The Indian Supreme Court’s decision in Adavya Projects Pvt. Ltd. v. M/S Vishal Structurals Pvt. Ltd. & Ors. has held that issuing a Notice Invoking Arbitration (NIA) under Section 21 of the Arbitration and Conciliation Act (ACA) is mandatory, however non-service of such notice on a person does not preclude their impleadment in the arbitral proceedings. Though prima facie such a proposition might seem dichotomous, a deeper analysis of the judgement exhibits that it is based on sound reasoning which furthers the cause of arbitration, albeit with some potential procedural difficulties which are discussed later in this post.

The Claimant and the Respondent No.1 (Company) entered into an agreement (the “LLP Agreement”) to form a Limited Liability Partnership (LLP)/(Respondent No. 2) for execution of a project, pursuant to which the Claimant and the Respondent No. 1 entered into a Supplementary Agreement and a Memorandum of Understanding (MoU). Clause 8 of LLP Agreement provided that Respondent No. 3 would be the CEO of the LLP and Clause 40 of the LLP Agreement provided for an arbitration clause. The Respondent No. 3 was also a director in the Respondent No. 1 Company, but only the Claimant and the Respondent No. 1 were signatories to the LLP Agreement. Once disputes arose, the Claimant issued the NIA to the Respondent No. 1 and thereafter the Claimant filed a Section 11 application for appointment of arbitrator, impleading only the Respondent No. 1 as a party. The High Court appointed a sole arbitrator to adjudicate disputes between the parties to the LLP Agreement regarding disputes arising out of the LLP Agreement, the Supplementary Agreement, and the MoU.

Before the arbitrator, the Claimant preferred an application under Section 23(3) of the ACA to amend his statement of claim in order implead the Respondent Nos. 2 & 3 as parties to the arbitration, which was allowed by the Arbitrator. The Respondents filed their Section 16 application challenging the jurisdiction of the arbitrator on the grounds that the arbitration was not maintainable against the Respondent nos. 2 and 3 as they were not parties to the NIA or the application for appointment of arbitrator. The arbitrator accepted the objections raised by the Respondent nos. 2 & 3, holding that proceedings against them was not maintainable. This order was challenged by the Claimant before the High Court, which agreed with the decision of the arbitrator regarding non-maintainability of the arbitral proceedings against the Respondent No. 2 & 3.

The Claimant appealed the decision of the High Court before the Supreme Court, which formulated the following two issues for its consideration i.e., a) whether service of NIA and joinder in Section 11 application is a prerequisite to implead a person as a party to arbitral proceedings; b) what is the source of jurisdiction of the arbitrator over a person/entity who is sought to be impleaded as a party to the arbitral proceeding and the scope of enquiry to be undertaken by the arbitrator to determine its jurisdiction under Section 16.

Analyzing the purpose of serving NIA under Section 21, the SC observed that first, the NIA is necessary to determine whether claims are within the period of limitation or are time-barred. Second, the date of receipt of notice is also relevant to determine the applicable law to the arbitral proceedings and to determine the applicability of any amendments to the ACA. Third, the SC observed that issuing NIA is necessary before invoking the referral court’s jurisdiction under Section 11 of the ACA for appointment of arbitrator.

In the instant case, the difficulty was that the NIA was issued only to the Respondent No. 1 and not the other respondents. However, the SC interpreting Section 21 of the ACA held that there was nothing in the wording of Section 21 or the scheme of the ACA to indicate that merely because NIA was not served on the Respondent nos. 2 and 3, they cannot be impleaded as parties to the arbitral proceedings. Further, relying on its decision in State of Goa v. Praveen Enterprises, the SC held that non-inclusion of certain claims and disputes in the NIA, did not preclude a claimant from raising them during the arbitration, so long as the said claims are covered under the arbitration agreement and are not barred by limitation. Thus, as regards the first issue, the SC held that non-service of the NIA upon Respondent nos. 2 & 3 and the absence of disputes being raised against the Respondent Nos. 2 and 3 in the NIA would not bar their impleadment as parties to the arbitral proceedings.

As regards the second reasoning i.e., the Respondent Nos. 2 & 3 not being parties in the Section 11 application and consequently the HC referring only the Claimant and the Respondent No. 1 for arbitration, the SC rejected this ground by undertaking an analysis regarding the purpose and scope of enquiry by courts while deciding a Section 11 application. Drawing from its earlier decisions in Interplay between ACA and Stamp Act and SBI v. Krish Spinning, the SC observed the scope of examination of a referral court in a Section 11 application is confined to only a prima facie examination into the ‘existence’ of the arbitration agreement. Further drawing from the Constitution Bench’s decision in Cox and Kings, it was observed that, the referral court under Section 11 should leave the issue of joinder of non-signatories to arbitral proceedings to the arbitral tribunal (AT). While the referral court under Section 11 can return a prima facie finding on the issue of impleadment of non-signatories, it does not bind the AT; which must decide the issue based on evidence and the applicable legal principles while deciding the issue in a Section 16 application.

On the second issue regarding the scope of enquiry of the AT under Section 16 while determining its jurisdiction over a person/entity who is sought to be impleaded as a party, the SC held that Section 16 of the ACA embodies the principle of kompetenz-kompetenz, i.e., the arbitral tribunal can determine its own jurisdiction. The source of the AT’s jurisdiction is derived from the consent of the parties to contractually bind themselves to refer disputes to arbitration, and such consent must be determined from the arbitration agreement. The SC held that it is under this contractual obligation that a person can be impleaded as a party to the arbitral proceedings, even if they were not served with a NIA and not referred to arbitration by the referral court. In the present case, it was observed that the arbitrator while allowing the Section 16 application did not examine whether the Respondent Nos. 2 & 3 were parties to the arbitration agreement for determining its jurisdiction qua them.

To determine whether the Respondent Nos. 2 & 3 (who were admittedly not signatories to the LLP agreement) were parties to the arbitration agreement, the SC again relied on the decision of Cox and Kings to hold 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. The SC observed that in the instant case, the arbitration clause in the LLP agreement was expansive which included disputes arising between the partners inter se each other, and between the partners and the LLP (Respondent No.2) and its administrator (Respondent No. 3). The SC observed that the Respondent No. 2 undertook projects based on the terms of the LLP agreement and the Respondent No. 3 who was the CEO of the LLP was responsible for the administration of the LLP and derived his position and duties from Clause 8 of the LLP Agreement. Thus, the Respondent No. 2 was bound by way of its conduct, and the Respondent No. 3 was bound as the CEO of the LLP (not in his individual capacity) to the LLP Agreement, therefore consequently both the Respondent Nos. 2 and 3 agreed to be bound by the arbitration clause of the LLP agreement.

There are three potential scenarios discussed in the ascending order of their complexities which would test the efficacy of the AT in dealing with non-signatory parties and safeguarding the interests of the parties to the arbitration.

Scenario 1: In the event the AT impleads the non-signatory to the arbitral proceedings, but the non-signatory party fails to appear before it and/or fails to submit his statement of defense, it is presumed that the AT can proceed with the arbitration in terms of Section 25 (b) of the ACA i.e., the AT has the discretion to forfeit the right of the non-signatory respondent to file statement of defense and continue the proceedings without treating failure of submission of statement of defense as an admission of the allegations of the claimant.

Scenario 2: When the Claimant seeks impleadment of a non-signatory party under Section 23 of the ACA and urgent interim relief is sought against the non-signatory party under Section 17, but the non-signatory party challenges its impleadment under Section 16; such a scenario would require the AT to expedite its decision making on interim relief vis-à-vis impleadment of non-signatory party in order to preserve the interests of the Claimant so as to not render the arbitration proceeding otiose. In today’s day and age where ‘emergency arbitrations’ are increasingly being adopted by leading arbitral institutions, it is imperative that national legislations also adopt the same to keep up with the changing needs of the time.

Scenario 3: It is not difficult to imagine that compliance of urgent interim reliefs directed by the AT under Section 17 of the ACA against a recalcitrant non-participating non-signatory party would prove to be a herculean task for claimants. The AT per se does not have contempt powers. Earlier a party aggrieved by non-compliance of an interim order of the AT would take recourse under Section 27 (5) which is essentially a contempt proceeding initiated by the court upon representation by the AT. After introduction of Section 17 (2) in the 2015 amendment to the ACA, interim orders by the AT are deemed to be order of the court for ‘all purposes’ and renders it enforceable under the Code of Civil Procedure, 1908, as though it were a court order. Nevertheless, in both the situations judicial interference is the only option available to the aggrieved claimant which renders the mechanism cumbersome, especially if there is urgency in compliance of the interim reliefs.

One possible solution in such a scenario is a legislative amendment empowering the AT with issuing peremptory order in line with Section 41 of the English Arbitration Act, wherein a timeline is prescribed for compliance of the interim order of the AT. After failure to comply with the peremptory order within the said timeline, the AT has several options like rejecting the defaulting party from placing reliance on material which was the subject matter of such order; proceeding to pass an award on the basis of material before it; or even order for payment of costs incurred due to non-compliance. Introducing such stringent measures can certainly prove effective against recalcitrant non-signatory parties and compel them to submit before the jurisdiction of the AT, thereby preserving the sanctity of the arbitration proceedings.         

Harisankar Mahapatra is a Partner at Vohra & Mahapatra Law Chambers.