Arbitration | Non-Signatory Party's Conduct And Relationship With Signatories May Indicate Intent To Be Bound : Supreme Court

In a recent ruling, the Supreme Court observed that an arbitration agreement is not necessarily non-binding on a non-signatory party. Such party, though not a signatory, may have intended to be bound through its conduct or relationship with the signatory parties. A referral court must determine the issue from a prima facie perspective; although, ultimately, it is the arbitral tribunal which shall decide the same based on evidence.

"The mutual intent of the parties, relationship of a non-signatory with a signatory, commonality of the subject matter, composite nature of the transactions and performance of the contract are all factors that signify the intention of the non-signatory to be bound by the arbitration agreement. An important factor to be considered by the Courts and Tribunals is the participation of the non-signatory in the performance of the underlying contract", said a bench of CJI DY Chandrachud and Justices JB Pardiwala, Manoj Misra.

Relying on its decision in Cox and Kings Ltd. v. SAP India Pvt. Ltd, the Court also reiterated that a referral court shall prima facie rule on the existence of the arbitration agreement. Drawing from the decision, it was further observed that the definition of “parties” under the Arbitration and Conciliation Act, 1996 includes both the signatory as well as non-signatory parties. As such, entities that have not signed the underlying contract (containing the arbitration agreement) may also intend to be bound.

"...the requirement of a written agreement under Section 7 of the Act, 1996 does not exclude the possibility of binding non-signatory parties if there is a defined legal relationship between the signatory and non-signatory parties. Therefore, the issue as to who is a “party” to an arbitration agreement is primarily an issue of consent. Actions or conduct could be an indicator of the consent of a party to be bound by the arbitration agreement."

The Court further said that the intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances that surround the participation of the non-signatory party in the negotiation, performance, and termination of the underlying contract containing such an agreement.

"...in order to infer consent of the non-signatory party, their involvement in the negotiation or performance of the contract must be positive, direct and substantial and not be merely incidental."

Factual Background

The matter arose out of a Family Arrangement Agreement (FAA) entered into between the petitioner-AMP Group and respondent-JRS Group. Representatives of the two groups were part of the same family. Another group viz. the SRG Group was also impleaded as a respondent. It had joined hands with the AMP Group and JRS Group in two entities i.e. Millenium and Deegee.

While the AMP Group was supposed to exit from Millenium and acquire shares in Deegee, the JRS and SRG Groups were supposed to exit from Deegee and, the SRG Group to acquire shares in Millenium.

Between 2013-2019, various disputes arose between the AMP Group on one side and the JRS and SRG Groups on the other which led to the filing of several proceedings before various forums.

After mediation between the parties yielded no result, and the two groups failed to agree on appointment of a Sole Arbitrator in 30 days, petitioner-AMP Group filed the present petition.

Submissions of petitioner-AMP Group

Petitioner-AMP Group submitted that though SRG Group was not a signatory to the FAA, it was a veritable party to the arbitration agreement since it participated in the negotiations leading up to the FAA and continued to talk with the parties on the issues pertaining to the implementation of the FAA.

Petitioner further contended that execution of the terms of the FAA required involvement and action of the SRG Group. It was also the petitioner's case that all the parties understood that the SRG Group would be a part of the execution and compliance of the FAA's terms and conditions. "Therefore, there was commonality of subject matter and composite transactions, in view of which SRG is a veritable party liable to be referred to arbitration", it said.

On the aspect of jurisdiction, the petitioner submitted that a referral court should leave it for the Arbitral Tribunal to decide whether a non-signatory party was indeed a party to the arbitration agreement on the basis of factual evidence and application of legal doctrine. It was also asserted that even a non-signatory should be referred to avoid the risk of its non-appearance before the Arbitral Tribunal and disregard of the award as beyond jurisdiction.

Submissions of respondents (JRS Group and SRG Group)

The JRS Group gave no-objection to appointment of the Sole Arbitrator nominated by the AMP Group. However, it claimed that SRG Group was not bound by the terms of the FAA since it was not a signatory to the said document. Further, it submitted that the FAA contained the definition of “parties” and the SRG Group was not defined in the FAA.

The SRG Group, on the other hand, pressed that the FAA was always intended to operate inter se the AMP and JRS Groups, and the SRG Group was neither a signatory nor a confirming party to the FAA. Referring to Section 7 of the Arbitration Act, it was further submitted that there was no defined legal relationship between the SRG Group and the petitioner.

Another argument raised by the SRG Group was that a dual test had to be satisfied to compel it to be a party to the arbitration proceedings i.e., (a) SRG Group had to be shown to have agreed to the underlying contract and (b) SRG Group had also to be shown to have agreed to be bound by the arbitration agreement. Both the conditions are not satisfied, the SRG Group said.

Issue

Whether the SRG Group, being a non-signatory to the FAA, could also be referred to arbitration along with the AMP and JRS Groups?

Court Observations

The Court went through a plethora of judgments relating to Section 11 of the Arbitration Act, including, SBP & Co. v. Patel Engg. Ltd., National Insurance Company Limited v. Boghara Polyfab Private Ltd, Duro Felguera S.A. v. Gangavaram Port Limited, Vidya Drolia and Ors. v. Durga Trading Corporation, SBI General Insurance Co. Ltd. v. Krish Spinning, and Cox and Kings (supra).

It was noted that Vidya Drolia (supra) endorsed the prima facie test in examining the existence and validity of an arbitration agreement both under Sections 8 and 11 respectively. However, it clarified that in cases of disputable facts, the Court may refer the parties to arbitration. Further, the bench in the captioned case stated that jurisdictional issues concerning whether certain parties are bound by a particular arbitration in a multi-party arbitration raise complicated questions of fact which are best left to the tribunal to decide.

In the context of Cox and Kings (supra), it was observed that there was a specific opinion that referral court shall prima facie rule on whether the non-signatory party is a veritable party to the arbitration agreement, but ultimately, the determination shall be left to the arbitral tribunal.

On facts of the case at hand, the Court was of the view that the requirement of prima facie existence of an arbitration agreement was satisfied, as both the respondent Groups did not question or deny the existence of the arbitration agreement. The only issue was whether the SRG Group could be a part of the arbitration proceedings.

So far as the second aspect, ie whether the SRG Group could also be referred to arbitration, the Court opined that entities which have not formally signed the arbitration agreement may also intend to be bound by it. One of the factors relevant to decipher intent of such an entity is its participation in the performance of the underlying contract. The conduct of the non-signatory party along with the other attending circumstances may lead the referral court to draw a legitimate inference that it is a veritable party to the arbitration agreement.

Considering that the SRG Group included Millenium and Deegee, the Court prima facie observed that without joinder of SRG Group, there may not be a complete and effective resolution of the disputes arising out of the FAA between the AMP and JRS Groups.

Taking into account other clauses of the FAA, it prima facie held that the SRG Group may be connected to the FAA and form part of the settlement contemplated. However, it would be proper that the arbitral tribunal decide the question.

In this regard, cognizant of its limited jurisdiction under Section 11(6) of the Arbitration Act, the Court mentioned that numerous disputed questions of fact were imperative in deciding whether the SRG Group could be bound by the FAA.

"...we should not conduct a mini trial and delve into contested or disputed questions of fact...Further, it is also the case of the SRG Group that a dual test needs to be satisfied before it is compelled to be a party to the present arbitration proceedings...We are of the considered view that the same requires a much more detailed examination of the evidence that may be adduced by the parties which can only be gone into by the Arbitral Tribunal", it said.

Conclusion

The Court concluded that it would be appropriate for the arbitral tribunal to take a call on the question whether the SRG Group is a veritable party to the arbitration agreement, after taking into consideration the evidence that may be adduced. The petition was allowed and former Chief Justice of Rajasthan High Court-Akil Kureshi appointed as the Sole Arbitrator.

Case Title: AJAY MADHUSUDAN PATEL & ORS. VERSUS JYOTRINDRA S. PATEL & ORS., ARBITRATION PETITION NO. 19 OF 2024

Citation : 2024 LiveLaw (SC) 727

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