Scope Of Inclusion Of Non-Signatory Party To An Arbitration Agreement

SO
S&A Law Offices

Contributor

S&A Law Offices is a full-service law firm comprising experienced, well-recognized and accomplished professionals. S&A Law Offices aims to provide its clients (both domestic and international) with top-quality counsel and legal insights, which combines the Firm's innovative approach with comprehensive expertise across industries and a broad spectrum of modalities. Being a full-service law firm, we take pride in having the capability of providing impeccable legal solutions across various practice areas and industries and makes an endeavor to provide a 360 degree legal solution. With registered office at Gurugram and other strategically located offices in New Delhi, Mumbai, and Bengaluru, along with associate offices across India, S&A is fully equipped to provide legal services on a pan-India basis.
Consent by parties is the foundation of any arbitration. Usually, this consent is expressed in an arbitration agreement which binds the formal signatories to the contract.
India Litigation, Mediation & Arbitration

 Consent by parties is the foundation of any arbitration.  Usually, this consent is expressed in an arbitration  agreement which binds the formal signatories to the  contract. However, in certain circumstances, the court  or tribunal may extend the arbitration clause to include  a party other than a signatory to the arbitration clause.

As early as in 1984, the ICC while passing an award in  Dow Chemical v. Isover-Saint-Gobain1  held that in order  to be bound by the arbitration clause, the nonsignatory companies must have played a vital role in  'conclusion, performance or termination' of the  contract. The tribunal further held that mere corporate  ties between different companies was not enough to  bind non-signatories to a single arbitration.

Subsequently in Sukanya Holdings Pvt. Ltd. v. Jayesh H.  Pandya and Ors.2 , the Supreme Court held that  arbitration agreement will bind only the parties which  have entered into it, different cause of actions against  different parties cannot be bifurcated into a single  arbitration.

However, the said position changed when the Supreme  Court in Chloro Controls (I) P. Ltd. vs. Severn Trent Water  Purification Inc. and Ors.3 , applied the doctrine of 'Group  of Companies' to bind non-signatories to an arbitration  agreement. The Supreme Court distinguished the said  judgment from Sukanya Holdings on the basis that the  former judgment dealt with Section 8 of the Arbitration  and Conciliation Act, 1996 (Act) while the Chloro dealt  with Section 45 of the Act, wherein the words "person  claiming through or under" in Section 45, would mean  to take within its ambit multiple and multiparty  agreement in exceptional cases.

67 "This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the  non-signatory parties. In other words, 'intention  of the parties' is a very significant feature  which must be established before the scope of  arbitration can be said to include the signatory  as well as the non-signatory parties."

69 "In a case like the present one, where origin and end of all is with the Mother or the Principal Agreement, the fact that a party was non-signatory to one or other  agreement may not be of much significance. The  performance of any one of such agreements may be  quite irrelevant without the performance and  fulfillment of the Principal or the Mother Agreement.  Besides designing the corporate management to  successfully complete the joint ventures, where the  parties execute different agreements but all with one  primary object in mind, the Court would normally hold  the parties to the bargain of arbitration and not  encourage its avoidance. In cases involving execution  of such multiple agreements, two essential features  exist; firstly, all ancillary agreements are relatable to the  mother agreement and secondly, performance of one  is so intrinsically inter-linked with the other agreements  that they are incapable of being beneficially performed  without performance of the others or severed from the  rest. The intention of the parties to refer all the disputes  between all the parties to the arbitral tribunal is one of  the determinative factors."

Since Chloro Controls dealt with Section 45 of the Act, it  was debated whether non-signatory parties could ever  be bound by an arbitration agreement in a reference  under Section 8 of the Act. This ambiguity was removed  by the Arbitration and Conciliation (Amendment) Act,  2015 (the Amendment Act), wherein the following  words were included in Section 8, 'a party to the  arbitration agreement or any person claiming through  or under him' were included to replace the word 'party'.

Subsequently, in Ameet Lalchand Shah and Ors. vs.  Rishabh Enterprises and Ors.,4  it was held that in case where several parties are involved in a single  commercial project executed through several  agreements/contracts then in such a case, all the  parties can be covered by the arbitration clause in the  main agreement. The Supreme Court by passing the  said judgment, adopted a wider interpretation and  diluted the principle laid down in Sukanya Holdings.

Another big concern of parties to arbitration was  addressed by the Supreme Court in Cheran Properties  Limited vs. Kasturi and Sons Limited and Ors.5 The court  held that even an arbitral award may be binding on a  third-party if such party falls within the meaning of  'parties and persons claiming under them' under  Section 35 of the Act. The court further explained that  since law has evolved, the modern business transactions  are often effectuated through multiple layers and  agreements. There may be transactions within a group  of companies. The circumstances in which the parties  have entered into the agreement may reflect an  intention to bind both signatory and non-signatory  entities within the same group. Therefore, factors such  as the relationship of a non-signatory to a party which  is a signatory to the agreement, the commonality of  subject matter and the composite nature of the  transaction weigh in the balance.

The court, in Reckitt Benckiser (India) Private Limited vs.  Reynders Label Printing India Private Limited and Ors,6 while applying the principle laid down in Cheran  Properities, held that unless the non-signatory's  intention to be bound by the arbitration agreement  can be established, such non-signatory cannot be  referred to arbitration. The court held as follows:

"...If the main plank of the applicant, that Mr.  Frederik Reynders was acting for and on behalf  of respondent No.2 and had the authority  of respondent No.2, collapses, then it must  necessarily follow that respondent No.2 was  not a party to the stated agreement nor had it  given assent to the arbitration agreement and, in  absence thereof, even if respondent No.2 happens  to be a constituent of the group of companies  of which respondent No.1 is also a constituent,  that will be of no avail. For, the burden is on the  applicant to establish that respondent No.2  had an intention to consent to the arbitration agreement and be party thereto, maybe for the  limited purpose of enforcing the indemnity clause  9 in the agreement, which refers to respondent  No.1 and the supplier group against any claim of  loss, damages and expenses, howsoever incurred  or suffered by the applicant and arising out of or  in connection with matters specified therein. That  burden has not been discharged by the applicant  at all. On this finding, it must necessarily follow  that respondent No.2 cannot be subjected to the  proposed arbitration proceedings."

This position was further examined in Mahanagar  Telephone Nigam Ltd. v. Canara Bank and Ors.7 , wherein  the court laid down the circumstances in which 'Group  of Companies' doctrine can be invoked and allowed  impleadment of a non-signatory party to single  composite arbitration by invoking the 'Group of  Companies' doctrine. The following conditions were  laid down:

a) There should be an intention to bind the signatory as well as the non- signatory group companies to the arbitration agreement;

b) The non-signatory company has either:

i) Been engaged in the negotiation or the performance or the termination of the contract; or

ii) Made statements expressing its intention to be bound by the contract;

c) The non-signatory has a direct relationship with the signatory party or the parties are involved in the execution of a composite transaction, i.e., a transaction with a common or shared business objective which would not be  possible without the participation of the nonsignatory party.

d) The 'Group of Companies' doctrine may also be invoked by the courts if it can be established that the signatory and non-signatory parties  have strong organizational and financial links  so as to constitute 'a single economic unit'.

Hence, it is clear that the 'group of companies' doctrine  is an exception to the rule of privity of contract i.e., the  arbitration agreement between parties. The doctrine is  also an exception to Section 7 of the Act as per which an arbitration agreement must be in writing, thereby  being enforceable only against parties who are  signatories to the agreement. Thus, a non-signatory  can be made bound to an arbitration agreement only  in exceptional circumstances.

Footnotes

1 ICC Award No. 4131, YCA 1984, at 131.

2 (2003) 5 SCC 351.

3 (2013) 1 SCC 641.

4 (2018) 15 SCC 678.

5  (2018) 16 SCC 413.

6 (2019) 7 SCC 62.

7 2019 SCC OnLine SC 995.

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.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More