Arbitration Laws in India (Part III - Position of Non-signatories to Arbitration Proceedings)

Hari Narayan & Kavya Varma[i]

The Indian position of non-signatories in arbitration proceedings has undergone significant changes post the 2015 Amendment to the 1996 Act. This section shall deal with the role of third parties as stood under the 1996 Act and the 2015 Amendment Act and its consequences.


Under the 1996 Act, a “party” is defined as party to an arbitration agreement.[ii] The definition of arbitration agreement as stood under the 1996 Act is similar to that of model law. Section 7 of the 1996 Act defines arbitration agreement as, an agreement made by the parties to submit to arbitration, the disputes which may arise between them.[iii] The Section further states that an arbitration agreement may be in the form of either an arbitration clause in a contract or a separate agreement. The Section talks about arbitration agreements which are in writing, signed by the parties or by exchange or letters or other modes of communication.[iv]

A literal interpretation of the Section means that it may be possible to extend an arbitration agreement to a non-signatory, provided that it is formalized by means other than writing. The position of non-signatories to arbitration agreements was considered for the first time in India by the SC in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr.[v] In the instant case, Sukanya Holdings, tried to enforce an arbitration agreement against a third party by taking recourse to Section 8 of the 1996 Act[vi] before the HC of Bombay. The application was rejected by the Bombay HC on the ground that all the applicant parties were not signatories/parties to the arbitration agreement. The Court also observed that Act did not impose any power on the judicial authorities to add third parties to arbitration agreements. Aggrieved by the decision of Bombay HC, an appeal was preferred before the SC. However, the appeal was dismissed on the ground that, “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8.[vii]


In the case of Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr.[viii], the SC dealt with the following two questions,

  1. Was a non-signatory to an arbitration agreement bound by the arbitration clause in the arbitration agreement entered into between two parties?

  2. Was a company considered as a party to an arbitration agreement by its previous conduct even though it was not a signatory to the agreement.

The Court applied the strict rules of interpretation with respect to Section 7 of the 1996 Act and held that existence of an arbitration agreement is necessary so as to invoke arbitration. The Court also observed that a third party may be bound by the arbitration agreement, provided that, it had acknowledged in any correspondence or document that it is a party to the agreement. Hence, the Court refused to appoint an arbitrator u/s 11 of the 1996 Act where a non-signatory was advanced as a party to the arbitration proceedings.


A Division Bench of SC in the case of Sumitomo Corporation v. CDS Financial Services (Mauritius) Ltd. and Ors.[ix] dealt with petitions u/s 45 of the 1996 Act.[x] It was held by the SC that even in cases of petitions u/s 45 of the 1996 Act, an arbitration proceeding shall only be between “parties” to an agreement as defined u/s 2(1)(h) of the 1996 Act. However, it is interesting to note that the SC erred in this decision by not applying the exact wordings of Section 45. The section itself provides for enforcement of arbitration proceedings by the request of one of the parties or “any person” claiming through or under him.[xi]

This injustice done by the Sumitomo judgment was remedied by the SC Division Bench in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors.[xii] (“Chloro Controls”). In Chloro Controls, the Court while deciding the scope of Section 45 of the 1996 Act, interpreted it liberally. Language of Section 45 has wider connotation. The intention of the legislature by referring to the expression ‘any person claiming through or under’ is to include within it multiple and multiparty arbitration agreements. Even non-signatory parties to some of the agreements can pray and be referred to arbitration provided they satisfy the prerequisites u/s 44 and 45 read with Schedule I of the 1996 Act.

The extension of non-signatories to arbitration proceedings was further endorsed by the ‘Group of Companies Doctrine’. This doctrine has developed in the international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and non-signatory affiliates.[xiii] A non-signatory could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The Court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject matter and the agreement between the parties being a composite transaction.[xiv]

The question as to whether a non-signatory can invoke arbitration proceedings can be answered in light of the 2015 Amendment Act.

Subsequent to the judgment, the 2015 Amendment Act came into force, which brought in drastic changes to the arbitration laws in India. With respect to the position of non-signatories, the 2015 Amendment Act took heed from Chloro Controls and amended Section 8(1) of the 1996 Act.[xv]

The 2015 Amendment Act substituted the word ‘a party’ of the principle section with ‘a party to the arbitration agreement or any person claiming through or under him’.[xvi]

Also, an amendment was proposed to the definition of party u/s 2(1)(h) of the 1996 Act by the Law Commission.[xvii] It was suggested by that Section 2(1)(h) be amended so as to include the expression ‘any person claiming through or under him’ to such arbitration agreements. The suggestion came up in light of Chloro Controls judgment to ensure that the section includes any person who derives a common interest from such party. However, the 2015 Amendment Act did not incorporate an amendment to the said extent. The reason may be that such an explicit amendment would have far reaching consequences that it may allow any third party to invoke the arbitration proceedings, which at times would result in chaos.

In Cheran Properties Limited v. Kasturi and Sons Limited and Ors.[xviii], a three judge Bench of SC included the group of companies doctrine expounded in Chloro Controls and held that the doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.

In Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Ors.[xix], a principle lease agreement with an arbitration clause was entered into by the appellant and the respondent. Later on, a sale and purchase agreement were executed between them, which did not contain an arbitration clause. On a dispute between the parties which arose out of the sale and purchase agreement, an application was filed u/s 8 of the 1996 Act to the refer parties to the arbitration. The Single Bench of Delhi HC dismissed the application on the ground that these were not inter-connected agreements and thus parties cannot be referred to arbitration. The decision was upheld by the Division Bench of Delhi HC as well. On appeal, the SC held that the sale and purchase agreement was executed in furtherance of the principle agreement and Court must always impart “sense of business efficacy” to the commercial transactions.[xx] The decision of Chloro Controls was followed by the Division Bench of SC. It is interesting to note that while the judgment in Chloro Controls had been passed in light of foreign-seated arbitration, the decision in Ameet Lalchand further extended the position of non-signatories to domestic arbitrations as well.


Hence, as far as the position of non-signatories to the arbitration proceedings are concerned, it is a settled issue both by the 2015 Amendment Act as well as the SC judgments.

Conclusion

Arbitration laws in India are subjected to changes each passing day. The SC has held that the courts must develop a pragmatic approach and not a pedantic approach while interpreting or construing an arbitration agreement or arbitration clause. The Arbitration clause cannot be construed with a purely legislative mindset, as if one is construing a provision in a statute.[xxi] By means of various judicial pronouncements, the Courts have developed a conducive approach to arbitration laws. Needless to say, too much interference by the Court can be identified as one of the major reasons behind the delay in arbitration proceedings. Without a question of doubt, it can be very well stated that the 2015 Amendment Act was a very remarkable approach so as to make India an arbitration-friendly jurisdiction. As far as the exponential growth of arbitration is concerned, it is definitely making appreciable steps towards less time consuming and a more cost-effective arbitration mechanism. Built on the principle of party autonomy, arbitration provides for the granting of arbitral awards without judicial interferences, except on public interest considerations. What comes within the ambit of public interest, as far as an arbitration agreement/clause is concerned is for the Courts to decide. The present need is for bringing in arbitration institutions so that the country turns out to be a global hub of international arbitration. With respect to the changes incorporated by the 2019 Amendment Act, the extent to which it brings lesser judicial intervention is yet to be practically understood.

[i] Hari Narayan is a Senior Partner at United Maritime Law Chambers, a boutique admiralty law firm based out of Cochin, Kerala. Hari through his firm, UMLC has acted for a wide variety of institutions involved in International trade including MNC’s, FMCG’s, ship owners, Corporate Houses, insurers, and P & I Clubs. Hari is also a visiting faculty and Counsel, Indian Maritime University, and Gujarat Maritime University. Hari has served as a faculty for training Judges from the Federal Capital Territory High Court of Nigeria. He regularly holds Master Class on Marine Insurance and Cargo claims at Dubai, Singapore, and Kuala Lumpur. Kavya Varma is a Graduate of National University of Advanced Legal Studies (NUALS). [ii] The Arbitration and Conciliation Act, 1996, Section 2(1)(h). [iii] Id, Section 7(1). [iv] Id, Section 7(2). [v] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr., A.I.R. 2003 S.C. 2252. [vi] Section 8 allows a court, before which an action is brought which is the subject of an arbitration agreement, to refer the matter to arbitration on an application by one of the parties. [vii] Id, Para 15. [viii] Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr., A.I.R. 2010 S.C. 1793. [ix] Sumitomo Corporation v. CDS Financial Services (Mauritius) Ltd. and Ors., A.I.R. 2008 S.C. 1594. [x] Section 45 of the Act pertains to the enforcement of arbitration agreements in cases of international commercial arbitration. [xi] Id. [xii] Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors., (2013) 1 S.C.C. 641. [xiii] Id, Para. 66. [xiv] Id, Para. 67. [xv] Prior to the amendment, Section 8(1) of the 1996 Act read as, “A judicial authority, before which an action is brought in a manner which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration”. [xvi] Section 8(1) as amended by the 2015 Amendment Act reads as, A judicial authority, before which an action is brought in a manner which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists. [xvii] Law Commission Of India, Report No. 246- Amendments To The Arbitration And Conciliation Act, 1996 (2014), available at http://lawcommissionofindia.nic.in/reports/Report246.pdf. [xviii] Cheran Properties Limited v. Kasturi and Sons Limited and Ors., (2018) 16 S.C.C. 413. [xix] Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr, A.I.R. 2018 S.C. 3041. [xx] Id, at Para 32. [xxi] Enercon (India) Ltd. v. Enercon GMBH & Ors., (2014) 5 S.C.C. 1. Preferred Citation: Hari Narayan and Kavya Verma, Arbitration Laws in India, Arbitration & Corporate Law Review, Published on 21st August, 2020.



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