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Introduction:

The recent judgment of the Madras High Court in the case of Vatsala Jagannathan v. Tristar Accommodations Ltd, 2023 SCC OnLine Mad 308 (“Vatsala Judgment”), provides greater clarity on the limited circumstances when a non-signatory can be held to be a party to the arbitration agreement through the application of the alter ego doctrine/ group liability doctrine. In this instance, the Madras High Court refused to appoint an arbitrator in a case where a party sought to compel non signatories to the arbitration agreement to arbitration.

The Vatsala Judgment dealt with a case wherein the Petitioners comprising two individuals contracted with a company pursuant to which the company would construct a multistorey building on the Landed Property owned by the Petitioners. The Petitioner alleged that the Company through its then Managing Director - Mr. Naren Rajan had committed malfeasance with respect to the Petitioners Landed Property by mortgaging the same without the consent of the Petitioners. Thereafter the companies Managing Director – Mr. Naren Rajan died. The Petitioners commenced arbitration proceedings under the arbitration agreement contained in the contract between the Petitioners and the Company in which they had sought to array the legal heirs of Mr. Naren Rajan i.e., his mother, his widow, his daughter, and his sister in the arbitration proceedings by invoking the alter ego doctrine.

The Madras High Court in analysing the particular facts of the case made an observation that whilst it can perhaps be argued that the mother of the of the Companies deceased Managing Director can be treated as the alter ego of the Company so as to bind her to the arbitration agreement contained in the contract between the Company and the Petitioners, in the particular facts of the case, the Companies deceased Managing Director, widow, daughter and sister cannot be said to be the alter ego of the Company. In the particular facts of that case the Companies deceased Managing Director, widow, daughter, and sister has a relatively insignificant equity stake in the Company in comparison to that of his mother. Additionally, at all material times the Companies deceased Managing Director’s mother was a director of the Company and was privy to all transactions entered into by the Company in comparison to that of his widow, daughter and sister.

The Madras High Court had arrived the conclusion of law that “the doctrine of alter ego is resorted to in exceptional cases to depart from the fundamental principle that only a signatory to an arbitration agreement is bound by it. It is further clear that it is a significant and exceptional departure which should not be resorted to unless there is convincing evidence that the nonsignatory is the alter ego of the signatory.”

Notwithstanding this observation the Madras High Court did not appoint an arbitrator in the dispute between the Petitioner and the Companies deceased Managing Director Mother as the Court came to a finding that the Petitioners by their conduct had waived and repudiated the arbitration agreement by having instituting a substantial lawsuit on the cause of action arising under the contract containing the arbitration agreement.