Author: Thaarani S, Sathyabama Institute of Science and Technology
To the Point
Arbitration agreements serve as the cornerstone of alternative dispute resolution mechanisms, providing parties with a flexible means to resolve disputes outside traditional court litigation. However, the issue of non-signatories presents a complex challenge within the realm of arbitration law. This blog explores the legal landscape in India concerning arbitration agreements and the involvement of non-signatories. Through a comprehensive analysis of Indian statutes such as the Arbitration and Conciliation act, judicial precedents, and various legal doctrines, the abstract delves into the evolving jurisprudence surrounding the enforcement of arbitration agreements involving non-signatory entities. This blog aims to examine the criteria and circumstances under which non-signatories may be bound by arbitration agreements, including various doctrines such as piercing the corporate veil, estoppel, and group of companies doctrine. Furthermore, the aim of the blog is to evaluate the implications of recent judicial decisions and legislative reforms on the enforceability and interpretation of arbitration agreements involving non-signatories in India. By synthesising legal principles and practical considerations, this abstract contributes to a nuanced understanding of the challenges and prospects for effectively addressing the issue of non-signatories within the Indian arbitration framework.
Abstract
While the Indian legal realm is very dynamic in nature, the interrelation of arbitration agreements combined with the question of non-signatories in accordance with The Arbitration and Conciliation Act, 1996 is a persistent issue at hand. Arbitration has become the preferred method of dispute resolution, furnishing parties with an effective and cheaper alternative to court litigation. Sometimes, the situation demands the non-signatories to be a part of the arbitral proceedings due to their relevance to the case at hand. The principle of party autonomy is one of the key principles inbuilt in the A&C Act,1996 which allows parties to customise the arbitration process to suit their needs. Nevertheless, the controversial question regarding to what extent a non-signatory may be bound without being a party to the arbitration agreement scrutinises party autonomy as well as the “kompetenz” of the tribunal. This question becomes particularly important when multi-party transactions are involved, corporate reorganisations occur or when disputes involve related companies or third parties that were not direct signatories to the arbitration clause. Recent judicial precedents rendered by the High Courts and Supreme Court have employed various rules and doctrine to influence the issue of non-signatory positively.
Use of Legal Jargon
Section 7 of The Arbitration and Conciliation Act,1996 defines an arbitration agreement as an understanding between parties to use arbitration in settling disputes connected with a particular legal relationship, be it contractual or non-contractual. The different ways to form an arbitration agreement as per Section 7 includes Standalone (separate) Arbitration Agreement through which parties can enter into a separate agreement dedicated solely to arbitration, in addition to their main operative agreement, or Arbitration Clause included within the main operative agreement itself, specifying the rights and options for dispute resolution through arbitration, or Incorporation by Reference where an arbitration clause from a separate contract can be incorporated into the main contract by reference, subject to certain conditions under Section 7(5). However, the Supreme Court has held that the reference must be clear and indicate the intention to incorporate. Further, By Communication, as per Section 7(b), an arbitration agreement can be inferred from the exchange of letters, emails, or other means of telecommunication that provide a record of the agreement between parties, where there is a clear intention to refer disputes to arbitration.
The foundation of this alternate method of dispute resolution is the mutual consent of the parties to settle disputes through tribunals. But, there are exceptions to this rule and this gives birth to non-signatories being a part of these proceedings. Some commonly diagnosed scenarios in which non-signatories might be obligated by an arbitration agreement include implied consent, assumption of responsibilities, and agency connections. Consequently, it is important to also pay heed to the concept of corporate veil-piercing, contrary to the doctrine of separate legal entity, through which courts may additionally pierce the corporate veil and bind non-signatory or subsidiary organisations to an arbitration settlement signed via any other enterprise in the same company group, particularly in instances of fraud or abuse of company form.
The issue of non-signatories differs with the method opted for arbitration. In Institutional Arbitration, this issue is dealt with the institutional rules prescribed by the governing institution. whereas, in Ad-Hoc proceedings, either the parties or the court appoints the arbitrator as per section 11 of the A&C Act,1996. Therefore, binding a non-signatory to the agreement becomes a question of law that is to be decided by the judicial system. Coherently, the doctrine of kompetenz-kompetenz empowers the arbitral tribunal to rule on its own jurisdiction, under Section 16’s mandate. But, this doctrine has been misinterpreted in various instances by the arbitrators to implead third parties.
While, the Court, in Vistrat Real Estates Pvt. Ltd. V. Asian Hotels North Ltd. maintained that the Arbitral Tribunal had the authority to independently determine its own jurisdiction and competence in involving a third party, a well-established notion is that arbitral tribunals do not have the vested i.e., inherent power to act parallel to courts thereto. An Arbitral Tribunal is empowered to implead non-signatories in institutional arbitrations but, in general, the power to implead cannot be inferred from Sections 16 or 17 of the Arbitration and Conciliation Act. Therefore, the authority of arbitral tribunal to implead parties is restricted to what is explicitly granted by the applicable law i.e.,the A&C Act,1996.
Arbitral Tribunals, constrained by statutory limitations, lack the authority to assume powers similar to those under Order I Rule 10 of the Civil Procedure Code (CPC), which permits national courts to add or substitute parties in a lawsuit. Consequently, Section 17 of the Act does not explicitly confer the power to implead non-signatories. The authority to frame interim measures under clause (e) cannot encompass impleadment, as it primarily pertains to temporary measures, whereas impleadment involves permanently joining a party to the proceedings. Furthermore, Tribunals are prohibited from invoking the alter ego or group of companies’ principles to join or implead parties who have not consented to its jurisdiction. Such actions would contravene the fundamental principle of arbitration, which necessitates consensus and agreement among the parties involved.
Case Laws
Arupri Logistics Pvt Ltd V. Shri Vilas Gupta and Ors. (2023)
Standing as a landmark judgement, the Delhi High Court, in the case of Arupri Logistics Pvt Ltd V. Shri Vilas Gupta and Ors., echoed previous judgments by the Madras High Court, asserting that arbitrators lack authority to involve non-signatories. It noted that Section 17 of the Act doesn’t explicitly grant such power, and interim measures don’t encompass permanent party involvement. The appellants contested an Arbitral Tribunal’s jurisdiction to include non-signatories post-court referral, arguing the absence of a specific provision granting such authority. They argued that legal doctrines like “alter ego” or “group of companies” are exclusive to courts, not arbitrators. They emphasised the importance of party consent in arbitration, rejecting any inherent tribunal powers to involve non-signatories.
Chloro Controls India (P) Ltd. V. Severn Trent Water Purification Inc., (2013)
In this case, The Supreme Court analysed sections 8 and 45 of the Arbitration and Conciliation Act, which deal with a judicial authority’s discretion to refer parties involved in a legal proceeding to arbitration. These sections state that a party to an arbitration agreement or a “person claiming through or under him” may seek to refer the parties to arbitration. The Court interpreted the statutory phrase “persons claiming through or under” broadly, expanding the scope of arbitration clauses beyond the direct signatories to include those integral to the transaction, even if they had not explicitly consented to the arbitration agreement. The Court’s reasoning was influenced by various precedents, which serve as landmarks in the issue of non-signatories.
Sukanya Holdings Pvt. Ltd. V. Jayesh H. Pandya & Anr (2003)
But contrary to the Chloro Chemicals case, In Sukanya Holdings Pvt. Ltd. V. Jayesh H. Pandya & Anr, the court ruled that when a lawsuit involves a matter outside the scope of the arbitration agreement and includes parties not bound by the agreement, Section 8 of the Arbitration and Conciliation Act does not apply. Although the judgement primarily addressed the segmentation of the cause of action, it didn’t directly address the involvement of third parties. The court concluded that Section 8 should not be construed to permit the division of the cause of action or subject matter of the lawsuit. It emphasised that splitting the suit between parties bound by the arbitration agreement and those who aren’t would only delay the proceedings.
Sudhir Gopi V. Indira Gandhi National Open University and Anr., (2017)
Additionally, In Sudhir Gopi V. Indira Gandhi National Open University and Anr., One of the issues raised was whether an Arbitral Tribunal (AT) could utilise the group of companies doctrine to involve a party. The Court responded in the negative as the arbitral tribunals lack the inherent power and are only functional units of statutory powers.
IMC Ltd. V. Board of Trustees of Deendayal Port Trust (2019)
Contrary to the previous case, the Gujarat High Court, in IMC Ltd. V. Board of Trustees of Deendayal Port Trust, reached a different conclusion, stating that there is no legal prohibition preventing the Arbitral Tribunal from employing the alter ego doctrine to include third parties. It explicitly disagreed with Sudhir Gopi’s stance and asserted that the Arbitral Tribunal has the authority to address all matters within the purview of a court, except those specified in A. Ayyasamy V. Paramasivam , such as allegations of fraud or criminality.
Cox and Kings Ltd V. SAP India Pvt Ltd. (2022)
The Court scrutinised the definition of an arbitration agreement as outlined in Section 7 of the Arbitration and Conciliation Act, 1996. The Court noted that the matter under consideration did not revolve around extending an arbitration agreement to encompass third parties, but rather centred on identifying the genuine or ‘true’ parties involved in the dispute. Emphasising the importance of embracing a modern approach to consent, the Court highlighted the need to effectively navigate the commercial intricacies arising from complex transactions involving multiple interconnected agreements and parties.
SREI Infrastructure Finance Limited V. Tuff Drilling Private Limited(2018)
While many courts disagree, The Supreme Court, In the case of SREI Infrastructure Finance Limited V. Tuff Drilling Private Limited, contended that the Arbitral Tribunal’s authority to exercise the powers akin to a civil court was essentially unrestricted (Section 19 of the Arbitration Act). The Supreme Court noted that the Arbitral Tribunal is not in any way precluded from applying such regulations and even extending beyond them, provided it adheres to the principles of natural justice.
Abhibus Services India Pvt. Limited and Ors. V. Pallavan Transport Consultancies Services Ltd (2022)
Negatively, The Madras High Court concluded in the case of Abhibus Services India Pvt. Limited and Ors. V. Pallavan Transport Consultancies Services Ltd, stating that the tribunal’s power to include non-signatories or third parties would essentially alter the terms of the reference itself. Such action was deemed contrary to the fundamental principles underlying the arbitral tribunal as outlined in the Act.
Oil and Natural Gas Corporation Ltd V. Discovery Enterprises (2022)
Coherently, the Court determined that the factors articulated in Oil and Natural Gas Corporation Ltd V. Discovery Enterprises, should be collectively considered when assessing the relevance of the Doctrines. However, the Court warned that the application of these factors must be tailored to the specifics of each case, taking into consideration the intricacies of contemporary commercial endeavours. These factors encompass:
Mutual intent of the parties;
The relationship of a non-signatory to a party which is a signatory to the agreement;
The commonality of the subject-matter;
The composite nature of the transactions; and
The performance of the contract.
Conclusion
The issue of non-signatories in arbitration agreements is a full-size and complex vicinity of law that has been notably debated and deliberated upon by means of courts and legal experts. The fundamental precept of arbitration is that it’s primarily based on the consent of parties to clear up their disputes through the alternate method of arbitration instead of traditional courts. However, in certain situations, courts have recognized exceptions in which non-signatories, who’ve not immediately signed the arbitration settlement, can nevertheless be pressured to take part in arbitration proceedings. These exceptions have emerged through judicial interpretations and are aimed at upholding the validity and effectiveness of arbitration agreements at the same time as balancing the concepts of party autonomy and consent. The question regarding if non-signatories are bound by arbitration agreements is a convoluted field that undergoes changes over time under the Arbitration and Conciliation Act, 1996. Despite its commitment to party autonomy and consent, several exceptions have been recognized by Indian courts for non-signatories’ compulsory involvement in arbitration processes. These exemptions include consenting by silence, assuming responsibilities, corporate veil-piercing, agency relationships and group of companies doctrine. However, an application of such exemptions depends on facts only and necessitates comparison between various interests. In today’s world where people prefer to use the mode of solving disputes through arbitration more than ever before, there will be several changes that will take place in relation to non-signatory law cases. Henceforth, while drafting comprehensive arbitration agreements parties should ensure they anticipate potential non-signatory problems at the drafting stage to minimise future complications and uncertainties.
FAQS
Who are Non-Signatories with respect to Arbitration Agreements?
Non- Signatories are external parties to the arbitration agreement but may be a party to the main/ primary agreement of the parties. The party who has not signed an arbitration agreement is usually termed as “Non- Signatories”. Non – Signatories are usually rendered to fall outside the scope of the arbitration agreement.
Can Non- Signatories be bound by an Arbitration Agreement?
While there is no explicit provision which provides for Non- Signatories to be bound by any arbitration agreement as per the Arbitration and Conciliation Act,1996, factors such as Mutual intention of the parties, Commonality of subject matter, conduct of the non-signatories may influence their obligation under the arbitration agreement.
Are there any legal cases/ precedent that address the issue of non-signatories?
Various Landmark Judgements have discussed the issue of non-signatories bound by arbitration agreements. The Courts have often ruled out that Non- Signatories can still fall under the ambit of an arbitration agreement based on certain factors. One such landmark case is the ruling in Cox and Kings Ltd V. SAP India Pvt Ltd (2022).
