2025 INSC 507
SUPREME COURT OF INDIA
(HON’BLE PAMIDIGHANTAM SRI
NARASIMHA, J. AND HON’BLE MANOJ MISRA, JJ.)
ADAVYA PROJECTS
PVT. LTD.
Appellant
VERSUS
M/S VISHAL
STRUCTURALS PVT. LTD. & ORS.
Respondent
Civil Appeal No. 5297 OF 2025 Arising
Out Of Slp (C) No. 25746 OF 2024-Decided on 17-04-2025
Arbitration
Arbitration and
Conciliation Act, 1996, 21, 11 and 16 – Arbitration proceedings – Impleadment - Whether the service of notice
invoking arbitration under Section 21 of the Act, 1996 on a person and joinder
of such person in the application under Section 11 for appointment of
arbitrator are prerequisites for an arbitral tribunal to exercise jurisdiction
over him, and further, when can an arbitral tribunal implead a person to the
arbitration proceedings - Held that a
notice invoking arbitration under Section 21 of the ACA is mandatory as it
fixes the date of commencement of arbitration, which is essential for
determining limitation periods and the applicable law, and it is a prerequisite
to filing an application under Section 11 - However, merely because such a
notice was not issued to certain persons who are parties to the arbitration
agreement does not denude the arbitral tribunal of its jurisdiction to implead
them as parties during the arbitral proceedings - The purpose of an application under Section
11 is for the court to appoint an arbitrator, so as to enable dispute
resolution through arbitration when the appointment procedure in the agreement
fails - The court only undertakes a limited and prima facie examination into
the existence of the arbitration agreement and its parties at this stage -
Hence, merely because a court does not refer a certain party to arbitration in
its order does not denude the jurisdiction of the arbitral tribunal from
impleading them during the arbitral proceedings as the referral court's view
does not finally determine this issue - The relevant consideration to determine
whether a person can be made a party before the arbitral tribunal is if such a
person is a party to the arbitration agreement - The arbitral tribunal must
determine this jurisdictional issue in an application under Section 16 by
examining whether a non-signatory is a party to the arbitration agreement as
per Section 7 of the ACA - Respondent
nos. 2 and 3 are parties to the arbitration agreement in Clause 40 of the LLP
Agreement despite being non-signatories - Their conduct is in accordance with
and in pursuance of the terms of the LLP Agreement, and hence, they can be made
parties to the arbitral proceedings - Impugned judgment and order of the High
Court liable to be set aside - Proceedings must be continued from the stage of
arbitral tribunal's order dated 15.02.2024.
(Para
1, 40 and 41)
Judgment
Pamidighantam Sri
Narasimha, J. :-
Leave granted.
2. The issues arising in the
present appeal are whether the service of notice invoking arbitration under
Section 21 of the Arbitration and Conciliation Act, 1996[Hereinafter "the ACA".] on a person and joinder of such
person in the application under Section 11 for appointment of arbitrator are
prerequisites for an arbitral tribunal to exercise jurisdiction over him, and
further, when can an arbitral tribunal implead a person to the arbitration
proceedings. In the present case, the arbitral tribunal, while determining its
own jurisdiction under Section 16, took the view that service of a Section 21
notice and being made party to the Section 11 application are mandatory
requirements for a person/entity to be made party to the arbitral proceedings.
By the impugned order, the High Court has affirmed and upheld this reasoning in
exercise of its appellate jurisdiction under Section 37, from which the present
appeal arises. Upon consideration of the purpose and scope of a Section 21
notice and Section 11 application, as well as the source of the arbitral
tribunal's jurisdiction being the arbitration agreement and the principle of
kompetenz-kompetenz under Section 16 of the ACA, we have allowed the present
appeal by answering the issues as follows:
First, while a notice invoking arbitration under Section 21 is mandatory and
fulfils various purposes by fixing the date of commencement of arbitral
proceedings, non-service of such notice on a person does not preclude his
impleadment in the arbitral proceedings. Second, the purpose of an application
under Section 11 is simply the constitution of the arbitral tribunal, which is
pursuant to a limited and prima facie examination by the referral court. The
order appointing the arbitrator does not limit the arbitral tribunal's terms of
reference or scope of jurisdiction. Third, the arbitral tribunal's jurisdiction
over a person/entity is derived from their consent to the arbitration
agreement. Hence, the proper inquiry in an application under Section 16 is
whether such person is a party to the arbitration agreement. Fourth, in the
facts of the present case, an arbitration agreement exists between the
appellant and respondent nos. 2 and 3, and hence they can be impleaded as
parties to the arbitral proceedings.
3. Facts: The facts that are
relevant for our purpose are as follows. The appellant and respondent no. 1
entered into an agreement dated 01.06.2012 to form a Limited Liability
Partnership[Hereinafter "LLP".]
by the name of Vishal Capricorn Energy Services LLP, which is respondent no. 2 herein, to carry out various oil and gas
sector projects. It is relevant to note at this stage that only the appellant
and respondent no. 1 are signatories to the LLP Agreement. Clause 8 of the LLP
Agreement provides that Mr. Kishore Krishnamoorthy, who is respondent no. 3
herein, shall be designated as the Chief Executive Officer of the LLP and will
be responsible for administration of business and looking after the execution
of contracts. It is relevant that respondent no. 3 is also a director of
respondent no. 1 company. Further, Clause 40 of the LLP Agreement provides for
dispute resolution through arbitration in the following terms:
"40.
Disputes or differences, if any, that may arise between partners inter se and/
or between the partner(s) and LLP hereto or their affiliates, assigns,
successors, attorneys, administrators and all those claiming through it
touching these presents or the construction thereof or any clause or thing
herein contained or otherwise or in any way relating to or concerning these
presents or the rights, duties or liabilities of any of the partners hereto in
connection therewith the matters in such dispute or difference shall be
referred to the arbitration in accordance with and subject to the provisions of
Arbitration and Conciliation Act, 1996 or to any statutory modification or
reenactment thereof for the time being in force. The venue of the Arbitration
shall be decided by the Arbitrator so appointed by mutual consent of both
partners."
3.1 By letter of award dated
31.12.2012, Oil India Ltd. awarded a contract for augmentation of storage
capacity at ITF, Tenughat, Assam to a consortium, of which respondent no. 1 was
a member. By agreement dated 08.01.2013, the consortium sub-contracted the ITF
Project to respondent no. 1. Pursuantly, the appellant and respondent no. 1
entered into a Supplementary Agreement and a Memorandum of Understanding[Hereinafter "MoU".], both
dated 29.01.2013, for execution of the ITF Project through respondent no. 2.
The appellant infused funds of Rs. 1.1 crores for the execution of this
Project.
3.2 Disputes arose in 2018 when
the appellant sought documents and information to audit respondent no. 2's
accounts in relation to the ITF Project. The appellant then issued demand
notices dated 11.10.2019 and 20.12.2019 to respondent no. 1 for payment of Rs.
7.31 crores towards reconciliation of accounts of the LLP. Subsequently, on
17.11.2020, the appellant issued a notice invoking arbitration under Clause 40
of the LLP Agreement. It is relevant that this notice was issued only to
respondent no. 1 through its Director, respondent no. 3. The appellant then
filed a Section 11 application for appointment of arbitrator, impleading only
respondent no. 1 as a party. The High Court, by order dated 24.11.2021,
appointed a sole arbitrator "to adjudicate the disputes that are stated to
have arisen between the parties out of the LLP Agreement dated 01st June, 2012
read with Supplementary LLP Agreement and MoU both dated 29th January,
2013."
3.3 After the arbitrator entered
reference, the appellant filed its statement of claim, wherein it also
impleaded respondent nos. 2 and 3 as parties to the arbitration. However, at
the time of filing, the prayer clause was restricted to respondent no. 1.
Respondent nos. 1-3 then filed an application under Section 16 of the ACA,
raising various objections to the arbitral tribunal's jurisdiction. The most
relevant objection for our purpose is that the arbitration is not maintainable
against respondent nos. 2 and 3 as they were not parties to the notice invoking
arbitration under Section 21 or the application for appointment of arbitrator
under Section 11. Further, it was contended that the arbitration agreement
contained in Clause 40 of the LLP Agreement does not bind respondent no. 2,
which is itself a creature of the LLP Agreement, and respondent no. 3 as he was
not a party to the LLP Agreement in his individual capacity.
3.4 In the meanwhile, the
appellant preferred an application under Section 23(3) of the ACA to amend the
statement of claim in order to bring on record a detailed memo of parties and
to amend the prayer clause to include respondent nos. 2 and 3 as well. The appellant's
application for amendment was allowed by the arbitral tribunal's order dated
01.08.2023 on the ground that these are ministerial amendments that do not
change the averments in the original statement of claim.
4. Arbitral Tribunal's Decision
on the Section 16 Application: By order dated 15.02.2024, the arbitral tribunal
allowed the application under Section 16 and held that the arbitral proceedings
against respondent nos. 2 and 3 are not maintainable. The reasoning of the
arbitral tribunal is that in the absence of the notice invoking arbitration
being served on respondent nos. 2 and 3, as well as considering that the High
Court did not refer them to arbitration while allowing the Section 11
application, the arbitral tribunal cannot exercise jurisdiction over them. The arbitral
tribunal also rejected the appellant's argument regarding its own competence to
implead non-signatories as necessary parties by holding that there is no
finding that respondent nos. 2 and 3 are essential for effective adjudication
of disputes.
5. Impugned Order: The appellant's
appeal under Section 37(2)(a) of the ACA against the arbitral tribunal's order
was dismissed by the High Court's order dated 08.07.2024, which is impugned
herein. The High Court proceeded on a similar basis and held that since the
Section 21 notice and the Section 11 application do not raise any disputes
against respondent nos. 2 and 3, and they are not included as parties therein,
the appellant cannot be permitted to subsequently raise disputes against them
in the statement of claim.
6. Submissions: We have heard Mr.
Gaurav Agrawal, learned senior counsel for the appellant and Mr. Varun Kanwal,
learned counsel for the respondents.
6.1 Mr. Agrawal has submitted
that: First, as per the principle of kompetenz-kompetenz enshrined in Section
16 of the ACA, the arbitral tribunal has the power to implead parties
(signatories or non-signatories) even after reference to arbitration if the
disputes involving them arise from the same agreement. [Relied on Cox and Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1.]
In the present facts, respondent nos. 2 and 3 ought to be impleaded for
complete adjudication of disputes, considering their intentional and consensual
involvement in the performance of the LLP Agreement, Supplementary Agreement,
and MoU as well as execution of the ITF Project. Second, they are bound by the
arbitration agreement in Clause 40 of the LLP Agreement as it specifically
refers to disputes between the partners and the LLP (respondent no. 2), and the partners and the administrator
(respondent no. 3). Further, even Section 23(4) of the Limited Liability
Partnership Act, 2008 read with Schedule I provides for arbitration between the
LLP and its partners. Third, given the intertwined roles of the respondents,
the absence of a separate notice under Section 21 being issued to them does not
bar the appellant from impleading them in the arbitral claim as they had
constructive notice through respondent no. 1 upon whom such notice was served.
6.2 Mr. Kanwal, on the other
hand, has submitted that the issue for consideration is not the arbitral
tribunal's jurisdiction to implead a non-signatory. Rather, it is whether a
person/entity that has not been served with a notice under Section 21, and has
not been referred to arbitration by the court under Section 11 of the ACA, can
be made a party to the arbitral proceedings. His submissions are as follows:
First, this Court's decision in Cox and Kings (supra) is not applicable to the
facts of the case, and has rightly been distinguished as neither the arbitral
tribunal nor the High Court have found that respondent nos. 2 and 3 are necessary
parties for effective adjudication of disputes. Second, that respondent nos. 2
and 3 are not bound by the arbitration agreement as they are not parties to the
same. Third, that the proceedings against respondent nos. 2 and 3 are contrary
to principles of natural justice as they were not served with any notice or
impleaded in the Section 11 application.
7. Issues: Given the factual
background and submissions of the parties, there are two questions of law that
can be framed for our consideration:
I. Whether
service of a Section 21 notice and joinder in a Section 11 application are prerequisites
to implead a person/entity as a party to the arbitral proceedings?
II. What
is the source of jurisdiction of an arbitral tribunal over a person/entity who
is sought to be impleaded as a party to the arbitral proceedings? As a
corollary, what is the relevant inquiry that the arbitral tribunal must
undertake when determining its own jurisdiction under Section 16 of the ACA?
7.1 After analysing and answering
these legal issues, we will examine the facts and the material on record in the
present case to determine whether respondent nos. 2 and 3 can be made parties
to the arbitral proceedings.
8. Notice Invoking Arbitration
under Section 21 of the ACA: Section 21 falls under Part I, Chapter V of the
ACA, which deals with "Conduct of arbitral proceedings". The
provision is extracted hereinbelow for reference:
"21.
Commencement of arbitral proceedings.—Unless otherwise agreed by the parties,
the arbitral proceedings in respect of a particular dispute commence on the
date on which a request for that dispute to be referred to arbitration is
received by the respondent."
9. A plain reading of the
provision shows that in the absence of an agreement between the parties, arbitral
proceedings are deemed to have commenced when the respondent receives a request
to refer disputes to arbitration. It is clear that Section 21 does not
expressly mandate the claimant to send a notice invoking arbitration to the
respondents. However, the provision necessarily mandates such notice as its
receipt by the respondent is required to commence arbitral proceedings, unless the
parties have mutually agreed on another date/event for determining when the
arbitral proceedings have commenced.
10. This Court has expounded the
purpose and object underlying the notice referenced in Section 21 in several
judgments, which can be stated as follows:
10.1 First, the notice is
necessary to determine whether claims are within the period of limitation or
are time-barred. Section 43(1) of the ACA stipulates that the Limitation Act,
1963 shall apply to arbitrations as it applies to court proceedings. Further,
Section 43(2) provides that for the purpose of the Limitation Act, an
arbitration shall be deemed to have commenced on the date referred to in
Section 21. Hence, the date of receipt of the Section 21 notice is used to
determine whether a dispute has been raised within the limitation period as
specified in the Schedule to the Limitation Act, as held by this Court in
Milkfood Ltd. v. GMC Ice Cream (P) Ltd.
[(2004) 7 SCC 288, paras 26, 29] and State of Goa v. Praveen Enterprises[(2012) 12 SCC 581, paras 16, 18.].
10.2 Second, the date of receipt
of notice is also relevant to determine the applicable law to the arbitral
proceedings. This can be understood in two senses: (i) When the arbitral
proceedings are governed by a law that is different from the proper law of the
contract, the governing law applies only after the arbitral proceedings have
commenced, as held in Milkfood Ltd (supra)
[Milkfood Ltd (supra), para 31.]. And, (ii) Section 85(2)(a) of the ACA
provides that the Arbitration Act, 1940 and Foreign Awards (Recognition and
Enforcement) Act, 1961 will apply to arbitral proceedings that commenced prior
to the ACA coming into force, unless otherwise agreed by the parties. Hence,
the date of invoking arbitration is necessary to determine which arbitration law
applies to the proceedings as per the decisions
in Milkfood Ltd (supra) [ibid, paras 46,
49, 70.] and Geo-Miller & Co (P) Ltd. v. Chairman, Rajasthan Vidyut
Utpadan Nigam Ltd. [(2020) 14 SCC 643,
para 10.] Similarly, the applicability of amendments to the ACA to arbitral
proceedings is determined by reference to the date on which such proceedings
commenced as per Section 21. [For
example, the applicability of the Arbitration and Conciliation (Amendment) Act,
2015 to arbitral proceedings depends on whether the notice invoking arbitration
was issued before or after the amendment came into force. See BCCIv. Kochi
Cricket (P) Ltd., (2018) 6 SCC 287, paras 38-39.]
10.3 Third, an application before
the High Court or this Court under Section 11 (6) of the ACA for appointment of
arbitrator can be filed only after the respondent has failed to act as per the
appointment procedure in the arbitration agreement. Hence, invocation of
arbitration as provided in Section 21, and the subsequent failure of the
respondent to appoint its arbitrator or agree to the appointment of a sole
arbitrator as provided in Sections 11 (4) and 11 (5), are necessary for
invoking the court's jurisdiction under Section 11. This is as per the decision
of this Court in BSNL v. Nortel Networks (India) (P) Ltd. [(2021) 5 SCC 738, para 15.] Further, the limitation period within
which the Section 11 application must be filed is also calculated with
reference to the date on which the appointment procedure under the arbitration
agreement fails. [ibid, para 16.]
11. It is clear that by fixing
the date of commencement of arbitral proceedings by anchoring the same to a notice
invoking arbitration, Section 21 of the ACA fulfils various objects that are
time-related. The receipt of such notice is determinative of the limitation
period for substantive disputes as well as the Section 11 application, and also
the law applicable to the arbitration proceedings.
12. In this case, a Section 21
notice was undisputedly issued by the appellant under Clause 40 of the LLP Agreement
on 17.11.2020; but the problem arises because this notice was issued only to
respondent no. 1. However, there is nothing in the wording of the provision or
the scheme of the ACA to indicate that merely because such notice was not
served on respondent nos. 2 and 3, they cannot be impleaded as parties to the
arbitral proceedings. The relevant considerations for joining them as parties
to the arbitration will be discussed at a later stage.
13. At this point, it is
important to note this Court's decision in State ofGoa v. Praveen Enterprises
(supra) wherein it was held that the claims and disputes raised in the notice
under Section 21 do not restrict and limit the claims that can be raised before
the arbitral tribunal. The consequence of not raising a claim in the notice is
only that the limitation period for such claim that is raised before the
arbitral tribunal for the first time will be calculated differently vis-a-vis
claims raised in the notice. However, non-inclusion of certain disputes in the
Section 21 notice does not preclude a claimant from raising them during the
arbitration, as long as they are covered under the arbitration agreement.
Further, merely because a respondent did not issue a notice raising
counter-claims, he is not precluded from raising the same before the arbitral
tribunal, as long as such counter-claims fall within the scope of the
arbitration agreement. [Praveen
Enterprises (supra), paras 19-20, 26.]
14. A similar rationale may be
adopted in this case as well, especially considering the clear purpose served
by a Section 21 notice. Extending this logic, non-service of the notice under
Section 21 and the absence of disputes being raised against respondent nos. 2
and 3 in the appellant's notice dated 17.11.2020 do not automatically bar their
impleadment as parties to the arbitration proceedings.
15. Appointment of Arbitrator by
the Court under Section 11: The other reason provided by the arbitral tribunal
and the High Court in this case is that respondent nos. 2 and 3 were not made
parties in the appellant's Section 11 application. Consequently, the High Court
order appointing the arbitrator only refers the appellant and respondent no. 1
to arbitration, and the arbitration is maintainable only qua both of them. We
find that this line of reasoning must also be rejected in light of the purpose
of a Section 11 application and the scope of inquiry by the courts while
deciding such application. The relevant portion of Section 11 reads as follows:
"11. Appointment of
arbitrators.—
(6) Where, under an appointment
procedure agreed upon by the parties,—
(a)
a party fails to act as required under that procedure; or
(b) the
parties, or the two appointed arbitrators, fail to reach an agreement expected
of them under that procedure; or
(c) a
person, including an institution, fails to perform any function entrusted to
him or it under that procedure, a party may request [the Supreme Court or, as
the case may be, the High Court or any person or institution designated by such
Court] to take the necessary measure, unless the agreement on the appointment
procedure provides other means for securing the appointment.
(6A)
The Supreme Court or, as the case may be, the High Court, while considering any
application under sub-section (4) or sub-section (5) or sub-section (6), shall,
notwithstanding any judgment, decree or order of any Court, confine to the
examination of the existence of an arbitration agreement."
16. As has been stated above, a
Section 11 application can be preferred by a party when the procedure for
appointment stipulated in the arbitration agreement fails. It is relevant that
Section 11 falls under Part I, Chapter III of the ACA that deals with
"Composition of arbitral tribunal". The statutory scheme, along with
the clear wording of Section 11(6), evidences that the purpose of this
application is for the court to take "necessary measure", in the
absence of any other means in the arbitration agreement, "for securing the
appointment” of the arbitral tribunal. By constituting the arbitral tribunal
when there is a deadlock or failure of the parties or the appointed arbitrators
to act as per the arbitration agreement, the court only gives effect to the
mutual intention of the parties to refer their disputes to arbitration. [Interplay Between Arbitration Agreements
under Arbitration and Conciliation Act, 1996 & Stamp Act, 1899, In re,
(2024) 6 SCC 1, para 150; SBI General Insurance Co. Ltd. v. Krish Spinning,
2024 SCC OnLine SC 1754, para 122.]
17. It is also relevant to note
that while deciding such an application under Section 11 (6), the High Court or
this Court, as the case may be, undertakes a limited examination as per Section
11 (6A). The court's jurisdiction is confined to a prima facie examination,
without conducting a mini-trial or laborious and contested inquiry, into the existence
of the arbitration agreement, i.e., whether there exists a contract to refer
disputes that have arisen between the parties to arbitration. [In re, Interplay (supra), paras 164-167.]
Further, any examination into the validity of the arbitration agreement must be
restricted to the requirement of "formal validity", i.e., whether the
requirements of a written agreement under Section 7 of the ACA are satisfied. [ibid, para 165; SBI General Insurance
(supra), para 110.] Beyond this, the court must leave it to the arbitral tribunal to "rule" on and
adjudicate the existence and validity of the arbitration agreement on the basis
of evidence adduced by the parties, in accordance with the principle under
Section 16 of the ACA. [In re, Interplay
(supra), para 167, 169; SBI General Insurance (supra), para 111.]
18. More specifically, in respect
of determining parties to the arbitral proceedings, the Constitution Bench in
Cox and Kings (supra) delineated the role of the court in a Section 11
application in the context of non-signatories as parties to the arbitration
agreement as follows:
"169.
In case of joinder of non-signatory parties to an arbitration agreement, the
following two scenarios will prominently emerge : first, where a signatory
party to an arbitration agreement seeks joinder of a non-signatory party to the
arbitration agreement; and second, where a non-signatory party itself seeks
invocation of an arbitration agreement. In both the scenarios, the referral
court will be required to prima facie rule on the existence of the arbitration
agreement and whether the non-signatory is a veritable party to the arbitration
agreement. In view of the complexity of such a determination, the referral
court should leave it for the Arbitral Tribunal to decide whether the
non-signatory party is indeed a party to the arbitration agreement on the basis
of the factual evidence and application of legal doctrine. The Tribunal can
delve into the factual, circumstantial, and legal aspects of the matter to
decide whether its jurisdiction extends to the non-signatory party. In the
process, the Tribunal should comply with the requirements of principles of
natural justice such as giving opportunity to the non-signatory to raise
objections with regard to the jurisdiction of the Arbitral Tribunal. This
interpretation also gives true effect to the doctrine of competence-competence
by leaving the issue of determination of true parties to an arbitration
agreement to be decided by the Arbitral Tribunal under Section 16."
(emphasis
supplied)
Therefore, the determination of
whether certain persons are parties to the arbitration agreement, and
consequently, whether they can be made party to the arbitration proceedings, is
left to the arbitral tribunal. While the Section 11 court can return a prima
facie finding on this issue, the same does not bind the arbitral tribunal,
which must decide the issue based on evidence and the applicable legal
principles. [Also see Ajay Madhusudan
Patel v. Jyotrindra S. Patel, (2025) 2 SCC 147, para 75.] The determination
of this issue goes to the very root of the arbitral tribunal's jurisdiction,
and hence, is covered under Section 16 of the ACA. [ibid, paras 73, 76.7.]
19. It is also relevant to take
note of this Court's decision in Praveen Enterprises (supra), wherein it held
that when a court appoints the arbitral tribunal under Section 11, the arbitral
tribunal's terms of reference are not restricted to specific disputes referred by
the court, unless the arbitration agreement itself requires the court to formulate
and refer disputes to arbitration.
[Praveen Enterprises (supra), paras 28-29. Also see Bharat Petroleum
Corporation Ltd. v. Go Airlines (India) Ltd., (2019) 10 SCC 250.]
20. Considering the purpose of a
Section 11 application for constitution of an arbitral tribunal and the limited
scope of examination into the existence of the arbitration agreement and prima
facie finding on who are parties to it, it follows that the court under Section
11 does not conclusively determine or rule on who can be made party to the
arbitral proceedings. Therefore, merely because respondent nos. 2 and 3 were
not parties before the High Court under Section 11, and disputes against them
were not referred to the arbitrator by order dated 24.11.2021, it does not mean
that they cannot be impleaded at a later stage on this ground alone.
21. Source of the Arbitral
Tribunal's Jurisdiction and Relevant Inquiry under Section 16: At this stage,
it is clear that not being served with a Section 21 notice and not being made a
party in the Section 11 application are not sufficient grounds to hold that a
person cannot be made party to arbitral proceedings. We will now deal with the
next question, i.e., when can a person be made party to the arbitration
proceedings?
22. This issue deals with the
source of the arbitral tribunal's jurisdiction, which is derived from the
consent of the parties to refer disputes to arbitration. [Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd., (2015)
13 SCC 477, para 22; Cox and Kings (supra), para 69 (Chandrachud, J).] Such
consent must be gathered from the arbitration agreement, [ONGC Ltd. v. Afcons Gunanusa JV, (2024) 4 SCC 481, para 263.]
that must in accordance with Section 7 of the ACA, which provides:
"7.
Arbitration agreement.—(1) In this Part, "arbitration agreement"
means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a
defined legal relationship, whether contractual or not.
(2) An
arbitration agreement may be in the form of an arbitration clause in a contract
or in the form of a separate agreement.
(3) An
arbitration agreement shall be in writing.
(4) An
arbitration agreement is in writing if it is contained in—
(a) a
document signed by the parties;
(b) an exchange
of letters, telex, telegrams or other means of telecommunication [including communication
through electronic means] which provide a record of the agreement; or
(c) an
exchange of statements of claim and defence in which the existence of the
agreement is alleged by one party and not denied by the other.
(5) The
reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if the contract is in writing and the
reference is such as to make that arbitration clause part of the
contract."
23. Once a person consents to
refer disputes to arbitration, and enters into an arbitration agreement under
Section 7, he is bound by the same. The implication of being a party to the
arbitration agreement is that such person has contractually undertaken to
resolve any disputes referenced in the arbitration agreement through the agreed
upon method of dispute resolution, i.e., arbitration. It is under this
contractual obligation that a person can be impleaded as a party to the
arbitral proceedings, even if he was not served with a Section 21 notice and
not referred to arbitration by the court under Section 11.
24. As briefly stated above, the
determination of who is a party to the arbitration agreement falls within the
domain of the arbitral tribunal as per Section 16 of the ACA. Section 16
embodies the doctrine of kompetenz-kompetenz, i.e., that the arbitral tribunal
can determine its own jurisdiction. The provision is inclusive and covers all
jurisdictional questions, including the existence and validity of the
arbitration agreement, who is a party to the arbitration agreement, and the
scope of disputes referrable to arbitration under the agreement. [Uttarakhand Purv Sainik Kalyan Nigam Ltd.
v. Northern Coal Field Ltd., (2020) 2 SCC 455, para 7.11; Cox and Kings
(supra), para 163 (Chandrachud, J); Ajay Madhusudhan Patel (supra), para 75.]
Considering that the arbitral tribunal's power to make an award that binds the
parties is derived from the arbitration agreement, these jurisdictional issues
must necessarily be decided through an interpretation of the arbitration
agreement itself. Therefore, the arbitral tribunal's jurisdiction must be
determined against the touchstone of the arbitration agreement.
25. This view finds support in
the jurisprudence and practice of international commercial arbitration. It is
notable that while most national legislations do not expressly provide for
joinder of parties by the arbitral tribunal, this must be done with the consent
of all the parties. [Redfern and Hunter
on International Arbitration (5th edn, Oxford University Press 2009). See also
David St John Sutton, Judith Gill and Matthew Gearing, Russell on Arbitration
(23rd edn, Sweet and Maxwell 2009).] Gary Born has taken the view that the
arbitral tribunal can direct the joinder of parties when the arbitration agreement expressly provides for the
same. However, he states that in reality, most arbitration agreements, whether
ad hoc or providing for institutional arbitration, neither expressly preclude
nor expressly permit the arbitral tribunal to join parties. In such cases, the
power must be implied, [Gary Born,
International Commercial Arbitration, vol 2 (3rd edn, Kluwer Law International
2021) 2777.] particularly when there is a multi-party arbitration clause in
the same underlying contract that does not expressly address the joinder of
parties in the arbitral proceedings. He states that: "In these
circumstances, there is a substantial argument that the parties have impliedly
accepted the possibility of consolidating arbitrations under their multi-party
arbitration agreement and/or the joinder or intervention of other contracting
parties into such arbitrations... the parties' joint acceptance of a single
dispute resolution mechanism, to deal with disputes under a single contractual
relationship, reflects their agreement on the possibility of a unified
proceeding to resolve their disputes, rather than necessarily requiring
fragmented proceedings in all cases." Further, in jurisdictions where
there is no provision in the national arbitration statute authorising the
courts to consolidate arbitrations or to join parties, it is left to the
arbitral tribunal to determine this issue at the first instance. [ibid, 2788-2789.]
26. Therefore, as per the legal
principles under the ACA as well as in international commercial arbitration, it
is a foundational tenet that the arbitral tribunal's jurisdiction is derived
from the consent of the parties to refer their disputes to arbitration, which
must be recorded in an arbitration agreement. The proper judicial inquiry to
decide a jurisdictional issue under Section 16 as to whether a person/entity
can be made a party to the arbitral proceedings will therefore entail an
examination of the arbitration agreement and whether such person is a party to
it. If the answer is in the affirmative, such person can be made party to the
arbitral proceedings and the arbitral tribunal can exercise jurisdiction over
him as he has consented to the same.
27. Returning to the Facts of the
Case: Now that we have set out the legal principles on when can a person be
made party to an arbitration proceeding and how must the arbitral tribunal
proceed under Section 16, we will deal with the approach adopted in the present
case. While allowing the Section 16 application by order dated 15.02.2024, the
arbitral tribunal proceeded only on the basis that respondent nos. 2 and 3 were
not served with the Section 21 notice and were not parties in the Section 11
application. The arbitral tribunal did not go into whether these respondents
are parties to the arbitration agreement, and whether its jurisdiction extends
to them. We are extracting the relevant portion of the arbitral tribunal's
order:
"8.
Ld. Counsel for the Claimant has also relied upon various judgments and in
particular the judgment in "Cox and Kings Ltd. Vs. SAP India Pvt. Ltd.
& Anr.", Arbitration Petition (Civil) No. 38/2020, dated 06.12.2023 to
argue that on the principle of competence-competence this Tribunal can continue
the Arbitral proceedings against Respondents No.2 and 3 as they are necessary
parties to these proceedings and their presence is required for effective
adjudication of the disputes being raised by the Claimant. In my view this
submission is also without any merit in as much as the principle of
competence-competence can be applied only when the Court or the Tribunal finds
that the presence of even non-signatories of the Arbitral Agreement is
required. A non-signatory of the Arbitral Agreement can be added in the
Arbitral Proceedings if he has played a positive, direct and substantial role
in the negotiations and performance of the Contract which contains an Arbitral
Clause and as such the Court or the Tribunal may add him also in the
proceedings for effectual adjudication of the disputes between the parties.
This principle is like the provision of Order 1 Rule 10 of the CPC. However, in
this case this Tribunal has not at all found or held that the presence of
Respondents No. 2 and 3 is essential in these proceedings for effective
adjudication of the disputes being raised by the Claimant. At this stage the
Tribunal is concerned only with the question of joining Respondents No. 2 and 3
without serving upon them a notice under Section 21 of the A&C Act, 1996
which admittedly was never served upon them and as such the Arbitral
proceedings initiated by the Claimant against them are unsustainable.
9. The
objection raised by Respondents No. 2 and 3 / Applicants in the present
proceedings against them is also on the ground that they were never made a
party to Section 11 A&C Act, 1996 proceedings and the High Court while
making a reference and appointing the undersigned as an Arbitrator had only
Respondent No. 1 before it. It is argued that there is no reference qua
Respondents No. 2 and 3 by the High Court of Delhi and as such the present
proceedings against them are void and illegal. As already discussed above the
principle of competence-competence is not applicable to the Respondents No. 2
and 3 at this stage. The absence of any reference qua them by the High Court
under Section 11 of the A&C Act, 1996 renders these proceedings against
them void-ab-initio and as such they cannot be proceeded against by this
Tribunal."
28. The arbitral tribunal's
approach clearly shows that it did not exercise its jurisdiction in accordance with
the principle of kompetenz-kompetenz, and rather held that such issue does not
at all arise at the present stage. Even the High Court, while exercising
appellate jurisdiction under Section 37, proceeded on a similar basis. In view
of the legal principles set out above, we are of the view that this is an
incorrect approach. Rather, the arbitral tribunal should have inquired into
whether respondent nos. 2 and 3 are parties to the arbitration agreement to
determine whether they could have been impleaded in the statement of claim. We
will be elaborating on this issue at a later stage.
29. High Court Decisions on these
Issues: Now that we have laid down the purpose of a Section 21 notice, the scope
of inquiry in a Section 11 application, and the judicial approach to
determining jurisdictional issues under Section 16, including whether a person
can be made party to the arbitration proceedings, we find it necessary to
clarify various decisions by High Courts that deal with these legal issues.
30. The Delhi High Court in
Alupro Building Systems Pvt Ltd. v. Ozone Overseas Pvt Ltd. [2017 SCC OnLine Del 7228.] allowed an application under Section
34 of the ACA against an award passed
by an arbitrator who was unilaterally appointed by the respondent therein,
without issuing a notice to the petitioner therein under Section 21 of the ACA.
The High Court proceeded to delineate the various functions served by a Section
21 notice as follows: [ibid, paras 25-30.]
(i) To inform the other party as to the claims, which will enable them to
accept or dispute the claims; (ii) To enable the other party to point out if
certain claims are time-barred, barred by law, or untenable, or if there are
counter-claims; (iii) For arriving at a consensus for appointment of
arbitrators under the arbitration agreement; (iv) For parties to inform each
other about their proposed arbitrator, to enable the other party to raise any
objections/issues regarding qualification; (v) To trigger the court's
jurisdiction under Section 11 in case the appointment procedure fails; and (vi)
To fix the date of commencement of arbitration for the purpose of Section
43(1).
30.1 The decision in Alupro
Building Systems (supra) has been relied on by the High Court in its impugned
order to hold that the notice under Section 21 is a mandatory requirement
before a person can be made party to arbitral proceedings.
30.2 While we agree with the
decision insofar as holding that the notice under Section 21 is mandatory,
unless the contract provides otherwise, we do not agree with the conclusion
that non-service of such notice on a party nullifies the arbitral tribunal's
jurisdiction over him. The purpose of the Section 21 notice is clear - by
fixing the date of commencement of arbitration, it enables the calculation of
limitation and it is a necessary precondition for filing an application under
Section 11 of the ACA. The other purposes served by such notice - of informing
the respondent about the claims, giving the respondent an opportunity to admit
and contest claims and raise counter-claims, and to object to proposed
arbitrators - are only incidental and secondary. We have already held that the
contents of the notice do not restrict the claims, and any objections regarding
limitation and maintainability can be raised before the arbitral tribunal, and the
ACA provides mechanisms for challenging the appointment of arbitrators on
various grounds. Hence, while a Section 21 notice may perform these functions,
it is not the primary or only mechanism envisaged by the ACA.
30.3 In this light, and
considering that in the facts of the present case a Section 21 notice was in
fact issued to respondent no. 1, we find it difficult to accept that the
decision in Alupro Building Systems (supra) can be relied on to entirely reject
the arbitral tribunal's jurisdiction over respondent nos. 2 and 3.
31. The next decision is in De
Lage Landen Financial Services India (P) Ltd. v. Parhit Diagnostic (P) Limited[12021 SCC OnLine Del 4160.], which has
been relied on by the appellant. This decision arose out of a Section 11
application that was allowed by the Delhi High Court by holding that the
respondent therein had due notice of the arbitration proceedings. Upon
considering the facts of the case and the appointment mechanism in the
arbitration agreement therein, the Court held that the rationale of serving a
Section 21 notice as laid down in Alupro (supra) stood fulfilled, and hence,
the Section 11 application was maintainable. In the present impugned order, the
High Court differentiated this decision by holding that the respondent in De
Lage Landen Financial Services (supra) was made a party to the Section 11
proceedings, which is absent in this case. At this stage, it will suffice to say
that De Lage Landen Financial Services (supra) does not seem to have deviated
from the legal position on a Section 21 notice laid down in Alupro (supra), and
its decision must be understood in the context of its facts.
32. Another relevant decision is
that of Arupri Logistics (P) Ltd. v. Vilas Gupta[2023 SCC OnLine Del 4297.], wherein the Delhi High Court was
dealing with the arbitral tribunal's power to implead non-signatories to the
arbitration agreement as parties. It held that unlike a court that has the
power to implead parties under Order I, Rule 10 of the Code of Civil Procedure,
1908, no such provision exists under the ACA. Further, proceeding on the basis
that a non-signatory is not a party to the arbitration agreement, the High
Court held that the arbitral tribunal cannot exercise jurisdiction over a
non-signatory and impleading such person would be contrary to consent being the
foundation of arbitration. It is necessary to note that this decision was prior
to the Constitution Bench judgment in Cox and Kings (supra), wherein it was
held that non-signatories can be impleaded in the arbitration if their conduct
shows that they are veritable parties to the arbitration agreement. We also
find that the reasoning in Arupri Logistics (supra) is in line with what we
have held hereinabove, i.e., the jurisdiction of the arbitral tribunal to
implead a person depends on whether such person is a party to the arbitration
agreement.
33. Finally, we must refer to the
Bombay High Court's decision in Cardinal Energy & Infra Structure (P) Ltd.
v. Subramanya Construction & Development Co. Ltd. [2024 SCC OnLine Bom 964.], which has a similar factual matrix as
this case. The petitioners therein were not served with the Section 21 notice
or made party in the Section 11 proceedings. Rather, they were impleaded by the
arbitral tribunal after it had framed issues, upon an application by respondent
nos. 1 and 2 therein. In a Section 34 application against the arbitral award,
the High Court considered the issue of whether the petitioners therein, who
were non-signatories to the arbitration agreement, could have been impleaded
without them being referred to arbitration in the order under Section 11. By
referring to Cox and Kings (supra), the relevant portion of which we have extracted
hereinabove, the High Court held that the arbitral tribunal has the power to
decide whether a non-signatory is bound by the arbitration agreement. The
referral court only gives a prima facie finding on this issue, and leaves it to
the arbitrator to decide the same. By relying on this rationale, the High Court
held that the non-joinder of a party in a Section 11 application does not
preclude its impleadment in the arbitration proceedings by the arbitral
tribunal.
33.1 In the impugned order in
this case, the High Court differentiated Cardinal Energy & Infra Structure
(supra) on the ground that the arbitral tribunal's order in this case does not
hold respondent nos. 2 and 3 to be proper parties to the arbitration
proceedings. However, as we have stated above as well, the arbitral tribunal
did not decide the issue of whether these respondents are parties to the
arbitration agreement and proper parties to the proceedings before it. Hence,
the decision in Cardinal Energy & Infra Structure (supra) was not properly
considered by the High Court in this case.
34. Whether Respondent Nos. 2 and
3 are Parties to the Arbitration Agreement: In light of the legal position set
out hereinabove, we will now consider whether respondent nos. 2 and 3 are
parties to the arbitration agreement, in order to determine whether the
arbitral tribunal can exercise jurisdiction over them. While we determine this
issue, it is necessary to set out the contours of our jurisdiction. Since this
appeal arises from the dismissal of an appeal under Section 37(2)(a) of the ACA
against the arbitral tribunal's order deciding its jurisdiction under Section
16, we are not confined by the grounds set out in Section 34 of the ACA. While
deciding an appeal against the arbitral tribunal's order under Section 16, the
appellate courts "must have due deference to the grounds which have
weighed with the Tribunal in holding that it lacks jurisdiction having regard
to the object and spirit underlying the statute which entrusts the Arbitral
Tribunal with the power to rule on its own jurisdiction." [ONGCLtd. v. Discovery Enterprises (P)
Ltd., (2022) 8 SCC 42, para 55.]
35. As we have held above, the
arbitral tribunal in this case did not delve into the issue of whether
respondent nos. 2 and 3 are parties to the arbitration agreement and
consequently, whether they can be impleaded in the arbitral proceedings. It is
also undisputed that these respondents are not signatories to the LLP Agreement
that contains the arbitration agreement in Clause 40. In this light, we are
required to examine whether respondent nos. 2 and 3 are parties to the
arbitration agreement.
36. In Cox and Kings (supra),
this Court held that non-signatories are parties to the arbitration agreement
if the conduct of the signatories and non-signatories indicates mutual
intention that the latter be bound by the arbitration agreement. [Cox and Kings (supra), paras 116, 120,
123, 126 (Chandrachud, J)] The test to determine whether such a
non-signatory is a party is as follows:
"132.
We are of the opinion that there is a need to seek a balance between the
consensual nature of arbitration and the modern commercial reality where a
non-signatory becomes implicated in a commercial transaction in a number of
different ways. Such a balance can be adequately achieved if the factors laid
down under Discovery Enterprises are applied holistically. For instance, the
involvement of the non-signatory in the performance of the underlying contract
in a manner that suggests that it intended to be bound by the contract
containing the arbitration agreement is an important aspect. Other factors such
as the composite nature of transaction and commonality of subject-matter would
suggest that the claims against the non-signatory were strongly interlinked
with the subject-matter of the tribunal's jurisdiction. Looking at the factors
holistically, it could be inferred that the non-signatories, by virtue of their
relationship with the signatory parties and active involvement in the
performance of commercial obligations which are intricately linked to the
subject-matter, are not actually strangers to the dispute between the signatory
parties." [Followed in Ajay
Madhusudhan Pate l (supra).]
36.1 The factors laid down in ONGC
v. Discovery Enterprises (supra) must be holistically considered to determine
whether non-signatories are parties to the arbitration agreement, which are as
follows:
"40.
In deciding whether a company within a group of companies which is not a
signatory to arbitration agreement would nonetheless be bound by it, the law
considers the following factors:
(i) The
mutual intent of the parties;
(ii)
The relationship of a non-signatory to a party which is a signatory
to the
agreement;
(iii)
The commonality of the subject-matter;
(iv)
The composite nature of the transactions; and
(v) The
performance of the contract."
36.2 Finally, in light of the
requirement under Section 7 of the ACA that the arbitration agreement must be
in writing, the mutual intention of non-signatories to be bound by the arbitration
agreement must be evidenced in writing. The non-signatory's conduct in the
formation, performance, and termination of the contract, and surrounding
circumstances like direct relationship with signatory parties, commonality of
subject-matter, and composite nature of transaction must be ascertained from
the record of the agreement, as held in Cox and Kings (supra):
"229.
Since the fundamental issue before the Court or tribunal under Section 7(4)(b)
and the Group of Companies doctrine is the same, the doctrine can be subsumed
within Section 7(4)(b). Consequently, the record of agreement that evidences
conduct of the non-signatory in the formation, performance, and termination of
the contract and surrounding circumstances such as its direct relationship with
the signatory parties, commonality of subject-matter, and composite nature of
transaction, must be comprehensively used to ascertain the existence of the
arbitration agreement with the non-signatory. In this inquiry, the fact of a
non-signatory being apart of the same group of companies will strengthen its
conclusion. In this light, there is no difficulty in applying the Group of
Companies doctrine as it would be statutorily anchored in Section 7 of the Act.
230.1.
An agreement to refer disputes to arbitration must be in a written form, as
against an oral agreement, but need not be signed by the parties. Under Section
7(4)(b), a court or Arbitral Tribunal will determine whether a non-signatory is
a party to an arbitration agreement by interpreting the express language
employed by the parties in the record of agreement, coupled with surrounding
circumstances of the formation, performance, and discharge of the contract.
While interpreting and constructing the contract, courts or tribunals may adopt
well-established principles, which aid and assist proper adjudication and
determination. The Group of Companies doctrine is one such principle."
37. In this case, Clause 40 of
the LLP Agreement (extracted hereinabove) is expansive in its wording. It
covers disputes arising between the partners inter se each other, and between
the partners on the one hand and the LLP and its administrator on the other
hand, when such disputes pertain to the LLP Agreement or its construction, or
relate to the rights, duties, and liabilities of the partners. This arbitration
agreement covers the present disputes arising out of reconciliation of accounts
in relation to the ITF Project, as this directly affects the rights and
liabilities of the appellant and respondent no. 1, who are the partners.
Further, the arbitration agreement itself includes within its scope disputes
that may arise between the partners and the LLP (respondent no. 2), and the
partners and the administrators of the LLP, i.e., respondent no. 3 as he is the
CEO of the LLP and responsible for its administration under Clause 8 of the LLP
Agreement. The question that must be answered is whether respondent no. 2 and 3
have consented to being bound by such arbitration agreement.
38. We must answer this question
in the affirmative based on the following considerations. With respect to
respondent no. 2, it was created under the LLP Agreement and the scope of its
activities and the management of its business are set out in the LLP Agreement.
It is pursuant to the objectives, purpose, and terms of the LLP Agreement that
respondent no. 2 undertook the ITF Project, for which a Supplementary LLP
Agreement and an MoU were also signed by the partners. Hence, it can be said
that respondent no. 2 is carrying out its business and entering into contracts
and dealings with third parties, such as undertaking the ITF Project, based on
the terms of the LLP Agreement. Hence, by way of its conduct, respondent no. 2
has undertaken to be bound by the LLP Agreement and it is therefore bound by
the arbitration clause contained therein. Similarly, respondent no. 3, who is
the CEO of the LLP and is responsible for its administration and looking after
its business derives his position and duties from Clause 8 of the LLP
Agreement. His obligations as the CEO of the LLP are therefore derived under
the LLP Agreement, and he is acting under this contract. Therefore, it can be
said that respondent no. 3 is also bound by the arbitration clause contained in
the LLP Agreement, not in his individual capacity but as the CEO of the LLP.
39. Therefore, in view of the
fact that respondent nos. 2 and 3 have, through their conduct, consented to
perform contractual obligations under the LLP Agreement, it is clear that they
have also agreed to be bound by the arbitration agreement contained in Clause
40 therein. Since they are parties to the underlying contract and the
arbitration agreement, the arbitral tribunal has the power to implead them as
parties to the arbitration proceedings while exercising its jurisdiction under
Section 16 of the ACA and as per the kompetenz-kompetenz principle.
40. Summary of Conclusions: Our
legal analysis of the issues that we set out above, as well as our findings in
the facts of the given appeal, can be stated as follows:
I. A
notice invoking arbitration under Section 21 of the ACA is mandatory as it fixes
the date of commencement of arbitration, which is essential for determining
limitation periods and the applicable law, and it is a prerequisite to filing
an application under Section 11. However, merely because such a notice was not
issued to certain persons who are parties to the arbitration agreement does not
denude the arbitral tribunal of its jurisdiction to implead them as parties
during the arbitral proceedings.
II. The
purpose of an application under Section 11 is for the court to appoint an
arbitrator, so as to enable dispute resolution through arbitration when the appointment
procedure in the agreement fails. The court only undertakes a limited and prima
facie examination into the existence of the arbitration agreement and its
parties at this stage. Hence, merely because a court does not refer a certain
party to arbitration in its order does not denude the jurisdiction of the arbitral
tribunal from impleading them during the arbitral proceedings as the referral
court's view does not finally determine this issue.
III. The
relevant consideration to determine whether a person can be made a party before
the arbitral tribunal is if such a person is a party to the arbitration
agreement. The arbitral tribunal must determine this jurisdictional issue in an
application under Section 16 by examining whether a non-signatory is a party to
the arbitration agreement as per Section 7 of the ACA.
IV. In
the facts of the present appeal, respondent nos. 2 and 3 are parties to the
arbitration agreement in Clause 40 of the LLP Agreement despite being
non-signatories. Their conduct is in accordance with and in pursuance of the
terms of the LLP Agreement, and hence, they can be made parties to the arbitral
proceedings.
41. In light of the above
reasoning, we allow the present appeal and set aside the impugned judgment and
order of the High Court of Delhi dated 08.07.2024 in Arb. A. (Comm.) 24/2024.
We direct that respondent nos. 2 and 3 be impleaded as parties before the
arbitral tribunal, and the proceedings must be continued from the stage of
arbitral tribunal's order dated 15.02.2024. Considering that the claim was
filed in 2022, we would request the arbitral tribunal to complete the hearings
and pass its award as expeditiously as possible.
42. No order as to costs.
43. Pending applications, if any,
stand disposed of.
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