Oil and Natural Gas Corporation Ltd. Vs Discovery Enterprises Pvt. Ltd. (Supreme Court)
Facts- The main contention of the appellant (ONGC) is that DEPL and JDIL constitute one single commercial entity and that ONGC is hence entitled by law to compel JDIL to participate in the arbitration proceedings so as to enforce the award against it.
It contended that the interim award has been rendered purely on the premise that a non-signatory to the arbitration agreement cannot be impleaded as a party. That, the group of companies doctrine is applicable in this case.
ONGC also submitted that the applications for discovery and inspection must be decided first and it is only on the completion of the process that JDIL’s challenge to jurisdiction under Section 16 could be addressed.
Conclusion- Held that the first Arbitral Tribunal deferred a decision on the two applications until the issue of jurisdiction was decided. The net result is that the applications for discovery and inspection which were crucial to ONGC’s claim that there existed functional, financial and economic unity between DEPL and JDIL remained to be decided before the application under Section 16 was taken up. There is merit in the submission which was been urged on behalf of the ONGC that the application for discovery and inspection had to be decided before the plea of jurisdiction was adjudicated upon. The application for discovery and inspection was intended to facilitate ONGC in its plea that there existed functional, financial and economic unity between the two companies. The failure of the first Arbitral Tribunal to hear the application for discovery and inspection goes to the root of its interim award dated 27 October 2010 holding an absence of jurisdiction qua JDIL.
The interim award of the Arbitral Tribunal in the first proceeding, dated 27 July 2010 refers to the documents which were produced by ONGC and to the submission that neither DEPL nor JDIL had led any evidence to controvert the documentary and oral evidence adduced by ONGC. The first Arbitral Tribunal upheld the plea of jurisdiction that JDIL is neither a party to the contract nor had it submitted a bid to ONGC which resulted in the formation of the contract. The Tribunal held that the agreement was only between ONGC and DEPL and that in terms of Section 7, an agreement to arbitrate is between the parties to the agreement. While observing that the arbitration agreement was only between DEPL and ONGC, the Tribunal held that neither was there an arbitration agreement between ONGC and JDIL nor was JDIL a signatory to the agreement between ONGC and DEPL. After noting the documents which were relied upon by ONGC, the Tribunal held that there was “no tickle of evidence to indicate that JDIL”, a distinct incorporated legal entity, ever played any role to find itself in the contract between JDIL and ONGC. The executives of JDIL who participated in the contractual dealing were held to be representatives of DEPL.
Reading the interim award dated 27 October 2010 of the first Arbitral Tribunal, the unmistakable impression which emerges from the record is that the primary basis for the determination of an absence of jurisdiction is that the arbitration agreement was between ONGC and DEPL. The legal foundation of the group of companies doctrine has not been evaluated, on facts or law.
However, ONGC had clearly laid out the factual and legal foundation for setting up a case in opposition to the plea of JDIL. The first Arbitral Tribunal has made a fundamental error of law in not deciding the application by ONGC on discovery and inspection of documents before it ruled on jurisdiction. In doing so, the first Arbitral Tribunal’s interim award dated 27 October 2010 goes against the principles of natural justice. The failure to consider the application for discovery and inspection of documents results in a situation where vital evidence that could have assisted the Tribunal in its determination of the challenge under Section 16 was shut out. As a matter of fact, it emerged from the record that no evidence was adduced by JDIL in support of its plea of the absence of jurisdiction under Section 16. JDIL having taken the plea of absence of jurisdiction was required to establish the grounds on which it set about to establish its plea.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
A Facts
1 The appeal arises from a judgment dated 27 June 2012 of the High Court of Judicature at Bombay by which an appeal under Section 37 of the Arbitration and Conciliation Act, 19961 has been dismissed. Oil & Natural Gas Corporation Limited2 instituted an appeal against an interim award dated 27 October 20103 of the Arbitral Tribunal holding that the second respondent – Jindal Drilling and Industries Limited4 was not a party to the arbitration agreement and must be deleted from the array of parties. The interim award was challenged in an appeal which was dismissed by the impugned judgment.
2 On 22 March 2006, ONGC awarded a contract to Discovery Enterprises Private Limited5, the first respondent, which is a company belonging to the D P Jindal Group, for operating a floating, production, storage and offloading vessel6. Pursuant to the stipulation contained in clause 25.7.11 of the contract, a vessel called Crystal Sea was imported on 11 May 2006. ONGC paid the customs duty in the amount of Rs. 55.78 crores on the understanding that the vessel would be reexported after work was complete under duty drawback whose formalities would be completed by DEPL. The vessel left Indian territorial waters and did not return. According to ONGC, DEPL failed to complete the formalities for duty drawback and did not compensate ONGC for customs duty and other expenses incurred in the amount of Rs. 63.88 crores.
3 Clause 37 of the contract between ONGC and DEPL provides for the settlement of disputes of the parties through arbitration. On 25 April 2008, ONGC invoked arbitration against DEPL and JDIL and claimed an amount of Rs. 63.88 crores. An Arbitral Tribunal consisting of Mr Justice S P Kurdukar (Retd.), Mr Justice M S Rane (Retd.) and Mr S Venkateswaran (Senior Advocate) was constituted. In its statement of claim filed before the Arbitral Tribunal, ONGC set up the case that DEPL and JDIL belonged to the DP Jindal Group of Companies and since they constitute a single economic entity, the corporate veil should be lifted to compel the non-signatory, JDIL, to arbitrate. According to ONGC, DEPL is an alter ego and agent of JDIL. The statement of claim read thus:
“17. It is submitted the Respondent no.1 was awarded the contract by relying on the fact that it is Group Company of D P Jindal group of companies and that the Respondent No.2, M/s Jindal Drilling & Industries Ltd has a vital business interest in the Respondent No.1, which can be said to be the alter ego of Respondent No.2. In fact, the Respondent No. 2 is the ultimate beneficiary of the business of Respondent No. 1. […] Presently, they are having three valid existing contracts with ONGC. DEPL has close corporate unity with Jindal Group and in fact the shareholders are almost common. Respondent No. 1 has throughout represented that they are group company of Jindal apart from their representation in the bid they have been representing that through the letter heads which clearly indicated that they belong to a single group of companies, namely DP Jindal Group of companies. M/s Jindal Drilling has also acknowledged that the contractor M/s DEPL is a group company of Jindal Group in their website in an article titled “Key due diligence observations”. A copy of the said article is annexed herewith and marked as Annexure 8. Since Respondent No. 1 is liable to compensate ONGC for the losses suffered by it, ONGC has adjusted the said amount from the monies payable to Jindal Drilling and Industries Limited as a security to satisfy the award to be passed in this case.
18. As stated above, Respondent No. 2 was supplying vessels and rigs to ONGC under various contracts, for last many years. It is a fact that the Respondent No.1 was formed as a group company with the charter of introducing cutting-edge technology and solutions to the oil and gas market in India. Respondent No.1 has represented itself as a part of the DP Jindal group of companies as seen from the company’s website (www.discoveryepl.com). A copy of the relevant extract from the website is attached herewith and marked as Annexure A-9. The same web-based representation was made in categorical and unequivocal manner by Respondent No.1 in the bid submitted by them in connection with the subject contract. The copy of the same is annexed herewith and marked as Annexure-10. The Directors of the Respondent No.1 are Mr. Manav Kumar and Mrs. Shilpa Agarwal, son and daughter in law of Shri Naresh Kumar who is the Managing Director of the Respondent No. 2 i.e, the Jindal Drilling and Industries Ltd. The two companies operate out of the same premises, same floor, same building i.e. Keshav Building, Bandra Kurla Complex. Copies of the Letter Head of both the companies addressed to the claimant is enclosed herewith and marked as Annexure A-11 (colly). More significantly a prominent Jindal Drilling Executive has taken an active interest in the negotiations concerning the subject contract […]. It makes it abundantly clear that the activities of DEPL i.e. Respondent No. 1 contractor are an extension of the activities of Respondent No. 2 who has set up the Respondent No. 1 company as an agency to carry out its activities. Therefore, it is submitted that the doctrine of group company can be applied in this case – an arbitration agreement signed by one company in a group of companies entitles (or obligates) other group non-signatory companies, if the circumstances surrounding the negotiation, execution of the agreement show that the mutual intention of all the parties was to bind non-signatories. This group companies constitute the same “economic reality“. This is evident when veil-piercing is done. Copies of documents evidencing close relationship between both the companies are annexed herewith as indicated above.
19. In any case, Respondent No. 1 can be considered as an agent/ alter ego of Respondent No. 2 because of its deep and pervasive family links, apart from the fact that Respondent No. 2 is the intended third-party beneficiary of this contract. The Arbitral Tribunal has to determine these questions in accordance with evidence and law. Further, there is corporate unity and cross shareholdings in both the companies by shareholders, common to both the companies.
[…]
21. It is submitted that this is a fit case where this Hon’ble Tribunal has to pierce the corporate veil in order to see the acknowledged the realities of Respondent No.1 being a group company of DP Jindal Group. As submitted above, there is a clause ‘corporate unity’ and applying the doctrine of group companies/alter ego/ultimate beneficiary. This Tribunal has to hold Respondent No. 2 also liable to compensate ONGC for the dues of respondent No.1. The issue preferred to Tribunal is within the arbitration agreement and under law and this Hon’ble Tribunal has jurisdiction to entertain and decide the dispute.”
4 An application under Section 16 of the Act of 1996 was filed by JDIL seeking its deletion from the arbitral proceedings on the ground that it is not a party to the arbitration agreement. ONGC responded to the application. During the course of the proceedings, ONGC filed an application on 5 January 2009 for discovery and inspection to support its case that DEPL is an alter ego of the Jindal Group of companies. In support of the application for discovery and inspection, ONGC pleaded that:
(i) DEPL and JDIL are group companies and that the former is an agent or alter ego of the latter;
(ii) There exists corporate and functional unity between them;
(ii) DEPL is a corporate facade which has been created to promote and extend the business of JDIL;
(iv) JDIL is responsible for the acts of omission and commission of DEPL on the basis of the group of companies doctrine;
(v) DEPL has been created by the Jindal Group to render services in the oil and gas sector and each entity of the group is strategically formed to render certain services; and
(vi) DEPL is working under the “fraternal hood” of the group based on the admission on the corporate website of JDIL.
5 ONGC stated that the documentary evidence demonstrates that there is a “close corporate unity and functional unity existing between these two companies” and hence it was necessary to discover the documents set out in the schedule to the application. The documents of which discovery was sought are tabulated below:
“SCHEDULE OF DOCUMENTS
1. Memorandum of Association of Respondent No.2.
2. Articles of Association of Respondent No.2.
3. Ledger account of Respondent No.2 for the financial years 2003-04, 2004-05, 2005-06 and 2006-07.
4. Employees salary register of Respondent No.2 for the financial years 2003-04, 2004-05, 2005-06 and 2006-07.
5. Titled document showing Respondent No.1’s rights/ownership over the registered office premises at Suite 110, Tower-I, 70 Najafgarh Road, B-39, New Delhi-110 015.
6. Titled document showing Respondent No.2’s rights/ownership over the office premises at 3rd Floor, Keshav Building, Banda-Kurla Complex, Banda (East), Mumbai-400 051.
7. Documents showing grant of telephone connection of the following telephone and fax numbers at the Delhi office of Respondent No. 1 and the payment of the bills of the said telephone and fax numbers by Respondent No. 1 from the calendar years 2003 to 2007. (i) Telephone No. 52531100, (ii) Fax No.52531191.
8. Documents showing grant of telephone connection of the following telephone and fax numbers at the Mumbai office of Respondent No. 2 and the payment of the bills of the said telephone and fax numbers by Respondents from the calendar years 2003 to 2007. (i) Telephone Nos.26592889 & 55020047, (ii) Fax No.26592630.
9. List of the contract bagged from ONGC so far the inception of Respondent No.2.
10. List of crew members in the Drilling Unit “Noble Ed-Holt awarded on 17.8.06 and Noble Charlie Yester on 2.12.06.”
6 ONGC led evidence in support of the statement of claim. During the course of the examination, ONGC’s witness, Anindya Bhattacharya who was working as Chief Manager (MM) of ONGC, produced documents in support of claim. The production of documents was objected to by JDIL on the ground of relevance and admissibility. During the arbitral meeting on 7 July 2009, the Tribunal recorded the following minutes:
“Per Tribunal :
The documents produced by the witness Anindya Bhattacharya (CW-1) along with his affidavit dated June 26th 2009 and annexures 1 to 10 are taken on record. Mr. Rahul Narichania, Ld. Advocate for Respondent No. 2 objects to these documents being taken on record on the ground that the same are not relevant and admissible as far as the Respondent No. 2 is concerned. He further stated that he will cross examine the witness on the documents without prejudice to his rights that the said documents were neither relevant nor admissible in evidence and ought not to be marked as exhibits.
The rival contentions will be decided while disposing of the application made under Section 16 of the Arbitration & Conciliation Act, 1996. It is also made clear that merely because the witness has been cross examined on behalf of the Respondent No. 2 on the documents, the documents do not automatically stand exhibited.
Mr. Rajiv Kumar objects to the procedure recorded above. The Claimants do not waive any rights in this behalf.”
7 By its interim award dated 27 October 2010, the Arbitral Tribunal held that it lacked the jurisdiction to arbitrate on the claim against JDIL, which was not a party to the arbitration agreement. The tribunal relied on the judgment of this Court in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr.7. The conclusion of the Tribunal was that JDIL is not a signatory of the arbitration agreement and hence could not be impleaded as a party to the proceedings. The Arbitral Tribunal held:
“20. After considering rival contentions, the arbitral tribunal is of the opinion that it may not be permissible for it to go beyond the ambit of section 7 of the act. The word ‘party’ is defined under section 2(1)(h) means a party to an Arbitration Agreement and the arbitration agreement has been defined under section 7 of the Act. […] To put it differently, this arbitral tribunal lacks the jurisdiction to investigate, enquire into and record any finding on the basis of claim petition paragraphs 17 to 21 against M/s Jindal Ltd/ Respondent No.2. The arbitral tribunal is therefore of the opinion that the claim petition of ONGC vis a vis M/s Jindal Ltd./ Respondent No.2 is untenable for want of jurisdiction under the Act. The arbitral tribunal makes it clear that the position of M/s Jindal Ltd/ respondent no.2 considered only on the basis of the provisions contained in section 2(1)(h) and section 7 of the Act.”
(emphasis supplied)
8 JDIL was accordingly struck off the array of parties. ONGC filed an appeal under Section 37 before the Bombay High Court which was dismissed on 27 June 2012 with the following observations:
“16. As observed hereinabove, there is no evidence tendered before Arbitral Tribunal that DEPL and JDIL had common shareholders and common board of directors. Even if that had been the case, the Hon’ble Supreme Court of India in Indowind Versus Wescare case (supra) has held in terms that merely because two companies have common shareholders and directors, they do not become a single entity. In the instant case also, the Arbitral Tribunal has correctly held that merely because the two companies may at one point of time have had a common address and telephone number, it does not make them one economic unit. The mere fact that the son and daughter-in-law of the managing director of JDIL are directors in DEPL also does not and cannot establish that these companies are one and the same. There is also no credible evidence to show that because of the alleged nexus between the two companies, ONGC awarded the said contract to DEPL. Even assuming this to be correct, it does not take the case of ONGC any further. JDIL is admittedly not a party to the contract and cannot be liable under the said contract which is only between ONGC and DEPL. If ONGC wanted to bind JDIL to the said contract, it should have asked JDIL to be a party to the said contract. In fact, this court inquired from learned Advocate appearing for ONGC as to why ONGC did not insist on JDIL signing the said contract when admittedly there are other contracts which are entered into between ONGC and JDIL. However, the learned advocate appearing for ONGC had no answer to the same. In response, he only submitted that ONGC has also filed suit being 2947 of 2011 in this court in which DEPL and JDIL have been arrayed as the defendants.”
9 The judgment of the High Court was challenged by ONGC under Article 136 of the Constitution. The Arbitral Tribunal delivered its final award dated 6 June 20138 and, while allowing the claim of ONGC, held that it is entitled to recover an amount of Rs.63.87 crores and USD 1,756,197.50 together with interest at 9% per annum and legal costs. The counter claim filed by DEPL was dismissed.
10 At this stage, it would also be necessary to note that in the course of its interim award, the Arbitral Tribunal dealt with the applications filed by ONGC on 5 January 2009 for discovery of documents and inspection. The Arbitral Tribunal noted ONGC’s contention that its application for discovery and inspection should be heard and disposed of first on merits and that the application filed by JDIL under Section 16 should be heard thereafter so that all relevant documents would emerge before the Arbitral Tribunal. The Arbitral Tribunal, however, directed that the application for discovery and inspection filed by ONGC be “deferred until the issue of the jurisdiction is decided”.
A.1. Transferred cases arising out of the arbitration
11 During the pendency of the arbitration between ONGC and DEPL, ONGC withheld a sum of US$14,772,408.54 towards recovery of its claim of Rs.64.88 crores against four contracts with JDIL. By a letter dated 24 October 2007, JDIL sought the release of the sum withheld together with interest failing which it stated that it would exercise its right to take legal recourse. ONGC replied to the letter on 5 May 2008 stating that they are withholding the dues as an adjustment against the dues owed to ONGC by DEPL. Aggrieved by the deductions made by ONGC under its four contracts for drilling services, JDIL invoked arbitration on 4 February 2010. An Arbitral Tribunal consisting of Ms Justice Sujata Manohar (Retd.), Mr Justice B N Srikrishna (Retd.), and Mr Justice M S Rane (Retd.) was constituted. In the meanwhile, ONGC instituted a declaratory suit against JDIL and DEPL before the Bombay High Court which is presently pending. The Arbitral Tribunal, by a common award dated 9 October 2013,9 directed ONGC to pay JDIL an amount of US$14,772,495.55/- together with interest at 4% per annum calculated from the due date of each invoice till the date of payment or realisation. The Arbitral Tribunal dealt with the submission of ONGC that DEPL and JDIL belong to the same group thus entitling ONGC to make the deductions. Rejecting the contention of ONGC, the Arbitral Tribunal held:
“25. There is hardly any evidence to support the plea of the Respondent that DEPL and the Claimant are one and the same company. Both DEPL and the Claimant are group companies of D.P. Jindal group of companies. Although the directors of DEPL are the son and daughter-in-law of the managing director of the Claimant, and the two companies, for some time, shared a common office and telephone numbers, that does not make the two companies one. Both are subsidiaries of the main company and both have independent legal existence. DEPL was incorporated in the year 2003. The Claimant is a public limited company listed on the stock exchange and was incorporated in the year 1983.
26. […] The facts of the present case are totally different and do not warrant lifting of corporate veil, assuming there is one. The evidence in the present case does not justify the application of “lifting the corporate veil”. In respect of the contract which was entered into by the Respondent with DEPL, the tender was floated by ONGC in 2005 and the contract was entered into in 2006. There is no material to show that the Respondent awarded the contract to DEPL because it was in fact the claimant and/ or was supported by the claimant. The minutes of the meeting held by the Respondents for short-listing of bidders in respect of the contract have not been produced. The only witness produced by ONGC was not present at the meetings held by the executive purchase committee when the deliberations on the award of the contract recommended bidder took place. […] There is no evidence to show that in order to secure the said contract, DEPL represented that it was a part of the Claimant group. […]
27. There is no guarantee or letter of “comfort” from the Claimant to the Respondent in respect of the liabilities, if any, of DEPL under its contract with ONGC. […]
[…]
30. In the present case the Claimant and DEPL have throughout maintained their separate legal character. There is no evidence to indicate that they ever represented to the Respondent that they are one company or that the Claimant will be liable under the contract of the Respondent with DEPL.
31. In the present case the Respondent ONGC had earlier initiated arbitration proceedings against both DEPL and the Claimant before an Arbitral Tribunal […]. By its ‘interim final award’ dated 27-10-2010, the Arbitral Tribunal held that in the dispute between the Respondent and DEPL, the Claimant could not be impleaded. […] The findings of the earlier arbitral tribunal and the High Court in its order of 27 June 2012 support our present conclusions, and we respectfully agree with the same.”
12. DEPL was not a party to the above arbitral proceedings which were initiated by JDIL. ONGC instituted petitions10 under Section 34 of the Act of 1996 for challenging the Arbitral Award in the second proceeding in respect of the four contracts of JDIL. The petitions were dismissed by a Single Judge of the Bombay High Court on 28 April 2015. ONGC filed an appeal11 under Section 37 of the Act of 1996 during the pendency of the special leave petition arising from the interim award of the Arbitral Tribunal dated 27 October 2010, consisting of Mr Justice S P Kurdukar (Retd.), Mr Justice M S Rane (Retd.) and Mr S Venkateswaran. ONGC sought a transfer of the appeals lodged before the Bombay High Court against the judgment of the Single Judge dismissing the petitions under Section 34 for challenging the Arbitral Award in the second proceeding. The transferred cases12 have come up before this Court together with the special leave petition arising out of the interim award dated 27 October 2010.
B Submissions of Counsel
13 Mr K M Nataraj, Additional Solicitor General13, appearing on behalf of ONGC submitted that:
(i) The case of ONGC is that DEPL and JDIL constitute one single commercial entity and that ONGC is hence entitled by law to compel JDIL to participate in the arbitration proceedings so as to enforce the award against it;
(ii) Though evidence was available with ONGC to buttress the above claim, it filed an application for discovery and inspection to secure material which was within the possession, control and custody of JDIL. However, with the deletion of JDIL from the array of parties, the application for discovery and inspection has been rendered otiose;
(iii) The Arbitral Tribunal has not enquired into the facts at all, despite the contention of ONGC that JDIL is a necessary party;
(iv) The Arbitral Tribunal has merely held, on the basis of the legal principle underlying Section 7 of the Act of 1996 and privity of contract, that JDIL which is not a signatory to the arbitration agreement cannot be impleaded in the arbitral proceedings;
(v) After the application for discovery and inspection was opposed by JDIL, the Arbitral Tribunal deferred its decision until the issue of jurisdiction was resolved on the application filed by JDIL under Section 16 of the Act of 1996;
(vi) The interim award did not consider or hear the application for discovery and inspection under Section 16. The decision has been rendered purely on the premise that a non-signatory to the arbitration agreement cannot be impleaded as a party;
(vii) ONGC has been precluded from tendering evidence that JDIL could be brought within the fold of arbitration on the basis of the group of companies doctrine;
(viii)While the Arbitral Tribunal has relied on the decision of this Court in Indowind (supra), the subsequent decisions of this Court have accepted and applied the group of companies doctrine. These decisions are:
a. Chloro Controls India Pvt. Ltd. Severn Trent Water Purification Inc. & Ors; 14
b. Cheran Properties Ltd. Kasturi & Sons Ltd. & Ors;15 and
c. MTNL Canara Bank & Ors. 16. and
(ix) The decision in Indowind (supra) is not good law in view of the subsequent judgments of this Court. The Arbitral Tribunal ought to have decided the jurisdictional issue after parties were permitted to lead evidence, since the application of the group of companies doctrine and the lifting of the corporate veil involves mixed questions of law and fact. The issue of jurisdiction and merits are inextricably intertwined and a ruling premised exclusively on the application of Section 7 of the Act of 1996 was improper.
14 Controverting the above submissions, Mr Shyam Divan, Senior Counsel appearing on behalf of the JDIL has indicated in the following tabulation:
(i) ONGC’s contentions;
(ii) JDIL’s response;
(iii) Findings in the interim award of the Arbitral Tribunal; and
(iv) The order of the High Court.
The tabulated statement is reproduced below for convenience of reference:
