Referral court under Section 11 Arbitration Act can examine if non-signatory is party to arbitration: Supreme Court

The Supreme Court has reiterated that a referral court (the court approached to appoint an arbitrator and initiate the arbitration process) under Section 11 of the Arbitration and Conciliation Act, 1996, is empowered to examine whether a non-signatory to a contract is a party to related arbitral proceedings [Hindustan Petroleum Corporation Vs BCL Secure Premises Pvt Ltd]..A Bench of Justices JB Pardiwala and KV Visvanathan said that a prima facie demonstration has to be made before the referral court that the non-signatory is a veritable party."The referral court under Section 11 is not deprived of its jurisdiction from examining whether the non-signatory is in the real sense a party to the arbitration agreement. The answer thereof will depend on the facts and circumstances of each case after examining the documents pertaining thereto," the Court ruled..Referring to the Constitution Bench's judgment in Cox and Kings Limited vs. Sap India Private Limited and Another, the Court said"A careful reading of the above passage reveals that the referral court should be prima facie satisfied that there exists an arbitration agreement and as to whether the non-signatory is a veritable party. It further holds that even if the referral court prima facie arrives at the satisfaction that the non-signatory is a veritable party, the Arbitral Tribunal is not denuded of its jurisdiction to decide whether the non-signatory is indeed a party to the arbitration agreement on the basis of factual evidence and application of legal doctrine. The Court further reinforces this proposition by holding that as to whether the non-signatory is bound would be for the Arbitral Tribunal to decide.".On the argument that such questions should be left to the arbitral tribunal, the Bench reiterated that even if the Court concludes, prima facie, that a party is a veritable or proper party, it would not prevent the arbitral tribunal from later deciding to the contrary after an intensive inquiry..However, the Court also said that if the referral court finds, prima facie, that a party is not a proper party, the matter cannot be referred to the arbitral tribunal."This does not mean that where the Referral Court finds prima facie a party is not a veritable party still the matter is left to the Arbitral Tribunal. To hold so, would relegate the Referral Court to the status of a monotonous automation. Further, to countenance such an extreme proposition would lead to disastrous consequences, where absolute strangers could walk into the Referral Court and contend that the matter has to perforce go to the Arbitral Tribunal for a decision on the veritable nature of the party. We are not prepared to accept such an extreme proposition," it added..The Court delivered the ruling while setting aside a Bombay High Court order appointing an arbitrator on a plea filed by BCL Secure Premises Pvt Ltd.The matter concerned a dispute related to a contract awarded by Hindustan Petroleum Corporation (HPCL) for a Tank Truck Locking System to AGC Networks Ltd.The tender conditions had a specific clause stating that the contractor shall not be entitled to sublet, transfer or assign the work under any contract without prior written consent. However, the AGC is stated to have given the work to BCL.In 2018, BCL claimed that it was entitled to 94 per cent of the contract value and demanded payment from HPCL, which denied any liability, asserting that it had no privity of contract with BCL. BCL then initiated civil suits and arbitration under MSME proceedings against AGC, eventually reaching a settlement in 2023 under which receivables from HPCL, if obtained, would be assigned to BCL.Following the settlement, BCL issued a notice invoking HPCL’s arbitration clause and claimed around ₹3 crore. HPCL rejected the claim and subsequently also opposed BCL’s Section 11 petition before the Bombay High Court, citing lack of privity, a contractual bar on assignment without consent, and a time-bar. However, the High Court appointed an arbitrator and directed the tribunal to first decide arbitrability in the matter. HPCL then challenged the decision before the Supreme Court..In the judgment dated December 9, the top court found that there was no arbitration agreement between HPCL and BCL, nor any factual basis to treat BCL as a “veritable party” to the principal contract."Not only has the respondent not shown any consent for assignment as required under clause 3.17 of the tender document, nothing even prima facie has been shown to establish that there was any semblance of an intent to effect legal relationship between the respondent and the party originally granting the contract and/or to indicate that the respondent was a veritable party," the Court said..It added that HPCL and BCL operated on “separate orbits” and that nothing on record suggested that "there was any intention to bind BCL to the contract between HPCL and AGC.".Concluding that the BCL had failed to establish its case or show even prima facie the existence of an arbitration agreement with HPCL, the Court set aside the Bombay High Court ruling."If the respondent has any other remedy available in law, it is at liberty to pursue the same. If any such proceedings are resorted to, they have to be decided in accordance with law and on their own merits. No order as to costs," it added..The appellant, Hindustan Petroleum Corporation was represented by Solicitor General Tushar Mehta with Advocates Sanjay Kapur, Surya Prakash, Shubhra Kapur, Mansi Kapur, Abhishek Tiwari..The respondent, BCL Secure Premises was represented by Senior Advocate Nalin Kohli with Advocates Chirag Madan, Ravleen Sabharwal, G. Sai Krishna Kumar, Rahul Agarwal, Ronit Bose, Aarushi Yadav, Nimisha Menon, Ayuushman Arora, Randeep Sabharwal, Vijay Pal, Deepankar and Anubh..[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.