Introduction
Non-signatories are individuals or entities who have not formally signed or agreed to an arbitration agreement or the underlying contract and, as a general rule, are not bound by its terms. However, in certain circumstances, these non-signatories may still be held accountable under the agreement. Arbitration agreements, governed by the principles of the Indian Contract Act, 1872, are typically subject to the doctrine of privity, which restricts the imposition of rights and obligations on third parties. This means that generally only those who have explicitly consented to an arbitration agreement can be subject to its terms, including any remedies or reliefs.
The critical issue before courts or tribunals in such cases is determining whether a non-signatory has effectively consented to be bound by the arbitration agreement. To resolve this, courts rely on established principles of contract and corporate law. These legal doctrines provide a framework for interpreting contractual language and the specific circumstances of the case to assess whether the non-signatory intended to be bound by the arbitration agreement. (Gary Born, International Arbitration Law and Practice, 3rd Edn., 2021, p. 1531.)
In the case of Ajay Madhusudan Patel vs. Jyotrindra S Patel,(2024) the court examines the question that How Non-Signatories may be bound by Arbitration Agreements focusing on the presumption that the formal signatories to an arbitration agreement are parties who will be bound by it, the 3-judge bench of Dr. DY Chandrachud, CJI and JB Pardiwala and Manoj Misra, JJ held that 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 or true party to the arbitration agreement. The Court observed:
“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.”
Facts of the case
The Court was dealing with an arbitration petition filed under Section 11(6) read with Section 11(9) of the Arbitration and Conciliation Act, 1996, seeking appointment of a Sole Arbitrator to adjudicate the disputes in terms of clauses of the Family Arrangement Agreement (FAA) read with the Amendment Agreement.
Analysis and Statutory Framework
In this Case, the court the court addressed the crucial question whether the non-signatories can be referred to arbitration, the court outlined two key situations that could arise:
- Joinder by a Signatory: when a signatory party to an arbitration agreement seeks joinder of a non-signatory party to the arbitration agreement; and
- Invocation by a Non-Signatory: when a non-signatory party itself seeks invocation of an arbitration agreement.
In both the situations, 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.
If both conditions are satisfied, the non-signatory can be held bound by the arbitration agreement.
However, recognising the complexity of such a determination, the arbitral tribunal was considered the proper forum since it can decide whether the non-signatory is a party to the arbitration agreement on the basis of factual evidence and application of legal doctrine. In this process, the non- signatory must also be given an opportunity to raise objections regarding the jurisdiction of the arbitral tribunal in accordance with the principles of natural justice.
How Non-Signatories may be bound by Arbitration Agreements?
- Existence of an arbitration agreement
The court analysed the scope of referral court’s jurisdiction under section 11(6) of the Act, and observed that the court should and need only look into one aspect—the existence of an arbitration agreement.
Scope of jurisdiction of the referral court under Section 11(6) of the Act, 1996
Section 11(6) deals with the procedures and provisions related to the appointment of arbitrators in arbitration proceedings under the Arbitration and Conciliation Act, 1996. Specifically, it outlines the steps to be taken when parties encounter issues with the agreed-upon appointment procedure.
Several judicial decisions have examined the scope of the Court’s jurisdiction and the referral court’s role in appointing arbitrators. Notably, the legal position on this issue shifted significantly before and after the 2015 Amendment to the Arbitration and Conciliation Act, 1996.
Pre-2015 Amendment
A seven-Judge Bench of this Court in SBP & Co. v. Patel Engg. Ltd. reported in (2005) 8 SCC 618, held that the power under Section 11 of the Act, 1996 was not an administrative but a judicial power. Therefore, it was established that the Chief Justice or his designate under Section 11(6) had the right to decide preliminary issues including his own jurisdiction, to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators.
The Chief Justice or the designated Judge would be entitled to seek the opinion of an institution in the matter of nominating an arbitrator qualified in terms of Section 11(8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the designated Judge.
Post-2015 Amendment:
The 2015 Amendment to the Arbitration and Conciliation Act, 1996 introduced Section 11(6A), which significantly narrowed the jurisdiction of referral courts. This amendment legislatively overruled the broader powers given to the courts by previous rulings such as SBP & Co. v. Patel Engg. Ltd. and Boghara Polyfab through the inclusion of a non-obstante clause in Section 11(6A). Even though the 2019 Amendment omitted Section 11(6A), the omission was not notified, so the section remains in force.
Section 11(6A) states:
“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.”
This amendment restricts the role of the courts to only determining the existence of an arbitration agreement—nothing more, nothing less. The legislative intent behind this provision is to limit judicial interference during the arbitrator appointment process, encouraging courts to focus solely on whether an arbitration agreement exists, in line with the purpose of Section 11(6A).
In Duro Felguera S.A. v. Gangavaram Port Limited reported in (2017) 9 SCC 729 was the effect of the change introduced by the 2015 Amendment to the Act, 1996 which inserted Section 11(6A).
“From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple—it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”
In Vidya Drolia & Ors. v. Durga Trading Corporation (2021) 2 SCC 1, a three-judge bench of the Supreme Court emphasized that Sections 8 and 11 of the Arbitration and Conciliation Act, 1996 must be interpreted to set a similar standard regarding the powers of the referral court. The Court held that questions of the existence and validity of an arbitration agreement are intertwined—if an agreement is illegal or fails to meet mandatory legal requirements, it cannot be considered valid.
The judgment endorsed the application of a prima facie test to assess the existence and validity of an arbitration agreement under both Sections 8 and 11. This prima facie assessment is intended to be a preliminary review, not an exhaustive one, aimed at filtering out arbitration agreements that are clearly non-existent, invalid, or involve non-arbitrable disputes. However, the Court also cautioned against delving into complex factual disputes at this stage, emphasizing that the referral court should avoid getting entangled in “thickets” of debatable factual issues.
Vidya Drolia (supra) while speaking in the context of Section 8 also pointed out that jurisdictional issues like whether certain parties are bound by the arbitration agreement must be left to the arbitral tribunal since they involve complicated factual questions and observed as thus:
“Jurisdictional issues concerning whether certain parties are bound by a particular arbitration, under group- company doctrine or good faith, etc., in a multi-party arbitration raises complicated factual questions, which are best left for the tribunal to handle.”
- Who is a Veritable Party to an Arbitration Agreement?
The Court further focused on the aspect that for a party to be bound by arbitration agreement, it needs to be a veritable party. The court observed:
Definition of “parties” under Section 2(1)(h) read with Section 7 of the Act, 1996 includes both the signatory as well as non-signatory parties. Persons or entities who have not formally signed the arbitration agreement or the underlying contract containing the arbitration agreement may also intend to be bound by the terms of the agreement. Further, 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. This aspect is also evident from a reading of Section 7(4)(b) which emphasises on the manifestation of the consent of persons or entities through actions of exchanging documents.
A “veritable party” or a “true party” in arbitration refers to a non-signatory whose participation in the contract’s life cycle — including its negotiation, performance, or termination — is so substantial, direct, and meaningful that they effectively assume the role of a party to the arbitration agreement.
Key Indicators of a “Veritable Party”
For a non-signatory to be deemed a “veritable party,” their involvement should not be incidental or peripheral but must indicate an intention to be bound by the terms of the contract, including the arbitration agreement.
The Court observed:
“The fact that a non signatory did not put pen to paper may be an indicator of its intention to not assume any rights, responsibilities or obligations under the arbitration agreement. However, the courts and tribunals should not adopt a conservative approach to exclude all persons or entities who intended to be bound by the underlying contract containing the arbitration agreement through their conduct and their relationship with the signatory parties. 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.”
The Supreme Court in the above context of the case, noted, “It is evident 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.” Further, when the conduct of the non-signatory is in harmony with the conduct of the others, it might lead the other party or parties to legitimately believe that the non-signatory was a veritable party to the contract containing the arbitration agreement.
However, 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.”
The burden is on the party seeking joinder of the non-signatory to the arbitration agreement to prove a conscious and deliberate conduct of involvement of the non-signatory based on objective evidence.
Evaluating Involvement of Non-Signatories
Evaluating the involvement of the non-signatory party in the negotiation, performance, or termination of a contract is an important factor for a number of reasons.
- Creating an appearance of a veritable party: By being actively involved in the performance of a contract, a non-signatory may create an appearance that it is a veritable party to the contract containing the arbitration agreement;
- Alignment with the Signatory Party: The conduct of the non-signatory may be in harmony with the conduct of the other members of the group, leading the other party to legitimately believe that the non-signatory was a veritable party to the contract; and
- Legitimate reasons for reliance:The other party has legitimate reasons to rely on the appearance created by the non-signatory party so as to bind it to the arbitration agreement.
The nature or standard of involvement of the non- signatory in the performance of the contract should be that the non-signatory has actively assumed obligations or performance upon itself under the contract.
Conclusion
In summary, the question of how non-signatories may be bound by arbitration agreements hinges on the principles of consent and the substantive involvement of the non-signatory in the underlying contract. While the general rule of privity restricts the binding nature of such agreements to signatories, courts recognize exceptions based on established legal doctrines. The case of Ajay Madhusudan Patel vs. Jyotrindra S. Patel illustrates that a non-signatory can be considered a “veritable party” to the arbitration agreement when their actions or conduct demonstrate a clear intention to be bound by the terms, including the arbitration clause.
The judicial approach emphasizes the importance of evaluating the non-signatory’s involvement in the contract’s lifecycle, highlighting key indicators such as their relationship with signatories, the commonality of the subject matter, and the overall composite nature of the transactions involved. Ultimately, the determination of whether a non-signatory is bound by an arbitration agreement requires a careful, fact-based inquiry, balancing the principles of contract law with the practical realities of the parties’ interactions and the specific context of the arbitration agreement.