As a preface to this article, it will be interesting to note that there are one hundred and thirty-five (135) references to the word “party” in the Arbitration and Conciliation Act, 1996, as amended (hereinafter, the “Arbitration and Conciliation Act”), but only three (3) such references are qualified, i.e., the reference to the word “party” in Section 8, Section 35 and Section 45. More on this later.
In the early 2010’s, arbitration was confined only to the “traditional” parties to the arbitration agreement, i.e., the signatories to the agreement. Cases in reference, on a purely exemplary basis, are (a) the Sukanya Holdings Case (2003), which was an appeal from a Section 8 proceeding, (b) the Indowind Case (2010), which was a Section 11 petition for appointment of arbitrator, and (c) the S.N. Prasad Case (2010), which was an appeal from a Section 34 petition challenging an arbitral award. This was consistent with the letter of the law, where Section 2(1)(h) of the Arbitration and Conciliation Act defined a “party” as a “party to an arbitration agreement”. Therefore, arbitration could not be initiated by, or against, a non-signatory, be it an International Commercial Arbitration or a Domestic Arbitration.
Section 45 of the Arbitration and Conciliation Act, which applies to International Commercial Arbitrations, permitted reference of a dispute to arbitration on an application made by:
A party to the arbitration agreement or by a person claiming through or under him. Based on this language, in the Chloro Controls Case, the Supreme Court referred even those parties to arbitration who were non-signatories to the arbitration agreement. The distinction between the language of Section 8 and Section 45 was specifically noted by the Supreme Court while rendering this decision.
However, there was no clarity as to whether the Supreme Court had judicially expanded the definition of “Party” under Section 2(1)(h) of the Act or not, although there exist precedents where the Supreme Court has taken up this mantle of expanding definitions under a statute (see, for example, the Bangalore Water Supply Case, where the definition of “industry” under the Industrial Disputes Act, 1947 was judicially expanded by the Supreme Court).
Broadly, three factors were laid down in the Chloro Controls Case to refer non-signatories to arbitration:
Existence of direct relationship with a party which is signatory to the arbitration agreement.
Direct commonality of non-signatory to subject matter covered by the arbitration agreement.
Whether the agreement between the signatory parties was part of a composite transaction involving the non-signatories as well.
The Supreme Court also held that it should also be ensured that a composite reference would serve the ends of justice. Thereafter, in the Cheran Properties Case, the Supreme Court held that in deciding whether a non-signatory is bound by the arbitration agreement, a meaning consistent with business sense must be attributed to the transaction.
Subsequently, in the Reckitt Benckiser Case, the Supreme Court has added a further condition that an intention to consent to the arbitration agreement by the non-signatory should also be shown by the party seeking reference of a third party.
By the 2015 Amendment to the Arbitration and Conciliation Act, the persons who could seek reference to arbitration under Section 8 was amended to include a person claiming through or under a party to the arbitration agreement. This paved way for commencement of even domestic arbitrations by, or against, non-signatories to the arbitration agreement based on the law laid down in the Chloro Controls Case.
In this very interesting case decided in 2018, the Supreme Court held that on the strength of Section 35 of the Arbitration and Conciliation Act, any non-signatory, who could be said to be a person claiming under a party to the arbitration agreement, was bound by any award passed in a domestic arbitration. In the Cheran Properties Case, an arbitral award in a domestic arbitration was sought to be enforced against a third party, who was not a party to the arbitration agreement or to the arbitration proceedings. Yet, Supreme Court held that this third party was bound by the award based on the language of Section 35.
Such non-signatories would, therefore, be deemed to have been capable of being made parties to such arbitration. It would be against all principles of natural justice to say that a non-signatory to the arbitration agreement, who is claiming under another person/entity, can be bound by the result of a proceeding where it has no right to participate – Audi Alteram Partem.
The above discussion in the Cheran Properties Case effectively renders meaningless the amendment made to Section 8 by the 2015 Amendment, since, as per the Supreme Court, the words added in Section 8 were always there, albeit in the context of Section 35.
A remarkably interesting question that arises from the law, as it stands today, is which all non-signatories could be referred to arbitration? In the context of the Group Companies Doctrine, and based on the Cheran Properties Case, even a non-signatory who is unrelated to the signatory¬-parties in terms of cross-shareholding, but is related to the transaction both in terms of rights and liabilities arising out of the Contract, would be amenable to the jurisdiction of the arbitration agreement.
Another question having significant ramifications is whether the Chloro Controls Case read with the Cheran Properties Case has expanded the definition of “Party” under Section 2(1) (h) of the Act for all practical purposes? Given that the Chloro Controls Case quoted Russell on Arbitration to the effect that a non-signatory would “become a party to the arbitration agreement”, the Supreme Court effectively expanded the definition of a “Party” provided in Section 2(1) (h) of the Act. Even the broad findings rendered in the Cheran Properties Case lead to this inevitable conclusion.
However, practically speaking, the most crucial question to be answered is whether a Section 11 Petition be filed by, or against, a non-signatory to the arbitration agreement? Several arguments can be made for, and against, this proposition, some of which are stated below:
Once a non-signatory party is adjudicated by the Court to be within the meaning of “Party” under Section 2(1)(h), it would have all like rights as a “Party” to the arbitration agreement. This would necessarily include initiation of proceedings under Section 9, Section 16, Section 17, Section 34, Section 36 of the Arbitration and Conciliation Act, amongst others.
The necessary consequence of the above is that until there is an adjudication that the non-signatory party is a “Party” within the requirements of the judgments mentioned above, no right to initiate any proceedings under the Arbitration and Conciliation Act would flow to such third party.
This would mean that the right of non-signatory parties to initiate Section 9 proceedings before the initiation of arbitration proceeding would be curtailed, given that it is unlikely that a Section 9 Court would have the power to adjudicate if the party applying is a party to the arbitration agreement or not.
In the opinion of the author, there is a need to amend the definition of “Party” under Section 2(1)(h) of the Arbitration Act to include persons claiming through or under a party to the arbitration agreement, and remove the three (3) qualified references in Section 8, Section 35 and Section 45 of the Arbitration Act.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
