Non-Signatory Parent Company Liable Under Group of Companies Doctrine for Substantial Involvement in Contract Performance

Respondent No. 2 (Hiranmaye Energy Ltd) commissioned a thermal power plant and appointed an EPC contractor, which was later substituted by the Appellant through a Supply Contract dated 03.07.2015.

The Appellant issued Work and Purchase Orders to Respondent No. 1 for coal handling systems.

Disputes arose regarding outstanding payments, leading Respondent No. 1 to initiate arbitration.

The Sole Arbitrator passed an award on 16.10.2019, holding the Appellant and Respondent No. 2 jointly and severally liable to pay ₹6,56,84,982 with 38.85% interest under the MSME Act.

The Appellant’s challenge under Section 34 of the Arbitration and Conciliation Act, 1996 ("the Act") was dismissed by the Single Judge on 01.05.2025.

The Appellant appealed under Section 37, contending it was a non-signatory to the original arbitration agreement and lacked privity of contract.

1. Whether a party can raise new pleas and grounds in proceedings under Section 34 or 37 of the Act which were not agitated before the Arbitrator.

2. Whether the 'Group of Companies' doctrine was correctly applied to hold the Appellant (a non-signatory) jointly and severally liable.

3. Whether interest at the rate of 38.85% under the MSMED Act, 2006 is applicable in ad-hoc arbitration without recourse to Section 18 of said Act.

The court applied Section 37 of the Arbitration and Conciliation Act, 1996, which limits the scope of judicial interference to the grounds mentioned under Section 34.

It relied on Union of India v. Susaka (P) Ltd. to establish that pleas not raised before the arbitrator are waived.

Regarding non-signatories, the court applied the 'Group of Companies' doctrine as refined in Cox & Kings Ltd. v. SAP India Pvt. Ltd., which mandates looking at the mutual intent, relationship, and substantial involvement of the non-signatory in the performance of the contract.

Furthermore, it applied Sections 15 and 16 of the MSMED Act, 2006, holding that the right to statutory interest is independent of the dispute resolution mechanism under Section 18.

The Court observed that the Appellant participated in the initial stages of arbitration but failed to contest the claims on merits, effectively abandoning its defense; therefore, it was precluded from raising new factual or legal pleas on appeal.

On the 'Group of Companies' doctrine, the Court found that although the Appellant was not an original signatory, it stepped into the shoes of the EPC contractor via a Tripartite Agreement and a Supply Contract.

The Appellant's "pivotal role"—including issuing purchase orders, verifying invoices, and making partial payments—demonstrated a clear intent to be bound by the underlying contractual obligations.

Regarding interest, the Court affirmed the Single Judge's reasoning that MSMED Act interest (three times the bank rate) is a statutory right for registered enterprises and applies to any arbitration assessing dues for supplied goods/services, regardless of whether the MSME Council was approached.

The Appellant was a "veritable party" to the contract under the Group of Companies doctrine due to its active involvement in the project's execution.

The award of interest under the MSMED Act was valid even in ad-hoc arbitration.

The High Court dismissed the appeal, holding that the Arbitrator and the Single Judge acted within the law, upholding the award and the Section 34 judgment as consistent with public policy.