Madras High Court Allows Enforcement Of Foreign Arbitral Award Against Non-Signatory That Issued Cheque As Security For Claim

The Madras High Court has allowed enforcement of a foreign arbitral award against a group company after noting that it had voluntarily issued a cheque as security for the disputed demurrage claim arising from a shipping contract.

A division bench of Justice C.V. Karthikeyan and Justice K. Kumaresh Babu observed that by issuing the cheque as security for the award amount, the company had effectively undertaken to satisfy the award if the charterer failed to do so. It therefore could not avoid liability by claiming that it was not a signatory to the arbitration agreement.

The court said:

“Though the 2nd respondent can claim that they were not a signatory to the agreement relating to which the arbitration proceedings had been initiated, they had taken a conscious decision to provide security for any award if granted against the 1st respondent. By the act of issuing a cheque as security for the award amount if passed, the 2nd respondent had directly undertaken to satisfy the award on failure of the 1st respondent to satisfy the award.”

The dispute arose from a voyage charterparty agreement between UAE-based shipping company LSS Ocean Transport DMCC and K.I. (International) Limited for transportation of coal from Richards Bay Terminal in South Africa to Krishnapatnam Port in India.

Under the charterparty, the charterer was required to discharge cargo at a stipulated rate. Failure to do so attracted demurrage charges payable to the shipping company.

According to the shipping company, the cargo was discharged well beyond the agreed time, resulting in substantial demurrage liability. The charterer, however, challenged the calculation of demurrage. According to it, the delay was far shorter, and only about 5.97 days of demurrage was payable.

With the parties unable to resolve the dispute, arbitration was invoked. The tribunal eventually issued a first final partial award directing the charterer to pay USD 294,816.67 towards disputed demurrage, along with interest and costs.

When the award-holder approached the Madras High Court for enforcement, it did not confine its claim to the charterer alone. Enforcement was also sought against Goyal Ispat Pvt Ltd, a company said to belong to the same corporate group.

The shipping company pointed out that during earlier proceedings seeking interim protection of its claim, the group company had stepped in and issued an undated cheque. That cheque, it said, was furnished as security for the very demurrage amount that later became the subject of arbitration.

Goyal Ispat resisted the move. It maintained that it was a separate legal entity and had no contractual relationship with the shipping company. The company stressed that it had neither signed the charterparty nor participated in the arbitration proceedings.

The division bench was not persuaded. The judges noted that the cheque had been voluntarily furnished as security and that it was issued with full awareness of the ongoing arbitration. At the time, the court had also treated the cheque as valid security for the claim.

Viewed in that context, the bench said the act of issuing the cheque carried legal consequences. By providing security for the disputed claim, the company had effectively undertaken responsibility for satisfying the award if the charterer failed to do so.

For that reason, the court found no need to examine the case through the lens of lifting the corporate veil. The liability arose from the company's own decision to secure the claim by issuing the cheque

It cautioned that allowing the company to escape liability after issuing such security would undermine enforcement of arbitral awards and encourage corporate structures designed to frustrate recovery.

The bench observed:

“They had knowledge that they would be made a party in an application seeking enforcement of the award. Having issued the cheque with such knowledge, they cannot now put forth a plea that, since they were not parties to the agreement or party to the arbitral proceedings, they cannot be made liable jointly and severally with the 1st respondent for the award passed by the arbitral tribunal. If permitted this would indirectly indicate encouragement of an act of deception and underlying fraud.”

The court also noted that the charterer had gone into liquidation. In these circumstances, the security provided by the group company became significant for enforcement of the award.

Accordingly, the bench allowed the appeal and set aside the order of the single judge, permitting enforcement of the arbitral award against the group company as well.