M/S KEPCO KDN CO. LTD. v M/S ENZEN GLOBAL SOLUTION PVT. LTD. and KERALA STATE ELECTRICITY BOARD

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** ## **THE HONOURABLE MR. JUSTICE SUNIL THOMAS** **WEDNESDAY, THE 11TH DAY OF DECEMBER 2019 / 20TH AGRAHAYANA, 1941** ## **OP(C).No.2078 OF 2019** **I.A.No.1 of 2019 in Arbitration Case No.2 of 2018 dtd 02.05.2019 of the Arbitral Tribunal** ## **PETITIONER/RESPONDENT:** **M/S.KEPCO KDN CO. LTD., HAVING ITS BRANCH OFFICE AT B-715, 7TH FLOOR, ADVANT IT PARK, TOWER-B, SECTOR-142, GREATER NOIDA EXPRESSWAY, GAUTAM BUDH NAGAR, UP-201305 AND ITS PROJECT OFFICE AT FIRST FLOOR, A-22, PILLAVEEDU LANE, KESAVADASAPURAM, THIRUVANANTHAPURAM - 695 004, REPRESENTED BY ITS HEAD INDIA BRANCH OFFICE AND THE AUTHORIZED SIGNATORY MR.JONGYUN SHIN.** **BY ADVS. SRI.SREELAL N.WARRIER SRI.B.RAGHUNANDANAN SRI.BIJU MATHEW SRI.M.S.AMAL DHARSAN** ## **RESPONDENTS/CLAIMANT & PURCHASER:** **1 M/S.ENZEN GLOBAL SOLUTION PVT. LTD., 90, HOSUR ROAD, MADIWALA, BANGALORE - 560 065, REPRESENTED BY ITS GENERAL MANAGER, MR.K.B.SREEJU. 2 KERALA STATE ELECTRICITY BOARD, 8TH FLOOR, VYDYUTHI BHAVANAM, PATTOM, THIRUVANANTHAPURAM - 695 004, REPRESENTED BY THE CHIEF ENGINEER (IT AND CR).** **R1 BY ADV. SRI.CYRIAC TOM R1 BY ADV. SRI.JIKKU SEBAN GEORGE R2 BY ADV. SRI.RAJU JOSEPH (SR.) R2 BY ADV. SRI.C.JOSEPH ANTONY** **THIS OP (CIVIL) HAVING BEEN FINALLY HEARD ON 26-08-2019, THE COURT ON 11-12-2019 DELIVERED THE FOLLOWING:** O.P(C).2078/19 2 ## **'CR'** ## **JUDGMENT** Petitioner herein challenges the order in I.A.No.1 of 2019 in Arbitration Case No.2 of 2018. 2. According to the original petitioner, the Government of India, Ministry of Power, had introduced a new project called Restructured Accelerated Power Development Programme (RAPDRP), aiming to reduce aggregate technical and commercial losses with respect to distribution of electricity. Power Finance Corporation was appointed as nodal agency for the planning and implementation of the project. As per RAPDRP, Kerala State Electricity Board (KSEB), who is the second respondent herein, issued a request for proposal notice on 27.03.2010 inviting proposals from PFC empanelled domain experts for the implementation of IT infrastructure under the above programme. Petitioner claiming himself to be a lead consortium member with two other consortium partners who were empanelled by PFC, after due consultation and based on their confirmation on all the technical requirements, submitted a bid to the second respondent, in response to the above request for proposal. The bid of the petitioner was accepted by the second respondent and contract was awarded to them. Letter of award dated 06.09.2010 was issued to O.P(C).2078/19 3 the petitioner. The concept of consortium and empanellment of domain experts by PFC was embedded in the original scheme as discernible from the PFC documentation and Ext.P2 letter of award. Subsequently, second respondent entered into an agreement with petitioner on 21.11.2012, a copy of which is produced as Ext.P3. A subsequent agreement is stated to have been entered into between the petitioner and the first respondent on 05.03.2013, in furtherance of the principal agreement. 3. Disputes arose between the petitioner and the first respondent with respect to the performance of the contractual terms on the basis of the alleged claims of delay and default. Invoking the provisions to the contract, arbitration proceedings were initiated and each of the party appointed an arbitrator and they in turn appointed an umpire. According to the petitioner, in the defence statement, it was stated that, Ext.P2 principal agreement dated 21.11.2012 between the petitioner and the second respondent and the subsequent contract dated 05.03.2013 between the petitioner and the first respondent were so inter-connected and inter-dependent that without the second respondent on the party array, no conclusive and final decision could have been arrived at by the Arbitral Tribunal. It was further stated that, about 21 issues were framed by the arbitrators, out of which majority required the presence of the second respondent in the party array. Hence, an application was filed before the arbitrator to implead the second respondent in the arbitration O.P(C).2078/19 4 proceedings. Arbitral Tribunal passed Ext.P10 order dated 02.05.2019 expressing its inability, due to lack of jurisdiction to implead the second respondent and directed the parties to approach and pursue the same before the jurisdictional court. Accordingly, original petition was filed. 4. According to the learned counsel for the petitioner, the law is settled by the Honourable Supreme Court that, though arbitration proceedings can be initiated against parties to the arbitration agreement and consequently, arbitral award could be enforced as against the parties to the proceeding, that will not preclude other persons claiming or acting through such party, who are also brought on record. Though, award if any passed against the petitioner could in principle be enforced as against KSEB as the person who has been benefited from the work, fairness of process, justice and equity required that an entity bound by a award should also be given an opportunity to defend the possibility of an award in an arbitration proceeding and accordingly, second respondent was liable to be brought on record. 5. Vehemently opposing the application, learned counsel for the KSEB contended that, it was an unnecessary party and the attempt of the petitioner was to drag KSEB into an interse dispute between the petitioner and the first respondent and to make the award binding on them. There was no privity of contract between the second respondent and the first respondent. It was further contended that, KSEB was an O.P(C).2078/19 5 absolutely unnecessary party and has no role in the interse dispute between the petitioner and the first respondent. 6. According to the counsel for the petitioner, second respondent is liable to be brought on record in the light of the decisions of the Supreme Court in **Cheran Properties Limited v. Kasturi and Sons Limited and Ors. (2018(16) SCC 413) as well as the decision in Ameet Lalchand Shah and Others v. Rishabh Enterprises and Another (2018 KHC 6393).** The above contention was opposed by the learned senior counsel for the second respondent relying on the decisions reported in **Engineering Mazdoor Sabha and Another v. Hind Cycles Limited (1963 Supp (1) SCR 625), Indowind Energy Limited v. Wescare (India) Limited and Another (2010(5) SCC 306), S.N.Prasad, Hitek Industries (Bihar) Limited v. Monnet Finance Limited and Others (2011(1) SCC 320) and Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited and Another ((2019)7 SCC 62)** to contend that, KSEB had no privity of contract with the first respondent and was an unnecessary party in the proceedings arising out of a dispute between the petitioner and the first respondent. 7. In **Chloro Controls (India) Private Limited v. Severn Trent Water Purification Inc. (2013)1 SCC 641),** it was held by a three Judges Bench of the Supreme Court that ordinarily, an arbitration O.P(C).2078/19 6 takes place between the persons who have been parties to both the arbitration agreement as well as the substantive contract underlying it. Invoking the doctrine of “group of companies”, it went on to observe that an arbitration agreement entered into by a company, being one within a group of corporate entities, can, in certain circumstances, bind its nonsignatory affiliates. This ex position of law was followed by another three Judges Bench in **Cheran Properties Limited's case (supra)** . 8. In **Cheran Properties Limited's case (supra),** it was held that, as the law has evolved, it has recognized that modern business transactions are often effectuated through multiple layers and agreements. There may be transactions within a group of companies. The circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group. It was held that, hence while deciding whether a nonsignatory to an arbitral agreement is liable to be fastened with the liability or whether he can be called upon to defend the proceeding, the Court approaches the matter by attributing the transactions a meaning consistent with the business sense, which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of the subject matter and the composite nature of the transaction weigh in the balance. The Court explained that the group of companies doctrine was O.P(C).2078/19 7 essentially intended to facilitate the fulfillment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort of the Court should be to find the true essence of the business arrangement and to unravel from 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 further held that, group of companies doctrine was akin to principle of agency or implied consent. 9. In **Ameet Lalchand Shah and Others v. Rishabh Enterprises and Another's case (supra)** though there were different agreements involving several parties, all were intended for the execution of a single commercial project. All agreements were held to be interconnected. The Supreme Court held that the intent of the parties was expressed in the terms of their agreement, and when those commercial entities and persons of business enter into such dealing, they do so with a knowledge of the efficiency of arbitral process. The commercial understanding was reflected in terms of the agreement between parties. It was held that duty of the Court was to import to that commercial understanding, a sense of business efficacy. Consequently, the Court held that the High Court was not right in refusing to refer the non parties to arbitration agreement to arbitration. O.P(C).2078/19 8 10. The above proposition was advanced forward by the Supreme Court again in **Mahanagar Telephone Nigam Ltd. v. Canara Bank and Others (2019(4) Arb. LR 165(SC))** wherein the Supreme Court held that the “Group of Companies” doctrine can be invoked where arbitration agreement was entered into by one of the companies in the group and non signatory affiliate, or sister or parent concern was held bound by the arbitration agreement. The circumstances in which such a doctrine could be invoked were if there was a direct relationship between the party which was a signatory to arbitration agreement, direct commonality of the subject matter and the composite nature of transactions between parties. 11. The contention of the learned senior counsel for the Electricity Board was that, there was no privity of contract between the first respondent and the second respondent. Principal contract was between the petitioner and the second respondent and the first respondent was not a party to the above proceedings. The second respondent was not a party to the contract between the petitioner and the first respondent. It was contended that, hence the second respondent cannot be referred to the arbitration proceeding between the petitioner and the first respondent. It was further contended that the attempt of the petitioner was to rope in the second respondent and to make the award binding on them. To substantiate the above contention, learned senior counsel for the second O.P(C).2078/19 9 respondent relied on the decision in **S.N.Prasad, Hitek Industries (Bihar) Limited's case (supra)** . In that case, guarantor of the loan was not a party to the loan agreement which contained an arbitration clause. On the question whether a guarantor can be made a party to the arbitration and subjected to arbitration award in a dispute for repayment of the loan, it was held that the arbitration agreement between the lender, borrower and one of the guarantors cannot be deemed or construed to be an arbitration in respect of another guarantor, not a party to arbitration agreement. 12. In **Indowind Energy Limited's case (supra),** the first respondent therein had entered into an agreement for sale with the second respondent. The second respondent was denoted as the buyer and promoters of company “I”. Dispute arose and arbitration proceeding was initiated against the second respondent and the company. The company contended that, there was no agreement between the first respondent and the company, that the company had not ratified the agreement for sale and that the company had not acted on it. It was contended that, it cannot be bound by the arbitration clause and cannot be made a party to the agreement. Supreme Court on facts held that Indowind had not acknowledged or confirmed any other correspondence or agreement that it was a party to the arbitration agreement or that, it was bound by the terms of the agreement. Hence, it was held that, they O.P(C).2078/19 10 ## cannot be bound by the arbitration proceeding. 13. In **Reckitt Benckiser (India) Private Limited's case (supra)** respondents 1 and 2 were constituents of a group of companies known as Reynders Label Printing Group and second respondent was a non-signatory party to the agreement executed between applicant and the first respondent. Claim was set up on the ground that one Frederik Reynders was acting for and on behalf of the second respondent as a result of which the second respondent had assented to the arbitration agreement. Answering the question that came up as to whether a nonsignatory party in an arbitration proceeding, Honourable Supreme Court referred to the decisions in **Cheran Properties Limited's case (supra) as well as Chloro Controls (India) Private Limited's case (supra)** . On facts, it was held that Frederik Reynders was neither connected nor had any authority of second respondent. He was only an employee of first respondent acting only in that capacity. Necessarily, his acts cannot bind the company. Accordingly, Court held that the application for proceeding against the second respondent has to fail on that conclusion. 14. The legal propositions made in the above cases clearly show that, recent decisions of the Supreme Court have consistently recognized that, in the present commercial scenario, where business transactions are often effectuated through multiple layers and agreements, there may be transactions within a group of companies. Applying the principle of O.P(C).2078/19 11 group of companies, it was held that the question whether a nonsignatory to an arbitration agreement can be made party to the arbitration proceeding depends upon the intention of the parties, the relationship of the non-signatory to the party to the signatory to the agreement, the commonality of subject matter, integrality of purpose or object and the composite nature of the transactions weigh in evaluating the issue. The duty of the Court was to impart to the commercial understanding, a sense of business efficacy, it was held. 15. The proposition advanced by the learned counsel for the KSEB cannot survive in the light of the decision in **Chloro Controls (India) Private Limited** and **Cheran Properties Limited's cases (supra)** . This exposition of law was affirmed and reiterated by the Supreme Court in **Ameet Lalchand's case** and **Mahanagar Telephone Nigam Ltd.'s case (supra).** In the light of the above, **Reckitt Benckiser (India) Private Limited's case (supra)** was different on facts. 16. In this background, the nature of the transaction between the parties in this case and its consequences will have to be evaluated. A copy of the letter of award (LOA) issued by the KSEB along with agreement dated 21.11.2012, and the copy of the original parent agreement entered into between the petitioner and the second respondent and the agreement between the petitioner and first respondent were made available. By the above LOA, petitioner herein O.P(C).2078/19 12 was appointed as the ITIA (IT Implementation Agency of the project). Clause (3) of the LOA indicates that, petitioner was recognized as one entity in consortium with M/s.POSDATA Co. Ltd. along with M/s.Enzen Global Solutions Private Limited. The various terms of the agreement, includes clause (27), which contemplates entering into a separate tripartite agreement between KSEB, ITIA and NSP/ISP. 17. Pursuant to the LOA, an agreement was entered into between the petitioner and the second respondent. In clause (5) of the agreement, there is a specific reference to the consortium. It was stated that, if the supplier is a consortium, the members of such consortium shall be jointly and severally liable to the purchaser (KSEB) for the fulfillment of the provisions of the contract. However, it was described that only the lead member shall have the authority to conduct all businesses for and on behalf of the consortium, during the bidding process and in the event the consortium is awarded the contract, during the contract execution. The composition of the consortium was not permitted to be altered. Arbitration clause was incorporated in the above contract. Thereafter a contract was entered into between the petitioner and the first respondent dated 05.03.2013. It is based on a clause in that agreement that the arbitration proceedings have been initiated. 18. Evidently, KSEB is not a party to the subsidiary agreement. However, a perusal of the original agreement with the KSEB indicates O.P(C).2078/19 13 that, KSEB has recognized the consortium inclusive the first respondent herein. The contract was with the petitioner as the lead member of the consortium. There is a commonality of purpose which was intended to provide service to KSEB in its implementation of IT project. All the agreements were entered into for achieving the common purpose for KSEB and for procurement of goods and services. All the agreements seems to be interconnected. There is a functional intergrality of the agreement between the petitioner and the second respondent. Agreement between the petitioner and the first respondent clearly shows that, even the KSEB contemplated a multi layer performance of the contract. 19. In the above factual situation, I feel that, prima facie there are materials sufficient to hold that, for the purpose of an effective arbitration proceedings, the presence of the second respondent in the arbitration proceeding is essential. The question whether KSEB can be bound by the terms of the award is a matter that has to be considered in the course of adjudication, which is not the subject matter of this original petition. Accordingly, original petition is liable to be allowed. I.A.No.1 of 2019 in arbitration case No.2 of 2018 stands allowed. KSEB will stand impleaded as a party in the arbitration proceedings. Arbitration proceedings can thereafter be proceeded in accordance with law. The second respondent will be free to raise all their objections in accordance O.P(C).2078/19 14 with law. It is made clear that, no comment is made regarding the respective rights, obligations and duties of the parties. Original petition is allowed to the above extent. **Sd/-** Sbna **SUNIL THOMAS JUDGE** O.P(C).2078/19 15 ## **APPENDIX** ## **PETITIONER'S EXHIBITS:** **EXHIBIT P1 TRUE PHOTOCOPY OF THE RELEVANT CLAUSES REGARDING CONSORTIUM IN MODEL RFP (REQUEST FOR PROPOSALS) ISSUED BY THE PFC (POWER FINANCE CORPORATION) WITH RESPECT TO ESSENTIAL REQUIREMENTS (CLAUSE 4, PAGES 5- 9). EXHIBIT P2 TRUE PHOTOCOPY OF THE LETTER OF AWARD DATED 6/9/2010 ISSUED BY THE 2ND RESPONDENT TO THE PETITIONER (PAGE-2). EXHIBIT P3 TRUE PHOTOCOPY OF THE RELEVANT PAGES OF THE AGREEMENT DATED 21/11/2012 BETWEEN THE PETITIONER AND THE 2ND RESPONDENT. EXHIBIT P4 TRUE PHOTOCOPY OF THE RELEVANT PAGES OF THE CONTRACT DATED 5/3/2013 BETWEEN THE PETITIONER AND THE 1ST RESPONDENT (CI.13). EXHIBIT P5 TRUE PHOTOCOPY OF THE 1ST AMENDMENT DATED 9/7/2013 OF EXHIBIT P4 AGREEMENT. EXHIBIT P6 TRUE PHOTOCOPY OF THE 2ND AMENDMENT DATED 13/9/2013 OF EXHIBIT P4 AGREEMENT (PAGE 1). EXHIBIT P7 TRUE PHOTOCOPY OF THE PROCEEDINGS DATED 3/4/2019 OF THE ARBITRAL TRIBUNAL FRAMING ISSUES IN ARB. CASE 2/2018 AS PER. EXHIBIT P8 TRUE PHOTOCOPY OF THE APPLICATION (IA NO.1/2019) FOR ISSUANCE NOTICE AND FOR ADDITION OF 2ND RESPONDENT. EXHIBIT P9 TRUE PHOTOCOPY OF THE PROCEEDINGS DATED 3/4/2019 ARBITRAL TRIBUNAL ORDERING ISSUE OF NOTICE IN IA NO.1/2019. EXHIBIT P10 TRUE PHOTOCOPY OF THE INTERIM ORDER DATED 2/5/2019 OF THE ARBITRAL TRIBUNAL IN (IA NO.1/2019).**