2025 (5) TMI 567 - SC - Indian Laws

Power and authority of an arbitral tribunal to implead or join a non-signatory to the arbitration agreement as a party to the arbitration proceedings. - Group of companies doctrine - Same Management Whether the Arbitral Tribunal has the power to Implead / Join Non- Signatories to the Arbitration Agreement? - HELD THAT - Owing to the intrinsic character of the test being one that entails a fact- intensive inquiry involving a mixed question of fact and law and further given the extensive standard it demands requiring a comprehensive and holistic appraisal of all material facts and attendant circumstances it may be safely concluded that the arbitral tribunal is the more appropriate and competent forum to adjudicate upon the issue of whether a non-signatory is bound by the arbitration agreement as the arbitral as it has the innate advantage of going through all the relevant evidence and pleadings in greater depth and detail than the referral court at the pre-reference stage and as such is uniquely positioned to undertake such a nuanced determination. Determining the existence viz- -viz the intention of parties from express words of an Arbitration Agreement - HELD THAT - There runs no umbilical cord between the exercise of determining the existence of the arbitration agreement and determining its existence qua the non-signatory . The latter is an independent and substantive determination that falls outside the narrow and circumscribed domain of the referral court s singular obligation under Section 11 sub-section (6A) of the Act 1996 and as such cannot be conflated to be one pertaining to or attacking the existence of an arbitration. Even if it is assumed for a moment that the referral court in its jurisdiction under Section 11 of the Act 1996 has the discretion to determine whether a non-signatory is a veritable party to the arbitration agreement or not by virtue of Cox and Kings (I) 2023 (12) TMI 427 - SUPREME COURT (LB) the referral court should only refrain but rather loathe the exercise of such discretion. Any discretion which is conferred upon any authority be it referral courts must be exercised reasonably and in a fair manner. Fairness in this context does not just extend to a non-signatory s rights and its apprehension of prejudice fairness also demands that the arbitration proceedings is given due time to gestate so that the entire dispute is holistically decided. Any determination even if prima-facie by a referral court on such aspects would entail an inherent risk of frustrating the very purpose of resolution of dispute if the referral courts opine that a non-signatory in question is not a veritable party. On the other hand the apprehensions of prejudice can be properly mitigated by leaving such question for the arbitral tribunal to decide as such party can always take recourse to Section 16 of the Act 1996 and thereafter in appeal under Section 37 and where it is found that such party was put through the rigmarole of arbitration proceedings vexatiously both the tribunal and the courts as the case may be should not only require that all costs of arbitration insofar as such non- signatory is concerned be borne by the party who vexatiously impleaded it but the arbitral tribunal would be well within its powers to also impose costs. Decision of Cox and Kings (II) and Ajay Madhusudan and the scope of Section 11 of the Act 1996 for joinder of non-signatories to arbitration proceedings - HELD THAT - The only thing the arbitral tribunal needs to be mindful of when deciding such an issue is that it adheres to the principles of natural justice by affording the non-signatory a fair opportunity to raise objections with regard to the jurisdiction of the arbitral tribunal earnestly makes an endeavour to determine this issue at the earliest possible stage to prevent any grave prejudice being occasioned to such non-signatory makes all possible efforts whether by way of imposition of costs or through other appropriate measures to mitigate and deter the possibility of any abuse by the signatories who might seek to coerce or arm twist the non-signatory by frivolously or vexatiously subjecting it to arbitration and lastly that its decision is grounded in the factors and threshold requirements laid down in Cox and Kings (I) (supra) as explained. There is no inhibition in the scheme of Act 1996 which precludes the Arbitral Tribunal from impleading a Non-Signatory on its own accord. Doctrine of Kompetenz-Kompetenz and the Jurisdictional Reach of an Arbitral Tribunal - HELD THAT - The jurisdiction of an arbitral tribunal is not created by the mere subjective intent or volition of the parties. Rather it is the arbitration agreement a legally cognisable and objective instrument that operates as the foundational source of jurisdiction in the eyes of the law. Just as the creation of a property automatically vests jurisdiction in the territorial courts competent to adjudicate over such property the conclusion of an arbitration agreement ipso jure brings into existence the jurisdiction of the arbitral tribunal. This jurisdiction exists in a de jure sense from the moment the arbitration agreement is validly executed regardless of whether the tribunal has been formally constituted. Requirement of Notice of Invocation under Section 21 of the Act 1996 - HELD THAT - The High Court in its impugned judgment while upholding the Arbitrator s Orders has rightly held that ABPL BCSPL and AISPL fall under the same management and it appears that the substitution in the contract took place merely for convenience . Further all the correspondence is in respect of the contract with ASF and ASF Group of Companies. There is no differentiation between BCSPL AISPL or ABPL all of which are part of the ASF Group. . In arriving at its conclusion the High Court correctly applied the test laid down in Cox and Kings Ltd. (I) taking note of the communications exchanged conduct of the ASF Group officials active involvement of the appellant with contractual obligations intertwined nature of the agreements involving BCSPL AISPL and ABPL and the composite business operations. Conclusion - The Arbitration Act was the first legislative enactment that dealt with arbitration that came into force in 1940. Fifty years later the aforesaid legislation was replaced by the Arbitration and Conciliation Act 1996. It has been almost thirty-years since the Act 1996 has remained in force. Various amendments to the Act 1996 have been made over the years so as to ensure that arbitration proceedings are conducted and concluded expeditiously. It is indeed very sad to note that even after these many years procedural issues such as the one involved in the case at hand have continued to plaque the arbitration regime of India. The Department of Legal Affairs has now once again proposed to replace the existing legislation on arbitration with the Arbitration and Conciliation Bill 2024. Unfortunately even the new Bill has taken no steps whatsoever for ameliorating the position of law as regards the power of impleadment or joinder of an arbitral tribunal. What is expressly missing in the Act 1996 is still missing in the Arbitration and Conciliation Bill 2024 despite a catena of decisions of this Court as-well as the various High Courts highlighting the need for statutory recognition of such power in order to obviate all possibilities of confusion. As observed in Gayatri Balasamy 2024 (2) TMI 1549 - SC ORDER any uncertainty in the law of arbitration would be an anathema to business and commerce. The Department of Legal Affairs Ministry of Law and Justice is urged to take a serious look at the arbitration regime that is prevailing in India and bring about necessary changes while the Arbitration and Conciliation Bill 2024 is still being considered. It is convinced that no error not to speak of any error of law could be said to have been committed by the High Court in passing the impugned judgment and order. This appeal fails and is hereby dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this judgment revolve around the power and authority of an arbitral tribunal to implead or join non-signatories to an arbitration agreement in arbitration proceedings. The principal issues include:

(a) Whether an arbitral tribunal has the jurisdiction or power to implead or join non-signatories to the arbitration agreement on its own accord, especially when such non-signatories were not parties to the referral application under Section 11 of the Arbitration and Conciliation Act, 1996 (the "Act, 1996").

(b) Whether the referral court under Section 11 of the Act, 1996 must prima facie determine if a non-signatory is bound by the arbitration agreement before leaving the question of impleadment to the arbitral tribunal.

(c) The legal framework and precedents governing the doctrine of 'group of companies', 'alter ego', agency, implied consent, and other principles that may bind non-signatories to arbitration agreements.

(d) The scope and extent of judicial scrutiny by courts at the referral stage under Section 11 of the Act, 1996, particularly in light of the principle of competence-competence enshrined in Section 16 of the Act.

(e) The procedural requirements and implications of notice of invocation under Section 21 of the Act, 1996, especially regarding impleadment of non-signatories who were not served such notice.

(f) The treatment of competing views among various High Courts regarding the power of arbitral tribunals to implead non-signatories and the evolution of the law in this regard.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Power of Arbitral Tribunal to Implead Non-Signatories

Legal Framework and Precedents: The Act, 1996 does not expressly confer power on arbitral tribunals to implead non-signatories. Earlier High Court decisions (Bombay, Delhi, Madras) generally held that only courts have such power, relying on the narrow definition of "party" under Section 2(1)(h) and the consensual nature of arbitration. They emphasized that arbitral tribunals cannot exercise inherent powers akin to courts (e.g., Order I Rule 10 CPC) and that jurisdiction derives strictly from the arbitration agreement.

However, the Gujarat High Court and some others recognized that arbitral tribunals may have such power, especially in light of the doctrine of 'group of companies' and related principles, subject to the non-signatory's implied consent.

Court's Interpretation and Reasoning: The Court analyzed the divergence of views and traced the evolution of law from the decision in Chloro Controls, which recognized that non-signatories may be bound under exceptional circumstances based on principles like 'group of companies', but limited the power of arbitral tribunals to implead such parties, confining it to courts at the referral stage under Sections 8 and 45.

The Court then examined the five-Judge Bench decision in Cox and Kings (I), which clarified that the legal basis for applying the 'group of companies' doctrine lies in the definition of "party" under Section 2(1)(h) read with Section 7 of the Act, 1996, and not in the expression "claiming through or under" used in Sections 8 and 45. This implies that arbitral tribunals, like courts, can determine whether a non-signatory is bound by the arbitration agreement and implead such parties.

The Court further held that the arbitral tribunal's power to rule on its own jurisdiction under Section 16 (the competence-competence doctrine) includes the authority to decide on the joinder or impleadment of non-signatories. The tribunal's jurisdiction is derived from the arbitration agreement itself, not merely from the act of appointment by the referral court.

Key Evidence and Findings: The Court noted that the arbitral tribunal had passed orders dismissing Section 16 applications challenging its jurisdiction to implead non-signatories, and the High Court had affirmed these orders. The factual matrix indicated that the non-signatories were part of the same corporate group and had substantial involvement in the contractual arrangements.

Application of Law to Facts: Applying the principles from Cox and Kings (I) and subsequent decisions, the Court found no legal impediment to the arbitral tribunal impleading non-signatories on its own accord, particularly where the factual circumstances indicate mutual intent and involvement.

Treatment of Competing Arguments: The Court rejected the appellant's argument that only the referral court can decide on impleadment and that the arbitral tribunal lacked jurisdiction to do so. It also rejected the contention that absence of notice under Section 21 to the non-signatories invalidated their impleadment.

Conclusions: The arbitral tribunal has the power to implead non-signatories to the arbitration agreement on its own accord, subject to compliance with principles of natural justice and the applicable legal framework.

(b) Scope of Judicial Scrutiny at Referral Stage under Section 11

Legal Framework and Precedents: Earlier decisions (SBP & Co.) held that referral courts exercise judicial power to decide all preliminary issues, including validity and existence of the arbitration agreement. However, this led to delays and inefficiency.

The Arbitration and Conciliation (Amendment) Act, 2015 introduced Section 11(6A), limiting the referral court's role to a prima facie examination of the existence of the arbitration agreement, leaving substantive issues to the arbitral tribunal.

Vidya Drolia initially allowed some judicial scrutiny of validity and arbitrability at referral stage, but later decisions (In Re: Interplay, Krish Spinning) clarified that the referral court's scrutiny must be limited to existence, not validity or detailed factual inquiries.

Court's Interpretation and Reasoning: The Court emphasized that the referral court's role under Section 11 is limited to examining the prima facie existence of an arbitration agreement, not to conduct mini trials or decide complex factual questions such as whether a non-signatory is bound by the arbitration agreement.

It held that the question of whether a non-signatory is a "veritable party" to the arbitration agreement involves a fact-intensive inquiry that is best suited for the arbitral tribunal, which has the institutional advantage of detailed evidence and pleadings.

Key Evidence and Findings: The Court observed that the referral court had not made a detailed determination on the non-signatory's status, and that the arbitral tribunal was the appropriate forum to decide such issues.

Application of Law to Facts: The Court found that the referral court correctly limited its inquiry to the existence of the arbitration agreement and left the question of impleadment and jurisdiction over non-signatories to the arbitral tribunal.

Treatment of Competing Arguments: The appellant's argument that the referral court must decide the non-signatory's status before arbitration was rejected as contrary to the legislative intent and judicial precedents.

Conclusions: The referral court's jurisdiction under Section 11 is confined to a prima facie determination of the existence of the arbitration agreement, and the arbitral tribunal is the proper forum to decide whether non-signatories are bound and can be impleaded.

(c) Doctrine of 'Group of Companies' and Determination of Mutual Intention

Legal Framework and Precedents: The doctrine of 'group of companies' permits non-signatories within a corporate group to be bound by an arbitration agreement if there is mutual intention to do so. The test involves examining factors such as the relationship between entities, commonality of subject matter, composite nature of transactions, and the conduct of the non-signatory in negotiation, performance, or termination of the contract.

Cox and Kings (I) clarified that this doctrine is a consent-based theory grounded in the mutual intention of parties, and not merely derivative rights under Sections 8 and 45 of the Act. The test for applicability is fact-intensive and requires a holistic assessment.

Court's Interpretation and Reasoning: The Court reiterated that the determination of whether a non-signatory is bound by the arbitration agreement is distinct from the mere existence of the agreement. The former requires a detailed inquiry into the parties' intentions and the factual matrix, which is best performed by the arbitral tribunal.

The Court endorsed the factors laid down in Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. and Cox and Kings (I) for assessing mutual intention, emphasizing that mere incidental involvement is insufficient; the non-signatory's involvement must be positive, direct, and substantial.

Key Evidence and Findings: The Court found that the non-signatories (AISPL and ABPL) were part of the ASF Group, shared common management, used common branding, and were involved in the negotiation and performance of contracts related to the dispute, thus satisfying the criteria for being veritable parties.

Application of Law to Facts: The Court applied the doctrine and held that the non-signatories' conduct and relationship with the signatories justified their impleadment in the arbitration proceedings.

Treatment of Competing Arguments: The appellant's contention that mere holding company status or common branding is insufficient was rejected, as the Court found substantive involvement and mutual intent beyond these factors.

Conclusions: The doctrine of 'group of companies' applies, and non-signatories with positive, direct, and substantial involvement in the contractual relationship can be bound by the arbitration agreement.

(d) Requirement and Effect of Notice of Invocation under Section 21

Legal Framework and Precedents: Section 21 of the Act, 1996 mandates that arbitration proceedings commence upon receipt of a notice of invocation of arbitration by the respondent. The primary purpose of this notice is procedural: to fix the date of commencement for limitation purposes and other time-related aspects.

Section 23 allows parties to file statements of claim and counterclaims, which need not correspond exactly to the disputes mentioned in the Section 21 notice. Amendments or supplements to claims are permissible unless unduly delayed.

Court's Interpretation and Reasoning: The Court held that non-service of a Section 21 notice on a party does not preclude its impleadment in arbitration proceedings. The notice's function is procedural, not jurisdictional, and does not create or validate the arbitral tribunal's jurisdiction over a party.

The Court emphasized that claims or counterclaims can be raised against parties not served with Section 21 notice, and such parties can be impleaded if found to be bound by the arbitration agreement.

Key Evidence and Findings: The appellant was impleaded without prior Section 21 notice, but the Court found this did not invalidate the arbitral tribunal's jurisdiction over it.

Application of Law to Facts: The Court found that the arbitral tribunal properly impleaded the appellant, and the absence of a Section 21 notice was not fatal.

Treatment of Competing Arguments: The appellant's argument that the absence of Section 21 notice invalidated its impleadment was rejected, with the Court relying on precedents such as Milkfood Ltd. and Adavya Projects Pvt. Ltd.

Conclusions: Section 21 notice is procedural for commencement and limitation; non-service does not bar impleadment of a party in arbitration proceedings.

3. SIGNIFICANT HOLDINGS

"The arbitral tribunal has the power to implead non-signatories to the arbitration agreement on its own accord, subject to compliance with applicable legal principles and natural justice."

"The referral court under Section 11 of the Act, 1996 is confined to a prima facie determination of the existence of an arbitration agreement and should leave substantive issues, including the question whether a non-signatory is bound by the arbitration agreement, to the arbitral tribunal."

"The doctrine of 'group of companies' is a consent-based theory that requires a fact-intensive inquiry into the mutual intention of the parties, including factors such as the relationship between entities, commonality of subject matter, composite nature of transactions, and the conduct of the non-signatory party."

"Non-service of a notice of invocation under Section 21 of the Act, 1996 on a party does not preclude its impleadment in arbitration proceedings if it is found to be bound by the arbitration agreement."

"Section 16 of the Act, 1996 embodies the principle of competence-competence, empowering the arbitral tribunal to rule on its own jurisdiction, including the joinder or impleadment of non-signatories."

"The jurisdiction of an arbitral tribunal is derived from the arbitration agreement itself and exists independently of the act of appointment by the referral court."

"The referral court's role under Section 11(6A) is limited to examining the prima facie existence of an arbitration agreement and not to conduct mini trials or detailed factual inquiries."

"The question whether a non-signatory is bound by an arbitration agreement is distinct from the mere existence of the arbitration agreement and involves a substantive inquiry best suited for the arbitral tribunal."

"The arbitral tribunal's power to implead or join parties is a necessary intendment of the Act, 1996, given the evolving commercial realities and the need for arbitration to remain an effective dispute resolution mechanism."

"The procedural provisions of the Act, 1996, including Sections 21 and 23, do not restrict the arbitral tribunal's jurisdiction to adjudicate claims or counterclaims against parties not served with a notice of invocation."

"The High Court correctly upheld the arbitral tribunal's jurisdiction to implead the non-signatories, given their substantial involvement and mutual intent to be bound by the arbitration agreement."