Addition of third party non-signatories in arbitration: Powers of referral court vs power of arbitrator

Robertson, in his History of the Common Law gave to us the memorable quote: “Honest men dread arbitration more than they dread law suits”. Of late, there have been innumerable legal issues arising out of arbitration proceedings, thereby delaying them, and vexing the parties.

The efficacy of arbitration hinges on its ability to resolve disputes consensually and effectively. However, the question of whether an arbitral tribunal can involve third parties who are not party to the original arbitration agreement poses a critical challenge.

The judicial view on the power of an arbitrator to add non-signatories was pretty unanimous prior to Cox & Kings. There were two leading views - that of the Madras High Court and that of the Delhi High Court.

The Madras High Court in Abhibus Services India (P) Ltd v. Pallavan Transport Consultancies Services Ltd held that impleadment of parties is a power vested only in the sovereign judiciary, and not in an adjudicatory body exercising powers born out of consent. The conclusion arrived at was that arbitrators could not exercise the power of impleadment in relation to parties neither before the referral court, nor impleaded in the order of reference.

Following the same, the Delhi High Court in Arupri Logistics (P) Ltd v. Vilas Gupta decided that the applicability of the Group of Companies Doctrine hinges on the interpretation of Section 8 and that interpretation can only be done by the court, hence establishing that the arbitral tribunal has no powers to implead non-signatories.

The Madras High Court in VG Santhosam v. Shanthi also held that the arbitrator had no power to implead third parties and reasoned as under:-

"…if such a neutral person is allowed to exercise the power to decide the civil rights of other legal heirs or persons, who all are not party to the Arbitration Agreement, then he would be exercising the powers of the Civil Court, which is not only impermissible but an infringement into the constitutional structure of Judicial System, as well as the principles laid down in the Constitution."

A Constitution Bench of the Supreme Court pronounced the judgment in Cox & Kings by a judgment which was rendered on December 6, 2023. The crucial paragraphs are extracted below:-

G. The standard of determination at the referral stage — Sections 8 and 11

"…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..."

It is necessary to appreciate two very important nuances:-

(a) The Constitution Bench expressly approved only the referral court’s power to add a non-signatory; and

(b) The Constitution Bench limited the referral court’s power of scrutiny in relation to the issue of whether such added party was correctly added or not.

After Cox, we see a divergence.

A Division Bench of the Madras High Court reiterated the view taken in Abhibus and Arupri in Sri Kauvery Medical Care Ltd v. Ceedeeyes Health Care Services, wherein it was observed that:

"Needless to point out, the Arbitral Tribunal is a creation of a contract between two parties and by entering into an agreement for arbitration, the parties to the contract agree to abide by the decisions of the Arbitrator. But, if we are to ask ourselves a question as to whether by such agreement, the parties can invest the power in the Arbitrator to pass orders against third parties also, our answer will have to be an emphatic no."

The Calcutta High Court in Wow Momo Foods Private Limited v. Sulfyaz And Ors, deviated slightly and appears to have affirmed the powers of the tribunal to pass orders under Section 17 against third parties, but in other respects appears to have followed the Abhibus and Arupri line of reasoning.

Then, the Bombay High Court in Cardinal Energy & Infra Structure (P) Ltd v. Subramanya Construction & Development Co Ltd held that in the light of Cox, even if a prayer for impleading a non-signatory is not present at the referral stage, the arbitral tribunal is not precluded from such impleadment.

Interestingly, the Delhi High Court appears to be split down the middle.

The Abhibus and Arupri view has been reiterated in Adavya Projects (P) Ltd v. Vishal Structurals (P) Ltd. In this judgment, the Court held that while the ambition to make India a hub for arbitration is laudable, the powers of the referral court to implead a third-party must be exercised following due process and the same cannot be brought about by merely adding the non-signatory to the claim statement without any notice to arbitrate.

Per contra, in ASF Buildtech (P) Ltd v. Shapoorji Pallonji & Co (P) Ltd, the Delhi High Court held that Arupri would no longer be good law, in the light of Cox.

The doctrine of separation of powers contemplates the sovereign functioning in three different facets: as the legislature, as the executive and as the judiciary, with each being independent of the other. The sovereign judiciary possesses all powers inherently, and its jurisdiction is universal, except where statutorily barred. The power to bring within its fold third parties and to issue orders erga omnes are all present within the sovereign courts.

Arbitrators are different.

An arbitral tribunal is established by contract and cannot assume the powers of the court akin to Order I Rule 10 of the Civil Procedure Code, 1908.

The line of cases deciding the same starting from Chloro Controls and culminating in Cox and Kings, recognise that an arbitration agreement can be something more than the mere piece of paper embodying the arbitration clause. If there are a group of contracts which constitute the collective bargain between the parties, then it is that totality of agreements which constitute the consensus ad idem between the contracting parties.

No doubt, the considerations at the enforcement stage are different as noticed in Cheran Properties, but the law as it now stands is clear that the definition of “party” under the Act includes within its purview non-signatory affiliates, provided that the circumstances demonstrate a mutual intention of all the parties to bind both the signatories and the non-signatory affiliates.

The following passage in Cox and Kings is very telling:

"…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."

The classical test on the lakshman-rekha between the referral court and the arbitral tribunal was laid down in Boghara Polyfab, but that test has, to some extent, been statutorily diluted.

As the Act stands today, the power of the referral court is delineated by the Supreme Court in Ajay Madhusudan Patel v. Jyotrindra S Patel, wherein the law is declared that the referral court would be required to take a prima facie view on existence of a valid arbitration agreement and also whether the non-signatory is a veritable party.

Thus, it appears to the authors that the law as on date is thus:

(a) Any party seeking arbitration against multiple parties, some of whom are signatories to the arbitration, and some of whom are not, must initiate arbitration by a notice under Section 21 against all parties against whom arbitration is sought.

(b) In the event of lack of agreement over the constitution of the arbitral tribunal, the party seeking such arbitration must then approach the referral court, making all desired respondents, as parties.

(c) The referral court will exercise a very limited jurisdiction, i.e. as to the existence of the arbitration agreement and as to whether the non-signatories are veritable parties.

(d) If in doubt, the referral court must refer.

(e) Thereupon, all non-signatories who are referred to arbitration, and who are dissatisfied thereby, must make necessary applications before the Arbitral Tribunal under Section 16. The drill under Section 16 will thereupon come into operation.

Consent is king; the genesis of the enactment stems from the fact that there must be written consent to arbitrate. Upon reading of the bare act, the legislative intent is made clear that there never was a provision to specifically allow for impleading of a non-signatory. This method of dispute resolution revolves around rights and liabilities arising out of a contract.

While the Cox & Kings judgment has endorsed the power to add non-signatories into arbitral proceedings, it has made it clear that such power can be exercised only by the referral court, with a residual power to the arbitrator to thereafter strike off wrongly added parties.

As India strives to become a leading hub for international arbitration, it is crucial to maintain the sanctity of judicial processes and ensure that the expansion of arbitral powers does not undermine the fundamental principles of fairness and justice.

Srinath Sridevan is a Senior Advocate practicing before the Madras High Court.

Ananya Pattabhiraman is an Advocate practicing before the Madras High Court.