Delhi High Court: In a batch of two appeals filed under Section 37(2) of the Arbitration and Conciliation Act, 1996 (‘Act’) and a petition under Section 14 of the Act arising out of orders dated 23-05-2023 and 17-10-2023 passed by the Sole Arbitrator appointed by the Court vide order dated 22-07-2022, a Single Judge Bench of Pratibha M. Singh, J. held that there was no legal incapacity in the Sole Arbitrator to deal with the claims and counterclaims and his mandate did not deserve to be terminated.
Background:
ASF Buildtech (P) Ltd. (‘ABPL’), the petitioner in the arbitration petition, had executed a Works Contract dated 21-11-2016 with Shapoorji Pallonji and Co. (P) Ltd. (‘SPCPL’) for the development of a building in Gurgaon, Haryana. This Works Contract was between ASF Insignia SEZ (P) Ltd. (‘AISPL’), as the owner, and SPCPL as the vendor. Thereafter, a supplementary Works Contract was executed between AISPL and SPCPL, and to ensure better operations of the project, a Co-Development Agreement was also executed between AISPL and Black Canyon SEZ (P) Ltd. (‘BCSPL’) which designated BCSPL as a Co-Developer.
Finally, there was a tripartite Novation Agreement dated 17-04-2018 between AISPL, BCSPL, an associate company of AISPL, and SPCPL. As per this Agreement, AISPL was substituted with BCSPL, and all the rights, claims, liabilities, obligations, and duties were transferred mutatis mutandis to BCSPL.
To clarify the extent of its obligations, AISPL issued a Letter of Comfort which stated that in-case BCSPL failed to make any payment under the Works Contract, AISPL would ensure prompt payment by BCSPL. As per AISPL, the said Letter did not imply that AISPL itself would be liable for any payments. Following these agreements, AISPL claimed to have withdrawn from the Works Contract and did not interfere with BCSPL’s management of the project, as per the terms of the Co-Development Agreement.
Subsequently, due to delays in completing the work, BCSPL and SPCPL agreed to foreclose the said Works Contract, and this led to a Settlement Agreement between them. The Settlement Agreement dealt with the costs and claims of SPCPL (Contractor) which would be paid by BCSPL (Owner) and contained the manner in which the payments were to be made. As per AISPL, the said Settlement Agreement did not mention any obligations to be fulfilled by the ASF Group.
Thereafter, proceedings under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) were initiated wherein AISPL received a demand notice dated 13-01-2022 from SPCPL under Section 8 of IBC demanding payment of certain sums due from AISPL. As per AISPL, SPCPL mischaracterized it as a Corporate Guarantor based on the Letter of Comfort.
As per AISPL, the National Company Law Tribunal (‘NCLT’) dismissed SPCPL’s application against AISPL on 05-08-2022, stating that AISPL could not be treated as a Corporate Guarantor. As per AISPL, despite NCLT’s order, a letter from SPCPL was received by them, which was a reply to a notice allegedly invoking arbitration and seeking an arbitrator’s appointment. However, AISPL claimed that it had not received any prior letter or notice from SPCPL for 14 months until the Sole Arbitrator passed the impugned order dated 23-05-2023 impleading AISPL in the arbitral proceedings. AISPL challenged its impleadment by filing an application under Section 16 of the Act which was rejected by the Sole Arbitrator and AISPL was directed to file a Statement of Defence (‘SoD’).
As per ABPL, the appellant in the other arbitration agreement, received a notice from the Sole Arbitrator on 23-05-2023 informing it that SPCPL had filed a Statement of Claim (‘SoC’) against them and directed them to appear on 07-07-2023.
It was ABPL’s case that the disputes primarily involved SPCPL and BCSPL regarding their respective obligations and the SoC did not contain specific allegations against it. SPCPL’s case against ABPL was based only on ABPL’s association with ASF Group of Companies, which includes both AISPL and BCSPL.
ABPL filed an application under Section 16 of the Act and claimed to be a separate and distinct legal entity, not an alter ego of BCSPL, despite both being part of the ASF Group of Companies. It was emphasized that there was no contractual relationship between BCSPL and SPCPL and that it had not received any notice invoking arbitration from SPCPL. ABPL sought a declaration that the Sole Arbitrator did not have the jurisdiction to adjudicate SPCPL’s SoC against ABPL and requested its deletion from the arbitration proceedings.
The Sole Arbitrator rejected the application vide order dated 17-10-2023 and noted that ABPL appeared to be an entity ‘inextricably linked’ to the performance of the Works Contract and the Settlement Agreement.
BCSPL had filed a petition under Section 14 of the Act seeking termination of the mandate of the Sole Arbitrator on the ground that he had become de jure incapable of performing his functions in respect of the arbitral proceedings arising out of the Works Contract, Novation Agreement, and the Settlement Agreement. BCSPL raised concerns about the bifurcation of the case by the Sole Arbitrator into case 1 and case 2.
The Sole Arbitrator clarified that these labels were only for convenience and did not imply consolidation or segregation. Vide order dated 17-10-2023, the Sole Arbitrator dismissed Section 16 applications and noted that the labels were for reference purposes only and did not imply any procedural significance.
Analysis and Decision
The Court stated that the genesis of all three petitions was the order dated 22-07-2022 passed by this Court by which a Sole Arbitrator was appointed to adjudicate the disputes between the parties. The Court also stated that the parties in the said arbitration petition under Section 11(6) were BCSPL and SPCPL.
The Court stated that a perusal of all the agreements as well as the Letter of Comfort revealed that the original Works Contract was entered into between AISPL and SPCPL. It was also revealed that as per AISPL, for better management of the project, BCSPL, an associate company of AISPL was nominated and that AISPL and BCSPL were group companies of the ASF Group and were under the management of the same set of management owners.
The Court also noted that the Letter of Comfort recorded that AISPL undertook the responsibility to intervene and ensure prompt payment in case BCSPL was unable to pay. It was also revealed that the determination of the final bill in terms of the Settlement Agreement had to take into consideration the costs of material taken over by BCSPL from AISPL, and that the term ASF included AISPL, BCSPL, and even ABPL.
The Court noted that under the Co-Development Agreement, BCSPL was required to continuously keep AISPL fully informed of the developments in the project, and the main company was AISPL and not BCSPL or ABPL. Further, the Court noted that the SoC filed by BCSPL was related to its claims that SPCPL had failed to demobilize the project site. It delayed the reconciliation exercise and thus, was entitled to withhold payments and claim damages on account of idling costs and interest. A perusal of the claim and counterclaim showed that the Works Contract was the genesis of claims by BCSPL and the SPCPL
The Court noted that the claim statement of BCSPL intended to portray how AISPL was no longer responsible for implementing the works and how no amounts were due and payable to SPCPL.
The Court observed that the procedure followed by the Sole Arbitrator was unusual since while filing a counterclaim against BCSPL, SPCPL had impleaded two further parties i.e., AISPL and ABPL without seeking leave of the Sole Arbitrator. BCSPL, AISPL, and ABPL had an objection to this counterclaim, labeled as a separate SoC.
Whether the Sole Arbitrator’s mandate was liable to be terminated
The Court opined that the above grounds for seeking termination of the Sole Arbitrator’s mandate were specious. The Court noted that counterclaims could be filed by the respondent in an arbitral proceeding, as allowed by Section 23(2-A) of the Act. The Court stated that the issue was only whether the counterclaim had to be restricted to the claimant alone or could other parties be impleaded as well.
The Court noted that the nature of the disputes in the present case showed that the role of the ASF Group, AISPL, and ABPL was not clearly delineated. The Court noted that the entities may be separate on paper, but ASF Group appeared to be one cohesive entity as was evident from the documents placed on record.
The Court placed reliance on Cox and Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1 (‘Cox and Kings Case’) and said that the view that all entities within a closely knit corporate group could be bound by the arbitration agreement if they are involved in the contract’s negotiation, performance, or termination.
The Court noted that in the present case, the ASF Group, through its entities AISPL and ABPL had been significantly involved in the contractual obligations and such involvement indicated that the ASF Group, as a cohesive entity, was integral to the arbitration process. Thus, the Court held that there was a need to implead the parties for a successful resolution of disputes.
The Court held that the mere fact that the claim was filed without seeking leave would not mean that there was a de jure or de facto legal incapacity which the Sole Arbitrator suffered from.
Whether labelling as Case 1 and 2 as well as the dismissal of Section 16 application filed by ASPL and ABPL deserved to be interfered with
The Court stated that for every arbitration claim to be raised, a notice under Section 21 of the Act is mandatory. However, the Court stated that a Section 21 notice would not be required if a party is filing a claim in the form of a counterclaim for which reference has already been made by the Court.
The Court in its order dated 22-07-2022 made reference in relation to BCSPL and SPCPL. Thus, the Court stated that SPCPL could not be faulted for raising claims before the Sole Arbitrator against AISPL and ABPL.
The Court opined that if the claims against AISPL and ABPL were maintainable under the Group of Companies doctrine as was held in Cox and Kings Case (supra), to avoid multiplicity of proceedings, contradictory findings and to ensure efficiency of arbitral proceedings, the Court ought not to interfere with the said orders.
The Court stated that a perusal of the impugned orders showed that the Sole Arbitrator had combined the issue of the applicability of the Group of Companies and alter ego doctrine, and thus had resorted to piercing the corporate veil. The Court stated that all three could not have been combined in the manner done by the Sole Arbitrator.
The Court held that based on overall findings, the delineation of cases 1 and 2 was wholly unnecessary, and the impleadment of AISPL and ABPL was in accordance with law even though the Sole Arbitrator used different reasons for dismissing the Section 16 applications.
The Court disposed of the petitions while stating that AISPL and ABPL are impleaded in the arbitral proceedings, and the SoC filed by SPCL is to be treated as a counterclaim against BCSPL, AISPL, and ABPL. Further, the Court set aside the delineation of cases 1 and 2 and stated that for all practical purposes, the case pending before the Sole Arbitrator is to be treated as one case arising out of reference order dated 22-07-2022.
The Court stated that considering that AISPL and the ASF Group had assumed responsibility for payments to be made to SPCPL and for implementation of the project, their impleadment was necessary for a comprehensive adjudication of the matter.
The Court ordered that since SPCPL had no objection to its claim petition being treated as a counterclaim to BCSPL’s claim, both cases shall be treated as a single reference and a single dispute. The Court directed that the claims of BCSPL and the counterclaim of SPCPL shall be adjudicated by the Sole Arbitrator after framing issues and that no bifurcation would be permissible.
[ASF Buildtech Pvt. Ltd. v. Shapoorji Pallonji & Co. Pvt. Ltd., 2024 SCC OnLine Del 4530, Decided on 04-07-2024]
Advocates who appeared in this case:
For Petitioner — Advocate Dr. Amit George, Advocate Vaibhav Jain, Advocate Shashank Pandey, Advocate Rayadurgam Bharat, Advocate Sanyat Lodha, Advocate Tejas Karia, Advocate Avlokita Rajvi, Advocate Ramakrishna Veerendra, Advocate Mahir Amir
For Respondents — Advocate Saurav Agrawal, Advocate Aakanksha Kaul, Advocate Aman Sahani, Advocate Anshuman Chowdhary, Advocate Satya Sabharwal, Advocate Rhea Borkotoky, Advocate Akash Saxena, Advocate Sanyat Lodha, Advocate Tejas Karia, Advocate Avlokita Rajvi, Advocate Ramakrishna Veerendra, Advocate Mahir Amir, Advocate Sanyat Lodha, Advocate Amit George, Advocate Vaibhav Jain, Advocate Shashank Pandey, Advocate Rayadurgam Bharat
Buy Arbitration and Conciliation Act, 1996 HERE
