Construction decision applies to this case, and the Petitioner has fulfilled, in substance, the parameters set out in Chloro Controls to deviate from the general rule as regards non-signatories to an arbitration clause. As a corollary, there is sufficient basis to refer the dispute between the lender, on the one hand, and the borrower and guarantor, on the other, to arbitration. Given the composite nature of the agreements and the inter-connected nature of liabilities, it would also subserve the interest of justice. 15. Accordingly, Arbitration O.P.(Comm. Div)No.129 of 2021 is allowed by appointing Mr. Justice K.Ravichandrabaabu, a retired Judge of this Court, Flat ID, Crescent Castle Apartment, 13, Second Crescent Park Road, Gandhi Nagar, Adyar, Chennai -600 020(Mobile No. 94980 33336) as the Sole Arbitrator. TheSole Arbitrator is directed to enter upon reference and adjudicate the dispute between the parties in accordance with law. The Sole Arbitrator may fix his fees and expenses in relation to such arbitral proceedings.