Arbitration is a prominent and widely sought mechanism for consensually resolving commercial disputes without court intervention. Since consent is the bedrock of arbitration, a third party cannot be forcibly joined in the arbitration proceedings as this would undermine the settled principle of party autonomy and privity of contract. However, in complex, multi-layered, and multi-party commercial disputes, it is often observed that some parties may not explicitly consent by formally executing the arbitration agreement, but their implicit consent can be inferred through their acts and conduct, such as relationship with the contracting parties, commonality of subject-matter, and involvement in the performance of a contract, etc. When mutual consent is discernible, a non-signatory may become a party to the arbitration agreement to prevent multiplicity of proceedings and timely adjudication of disputes.
The law on the joinder of non-signatories in arbitration has evolved progressively through a series of judicial precedents. Last year, a 5-judge constitution bench of the Supreme Court, through its landmark ruling in Cox and Kings Ltd vs SAP India Pvt Ltd[1], upheld the joinder of non-signatories based on the ‘group of companies’ doctrine. Recently, the Delhi High Court, in RBCL Piletech Infra vs Bholasingh Jayprakash Construction & Ors.[2], further expanded its scope by ruling that joinder is not only limited to cases where the signatory and non-signatory are a part of the ‘same group of companies’ but can also be allowed when inter-connected agreements are executed to achieve a common commercial goal with inter-twined obligations.
In this research piece, we analyze the progressive development of the law pertaining to the joinder of non-signatories in arbitration proceedings. We also highlight and address some practical questions, such as the determining factors for joining non-signatories, obtaining interim relief by non-signatories, enforcement of awards against non-signatories, etc.
Tracing the history of joinder of non-signatories in arbitration:
In the arbitral landscape, the development of law pertaining to the joinder of non-signatories is significantly influenced by the landmark three-judge bench judgment of the Supreme Court in Chloro Control vs Severn Trent Water Purification Ltd[3]. Thus, the evolution can be suitably bifurcated into two periods: pre-Chloro Control and post-Chloro Control.
Pre-Chloro Control era: Strict bar on joinder of non-signatories:
The underlying issue surfaced for the very first time in the matter of Sukanya Holdings Limited vs Jayesh H. Pandya[4], wherein an application under section 8 of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”) was filed to enforce an arbitration agreement between the signatories and a non-signatory. The Apex Court rejected the application by observing that there is no provision in the Arbitration Act that allows the joining of non-signatories, and only the parties to the agreement can be referred to arbitration.
A similar issue arose before the Supreme Court in the case of Indowind Energy Ltd. vs Wescare (I) Ltd.[5], wherein an application under section 11 of the Arbitration Act was filed to implead a non-signatory company to an arbitration, emanating from an agreement to sell executed between a buyer (the promoter of the non-signatory company) and a seller. Despite the evidently close connection between the promoter and the non-signatory entity, the Apex Court did not permit the non-signatory’s joinder in the arbitration proceedings, holding that non-signatories cannot be unnecessarily dragged into the arbitration proceedings against their consent.
Thus, the pre-Chloro Control era was marked by a strict and rigid interpretation of Arbitration Act where only the ‘parties’ explicitly named in the agreement could be joined in the arbitration proceedings, precluding any possibility of joining any non-signatory.
Chloro Control: Recognizing joinder of non-signatory vis a vis group of companies’ doctrine:
In Chloro Control (Supra), the moot question before the Apex Court was whether it could refer non-signatories to arbitration under section 45 of the Arbitration Act, especially when non-signatories are related parties to the signatories and have executed various ancillary agreements with them. To address this question, the Supreme Court placed strong reliance on the wording of section 45 of the Arbitration Act, which allows for a reference by ‘one of the parties or any person claiming through or under him’. The Apex Court opined that the term ‘any person’ clearly reflects the legislative intention to broaden the scope of parties beyond the mere signatories to the arbitration agreement.
Furthermore, the Apex Court highlighted that the joinder of non-signatories shall be permitted only when the signatories and non-signatories are closely interlinked within the same group or a single economic unit, popularly known as the ‘group of company’ doctrine. Although each corporate entity has a separate legal existence, this doctrine enables the joining of different entities in a single arbitration proceeding when the mutual intentions of all the parties are evident.
Developments post Chloro Control:
Following the Chloro Control (Supra) judgment, section 8 of the Arbitration Act was amended to include the phrase “claiming through or under”, similar to the corresponding section 45 in part II of the said Act. However, the definition of ‘party’ provided under section 2(1)(h) of the Arbitration Act was left intact.
Subsequently, in the matter of Ameet Lalchand Shah vs Rishabh Enterprises[6], the Supreme Court relied on the amended section 8 of the Arbitration Act and referred non-signatories to arbitration. In this case, four inter-connected agreements were executed involving multiple parties for the purpose of commissioning a solar plant in Jhansi, UP. Interestingly, the arbitration clause was not incorporated into all the agreements. A dispute arose between the parties, and an application under section 8 was filed seeking reference to all the parties to the arbitration. While allowing composite reference to arbitration, the Apex Court observed that since all the agreements are integrally connected with the sole purpose of achieving a single commercial goal, it is not essential that all interested parties must be signatories to the arbitration agreement.
However, a three-judge bench of the Supreme Court, in the case of Cox and Kings Ltd vs SAP India Pvt Ltd[7], questioned the correctness of the law laid down in Chloro Control (Supra). The Apex Court referred the matter to a larger bench, with the main question being whether the phrase “claiming through and under” in section 8 of the Arbitration Act could be interpreted to include the group of companies doctrine, which permits the joining of a non-signatory to the arbitration proceedings.
Cox vs SAP: Affirming joinder of non-signatories but overruling Chloro Control:
A five-judge constitution bench of the Supreme Court in Cox and Kings Ltd vs SAP India Pvt Ltd. (Supra) upheld the joinder of non-signatories but overruled the reasoning laid down in Chloro Contro (Supra). The Court clarified that the expression ‘claiming through or under’, as used in section 8 and section 45 of the Arbitration Act, does not permit the joinder of non-signatories to arbitration proceedings. The Apex Court observed that the aforesaid expression only intends to provide a derivate right and refers only to persons or entities standing in the shoes of the original party to assert a claim. Since non-signatories may have independent claims and obligations, they cannot be joined merely based on these provisions.
Further, the Apex Court emphasized that before joining a non-signatory, it must be a ‘party’ to the arbitration agreement, as defined under section 2(1)(h) read with section 7 of the Arbitration Act. Pursuant to section 7(3) of the Arbitration Act, there must be a written agreement between the signatory and non-signatory, although it need not be signed.
Justice P.S. Narasimha, in his concurring opinion, highlighted that to ascertain the existence of a written agreement between a signatory and a non-signatory, reference should be made to section 7(4)(b) of the Arbitration Act. As per the said section, a written agreement can be established through the exchange of correspondence, including letters, telexes, telegrams, and other telecommunication and electronic communication. Thus, whenever relevant correspondences indicates that the parties are at ad-idem, the courts should allow the joinder of non-signatories to the arbitration proceedings.
RBCL vs Bholasingh Construction: Enlarging the scope:
Recently, the Delhi High Court, in RBCL Piletech Infra vs Bholasingh Jayprakash Construction & Ors. (Supra), introduced a new dimension to the existing law by ruling that the joinder of non-signatories should not be restricted to cases where the signatory and the non-signatory belong to the same group of companies or a single economic unit. Instead, a joinder should be permitted when there are inter-connected agreements and the performance under the main agreement depends on the ancillary agreements.
In the instant case, Bharat Heavy Electrical Limited (“BHEL”) engaged Bolasingh Jaiprakash Construction (“Respondent”) for effecting some construction work at a site. The Respondent subcontracted the work to RBCL (“Petitioner”) and a work order was executed between the Petitioner and the Respondent having an arbitration clause. The work order provided for a back-to-back payment system wherein the invoices raised by the Petitioner were to be paid by the Respondent only after obtaining the approval and payment from BHEL. A dispute arose between the parties and the Petitioner approached the Delhi High Court for the appointment of an arbitrator, impleading both Respondent and BHEL as parties to the arbitration agreement.
The Delhi High Court, after considering the contractual mechanism, allowed the joinder of BHEL as a party to this arbitration proceedings as the payment to the Petitioner was solely dependent on its decision and it was also empowered to withhold payment. The Court held that although the Respondent and BHEL may not belong to the same group of companies, the interconnected nature of the agreements necessitates BHEL’s inclusion in the arbitration proceedings to ensure an effective resolution of the dispute.
The threshold for deciding the question of non-signatory at the referral stage:
At this juncture, an important question arises as to what shall be the threshold for determining the status of a non-signatory by the referral court under section 8 or section 11 of the Arbitration Act. The constitution bench of the Supreme Court in Cox vs SAP (Supra) stated that the referral court should conduct only a prima facie enquiry into the existence and validity of the agreement and whether the non-signatory is a party thereof or not. A detailed factual and legal enquiry to extend jurisdiction to the non-signatory party, by ascertaining mutual consent, should be undertaken only by the arbitrator.
Following this reasoning, the Bombay High Court, in the matter of Cardinal Energy and Infra Structure Private Ltd. vs Subramanya Construction and Development Co. Ltd.[8], held that even if the issue of joining a non-signatory is not raised before the referral court under section 11, the arbitral tribunal is vested with the authority to determine this issue and permit the impleadment of a non-signatory at a later stage.
Can a non-signatory obtain interim relief under section 9?
The Apex Court in Cox vs SAP (Supra) highlighted that only a ‘party’ to the arbitration agreement can approach the court to obtain interim relief. Thus, a non-signatory can seek such relief only after the arbitrator has finally determined that it is a party to the arbitration proceedings. Practically speaking, since this determination by the arbitrator involves a detailed factual inquiry, a non-signatory is not entitled to interim relief at the initial stage of the dispute, which is indeed very crucial to prevent irreparable harm and injury.
Enforcement of arbitral award against non-signatories: An unresolved quandary:
Although it is well established that a non-signatory can be a party to the arbitration proceedings, a critical question that still requires judicial clarity is whether an arbitral award can be enforced against a non-signatory who was not a party to the original arbitral proceedings. In Cheran Properties vs Kasturi & Sons Ltd[9], the Supreme Court relied on section 35 of the Arbitration Act and held that an arbitral award is final and binding on the parties and persons claiming under them respectively. The Court observed that the expression “persons claiming under them” in section 35 demonstrates that an arbitral award can be enforced even against a nominee of one of the signatory parties, who is a direct beneficiary of the underlying contract.
Similarly, in Gemini Bay Enterprise vs Integrated Sales Services[10], a foreign award was sought to be enforced against signatory and non-signatory entities. The Apex Court highlighted that section 46 of the Arbitration Act uses the expression ‘person’, which is wider and unrestrictive in nature, including non-signatory entities. Interestingly, the Court noted that although an arbitral award can be enforced against a non-signatory entity, it cannot raise objection against enforcement of an award under section 48 as this right is explicitly restricted to the parties officially named in the arbitration agreement. However, post the Constitution Bench ruling in Cox vs SAP (Supra), the term ‘party’ has been accorded a wider interpretation, and the non-signatories cannot be denuded of the right to raise objections.
Recently, the Delhi High Court, in the matter of Tomorrow Sales Agency Private Limited vs SBS Holdings[11], ruled that an arbitral award cannot be enforced against a third party who is merely funding the arbitration proceedings. The Court observed that a third party may only be bound by the arbitral award if it has been compelled to arbitrate and is a party to the arbitration proceedings. Even if a signatory is not a party to the arbitration proceedings, the arbitral award cannot be enforced against it. Though the Court did not emphasize much on the definition of ‘person’ and ‘party’, it distinguished Gemini Bay (Supra) by observing that, unlike the present case, the non-signatory was a party to the arbitral proceeding therein, which justifies enforcement.
Thus, considering this grey area, a detailed ruling is needed to determine the status of non-signatories who did not participate in the arbitration process.
Conclusion:
In a country like India, where a large number of business groups are operating with a complex web-like structure, it is extremely important to unravel the true sense of business arrangement and to include parties who are not signatories to the arbitration agreement. For joining non-signatories, the existence of written agreement and mutual consent must be established, which can be deduced from relevant correspondences, exchanges, performance and negotiation during the contract, commonality of subject matter, etc.
Additionally, it is now settled that the joinder is not restricted solely to the group of companies doctrine and the existence of inter-connected agreements coupled with inter-twined obligations also justifies inclusion. However, the issue pertaining to the enforcement of award against a non-signatory is plagued by inconsistent judicial decisions and requires an authoritative pronouncement.