Ramesh Patodia Petitioner(S) v. Vir Studdio Pvt. Ltd., & 1 (S)

Akil Kureshi, J.:— The petitioner seeks appointment of an arbitrator to resolve the disputes between the petitioner and the respondents herein.

2. Brief facts are as under. The petitioner is a sole proprietory concern. Case of the petitioner is that the petitioner wanted to invest in the business of plywood and other raw materials used for furniture. Respondent no. 2 is a company registered under the Companies Act. According to the petitioner, for the purpose of engaging in such business, the petitioner had negotiated with respondent no. 2 company. It was only on account of reputation of respondent no. 2 company that the petitioner was persuaded to engage in such business. The petitioner also incurred initial expenditure for setting up of a show-room. However, respondent no. 2 conveyed to the petitioner that actual agreement will take place only with respondent no. 1 company which is a group company of respondent no. 2 company. The petitioner therefore, under compulsion executed the agreement with respondent no. 1 and under such agreement dated 9.10.2013, petitioner started franchise store. According to the petitioner, the entire business was operated under instructions and directions of respondent no. 2 even after signing of this agreement. Case of the petitioner is that respondent no. 1 is merely a shell company or an alter-ego of respondent no. 2 company. It was only respondent no. 2 which would provide trained sales staff to the petitioner at the store.

3. Thus in the nutshell, the case of the petitioner is that though actual agreement of franchise was signed between the petitioner and respondent no. 1, for all purposes, behind the scene, it was respondent no. 2 who was operating the business. From the beginning, the petitioner had negotiated with respondent no. 2 and even after signing of the agreement, it was respondent no. 2 who was managing the business.

4. The said agreement contains an arbitration clause in the following terms:

“14. Arbitration and Jurisdiction

All disputes and differences of whatsoever nature arising out of this agreement whether during its term or after expiry thereof are prior termination shall be referred to the sole arbitration to the VSPL, whose decision will be final on every matter arising hereunder. The venue of arbitration shall be only Ahmedabad city of Gujarat State.

In witness whereof the parties above named and have signed the above presents at Ahmedabad in the presence of the following witnesses.”

5. During the course of running the business, multiple disputes arose between the parties. The petitioner therefore, issued a notice dated 10.2.2014 to the respondents and raised multiple grievances. The petitioner raised a claim of Rs. 30.70 lacs under different heads and called upon the respondents to pay the sum with interest.

6. The respondents replied to the said notice under communication dated 17.2.2014 and disputed the claim. On 17.3.2014, the petitioner issued yet another notice to respondent no. 1 and raised demand of Rs. 13.40 lacs with interest. This notice was replied under letter dated 9.4.2014 Finally on 21.11.2015, the petitioner issued a notice for appointment of an arbitrator to both the respondents and called upon them to agree to sole arbitrator of an advocate whose name was mentioned in such notice. The respondent no. 2 replied to such notice on 8.12.2015 conveyed to the petitioner that respondent no. 2 not being a party to the agreement dated 16.7.2013, would not participate in the arbitration. On the same day, respondent no. 1 also sent a reply to this same notice and suggested name of a senior advocate of High Court Shri Ashwin Lalbhai Shah who would act as a sole arbitrator. At that stage, present petition came to be filed.

7. Respondent No. 1 does not dispute presence of arbitration clause in the agreement between the parties. Respondent No. 2 however, strongly opposed any involvement in such arbitration, primarily, on the ground that the said respondent is not a signatory to the agreement and therefore, cannot be joined in the arbitration proceedings.

8. Learned advocate for the petitioner submitted that respondent no. 2 is the main company who is engaged in the business with whom the petitioner had negotiated from the beginning. Even after execution of the agreement with respondent no. 1, the petitioner continued to interact with respondent no. 2 company. Respondent no. 1 is merely a shell company and alter ego of respondent no. 2. Respondent No. 2 therefore, can be joined in arbitration proceedings. In this context, counsel relied on various decisions to which we would refer to at a later stage.

9. Counsel further submitted that in any case Shri Ashwin Lalbhai Shah, cannot act as an arbitrator since he had more than once replied to the legal notice of the petitioner on behalf of the respondents and thus would be disqualified to act as an arbitrator.

10. On the other hand, learned counsel for the respondents submitted that from the beginning it was clear that respondent no. 2 would not be part of the agremment. Even the agreement clearly envisaged the contractual relations between respondent no. 1 and the petitioner alone. Respondent no. 2 therefore, cannot be made a party to arbitration proceedings. The petition qua respondent no. 2 must therefore, be rejected. He however, could not refute the petitioner's contention on Shri Ashwin Lalbhai Shah having previously acted as an advocate for the respondents in this present dispute itself.

11. From the above, it can be seen that insofar as petitioner and respondent no. 1 is concerned, there is an agreement which contains arbitration clause. Admittedly, respondent no. 2 is not a signatory to this agreement. The request of the petitioner is to include also respondent no. 2 in arbitration on the ground that respondent no. 1 is merely a shell company and an alter ego of respondent no. 2 and that therefore, in the present case, corporate veil should be lifted and respondent no. 2 also be made answerable to arbitration. Main reliance for this contention was placed on decision of Supreme Court in case of Chloro Controls (I) P. Ltd. v. Seven Trent Water Purification Inc. reported in (2013) 1 SCC 641, in which it was observed that though the scope of an arbitration agreement is limited to the party who entered into it and those claiming under or through them, the Courts have been expanding the scope on certain principle such as Group of Companies Doctrine, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates. In the same judgement, it was further observed as under:

“100. Various legal basis may be applied to bind a non-signatory to an arbitration agreement. The first theory is that of implied consent, third party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on good faith principle. They apply to private as well as public legal entities. The second theory includes the legal doctrines of agent-principal relations, apparent authority, piercing of veil (also called the “alter ego”), joint venture relations, succession and estoppel. They do not rely on the parties' intention but rather on the force of the applicable law.”

12. Decision of Supreme Court in case of Chloro Controls (I) P. Ltd. (supra) was relied upon in later decision in case of Purple Medical Solutions Pvt. Ltd. v. MIV Therapeutics Inc reported in 2015 (2) Scale 127. It was observed that the basic rule that an arbitration agreement is limited to the parties who have entered into and those claiming under or through them thus has a few well known exceptions under which even a non signatory to the arbitration agreement can be brought within the scope of arbitration proceedings which may be on the basis of theory of intention of the parties or on the doctrine of agent-principal relations, piercing of veil, joint venture relations, succession or even estoppel. Whether a non signatory can be brought within the scope of arbitration proceedings must rest on facts of each case and normal rule of only parties to the agreement being involved in arbitration can be deviated only under exceptional cases.

13. Decision in case of Delhi Development Authority v. Skipper Construction Co.(P) Ltd. reported in (1996) 4 SCC 622 was more in the field of lifting corporate veil, of-course, one of the grounds on which a non signatory to the arbitration agreement can be made answerable to the arbitratal proceedings.

14. In the present case, even if the petitioner had earlier negotiated with respondent no. 2, admittedly when it came down to signing the agreement, the same was executed between the petitioner and respondent no. As the agreement itself demonstrates, it was an agreement for franchise and was entered into between the petitioner and respondent no. 1. The agreement also clearly provided that respondent no. 1 was a group company of respondent no. 2 and was a facilitator of various products of respondent no. 1 and would provide franchise in its own name and terms and conditions mentioned in the agreement. It was further recorded that respondent no. 2 will not be liable or responsible for any type of legal or other matters and franchise would directly contact respondent no. 1 for all issues. With these preliminary remarks, the agreement records the terms and conditions.

15. All these terms and conditions involve petitioner and respondent no. 1 for their bilateral obligations under the agreement. Even the arbitration agreement, as noted, provides that all disputes and differences shall be referred to sole arbitrator to respondent no. 1 company whose decision will be final on every matt er arising thereunder. Thus there was a clear understanding even under the agreement that the same was executed between the petitioner and respondent no. 1 alone and respondent no. 2 was specifically kept out of the purview of such agreement. When the petitioner siged such documents with full consciousness and out of free will, could it later on turn around and contend that it was respondent no. 2 who had entered into an agreement and that therefore, must be made answerable to arbitration proceedings. The contention that the petitioner was compelled to sign the agreement cannot be accepted since the petitioner was acting out of free will and was under no compulsion to go ahead with the agreement, if his case was that respondent no. 2 also must be party to such agreement.

16. In view of such clear terms and conditions between the parties and other materials on record, I do not find that this is a case where either corporate veil should be lifted or for such other similar grounds, respondent no. 2 could be made to participate in the arbitration proceedings. Request of the petitioner on this count is therefore, turned down.

17. The petitioner's alternative request of change of arbitrator appointed by respondent no. 1, however, needs to be accepted. As noted, person suggested by respondent no. 1 for such purpose, had already in the past in this very dispute, represented respondent no. 1 company as a legal adviser. He had also replied to the notices issued by the petitioner. (His involvement in this litigation would therefore, disqualify him on the ground of possible bias.

18. At this stage, learned advocate for the parties sought time to explore the possibility to suggest a common name of arbitrator.

19. SO to 26.8.2016