ARTICLE
12 May 2021

Extension Of Arbitration Agreement To A Non-Signatory

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As per the Contract Law, an agreement cannot be binding on the non-signatory. Similarly, an arbitration agreement is also governed by the same principle.
India Litigation, Mediation & Arbitration

As per the Contract Law, an agreement cannot be binding on the non-signatory. Similarly, an arbitration agreement is also governed by the same principle. Arbitration is based on consent and can only bind the parties who are in agreement to it. However, a non-signatory can be bound by an arbitration agreement in certain circumstances. Indian jurisprudence has developed in the light of the following circumstances:

INDIAN JURISPRUDENCE

A. The hon'ble Supreme Court of India in the case of Sukanya Holdings Pvt Ltd.1 held that non-signatory to the arbitration agreement cannot be referred to arbitration as there is no provision in the Arbitration Act which prescribes a mechanism in this regard.

B. However, the position of the apex court was broadened in 2013 in the case of Chloro Controld Pvt Ltd.2 The Sukanya Holding judgement was in context to Section 8 of the Arbitration Act (Domestic Arbitration) and thus, did not apply to the Chloro Controls Judgement as it is a foreign seated arbitration. The SC adopted the doctrine of “GROUP OF COMPANIES” and provided an exceptional scenario wherein a non-signatory could be included in the arbitration.

This doctrine was evolved in the ICC arbitral award of Dow Chemical Case3 and aimed to extend the arbitration agreement, signed only by one or some of the companies of a group, also to the non-signatory companies of the same group.4 According to it a non-signatory can be bound by the arbitration agreement if the conduct of the parties evidences a clear intention about the same. Thus, the court/ tribunal can admit a non-signatory as a party when it is satisfied that the non-signatory is a necessary party to the contract.

C. After these judgements, the Arbitration Act was amended in 2015 to apply the ratio Chloro Controls judgement even to the domestic arbitration. Hence, it replaced the word “party” with “a party to the arbitration agreement or any person claiming through or under him.”

D. The recent case in this regard is MTNL v Canara Bank5 , wherein the hon'ble Supreme Court has pointed out the circumstances when the Group of Companies doctrine can be invoked to make a non-signatory bound by an arbitration agreement. They are as follows:

  1. When it is established that it was the intention of all the parties to bind the signatory as well as Non-signatory to the arbitration agreement.
  2. When the non-signatory has been engaged in negotiation/ performance/ termination of the contract.
  3. When the non- Signatory has made statements to express its intention to be bound by the contract.
  4. When the non-signatory is involved in the execution of Composite Transaction which means a transaction with a common business objective which would not be possible without the participation of non-signatory party.
  5. When the signatory and non-signatory parties exist within a tight group structure with strong organizational and financial links to constitute “A Single Economic Unit”.

TYPES OF MECHANISM TO INCLUDE A NON-SIGNATORY TO AN ARBITRATION PROCEEDINGS

  1. JOINDER

A ‘joinder' refers to the inclusion of a third party by an original party to the arbitration proceedings using procedural methods. Joinder may occur at a later stage when the claimant chooses that a third party should become a supplementary respondent.6 Once a third[1]party assent to a bi-party arbitration, it converts to a multi-party arbitration proceeding. Insolvency is a very usual condition for joinder needs.

  1. CONSOLIDATION

Consolidation means consolidation of parallel arbitrations that have previously commenced or of claims developing from two distinctive arbitration agreements.7 The wording of the arbitration agreement, the laws of the seat of arbitration and the arbitral institute's rules play a predominant role in consolidation of arbitration. Consolidating associated mediations might be cost effective and may likewise evade conflicting results.8

  1. INTERVENTION

Intervention is the point at which an outsider shall submit a request for joinder to the institution by stating that “a third party wishing to be joined as an additional party to the arbitration”. Prior to the confirmation of the arbitral tribunal, the Institution has the right to decide whether such third party may intervene while post confirmation, the arbitral tribunal itself is conferred with the right to take such a decision. Furthermore, once the additional party is joined to the arbitration before the date on which the arbitral tribunal is confirmed, all parties shall be deemed to have waive of their right to designate the arbitrator and the institution shall appoint the arbitral tribunal. Intervention can be used only if the applicable institutional principles or national laws allow it like HKIAC rules.

CONCLUSION

There are mechanisms for referring a non-signatory to an arbitration. In determining whether a non-signatory should be joined to the proceedings, arbitrators have the same main requirements - consent, connectivity, timing, and procedural efficiency. The precedents have developed sufficiently to accommodate such situations. The apex court has evolved the horizon of domestic arbitration by adopting the doctrines such as Group of Companies and Composite transactions.

Although the Arbitration Act included the terms “a party to the arbitration agreement or any person claiming through or under him.” in Section 8, it still failed to address the issue on who can be termed as a person if they do not fall under the tight group of companies. As we can see the rules for extending an arbitration agreement to a non-signatory are still evolving.

Footnotes

1 (2003) 5 SCC 351

2 (2013) 1 SCC 641

3 ICC Award no. 4131, YCA 1984. At 131 et seq

4 Pietro Ferrario, ‘The Group of Companies Doctrine in International Commercial Arbitration: Is There any Reason for this Doctrine to Exist?' (2009) 26 Journal of International Arbitration, Issue 5, pp. 647–673

5 2019 SCC Online SC 995

6 Voser & Schellenberg 2009 at p. 346.

7 Lara M. Pair and Paul Frankenstein, ―New ICC Rule on Consolidation: Progress Or Change Emory Int'L L. Rev. 25, 2011: p. 1061 at p. 1063.

8 Brian King-Consistency of Awards in Cases of Parallel Proceedings concerning Related Subject Matters-, in A.V. Schlaepfer, P. Pinsolle, L. Degos, eds, Towards a Uniform International Arbitration Law, IAI Series on International Arbitration, No. 3 (Juris Publishing Inc. 2005) at p. 293

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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