Non-signatory to contract can invoke arbitration clause: Karnataka HC

Non-signatory to contract can invoke arbitration clause: Karnataka HC

Aditya AK

The Karnataka High Court has reiterated the position that a third party can invoke the arbitration clause in a contract against a signatory.

A ruling to this effect was passed by a Bench of Justice Alok Aradhe in petitions challenging an order of the Karnataka government resulting in the cancellation of a contract.

In 2004, the Government of India had introduced the Information and Communication Technologies Scheme with a view to spreading computer literacy in schools. The project, which involved modernising and upgrading computer hardware and infrastructure in schools, was estimated at a total value of around Rs. 426 crore.

The Karnataka government decided to have the project implemented through Karnataka State Electronics Development Corporation Limited (KEONICS). It also expressly permitted KEONICS to appoint sub-contractors and consortium partners. Accordingly, KEONICS floated a tender and one of the petitioners, Everonn Education Ltd, was declared the successful bidder. Siddharth Infotech Pvt. Ltd. and Ricoh Ltd. were brought on board by Everonn Education Ltd. as consortium partners.

The state government executed an agreement with KEONICS, which in turn signed an agreement with the consortium leader Everonn Education. Both agreements provided for arbitration clauses. The petitioner companies had submitted bank guarantees worth crores to secure advance payments for site preparation and hardware delivery.

However, in 2016, the state government terminated the contract with KEONICS. This prompted Siddharth Infotech to file a writ petition in the Karnataka High Court challenging the termination orders. Everonn Education, which was undergoing liquidation proceedings before the Madras High Court, also filed a petition and the matters were heard together.

It was submitted by the petitioners before the High Court that the decision of the government to unilaterally rescind the contract was arbitrary and suffered from non-application of mind.

Arguments were also made on a preliminary objection regarding the locus of the parties to approach the High Court under Article 226 jurisdiction. It was argued on behalf of the petitioners that the High Court, in exercise of powers of judicial review, can interfere even in contractual matters where the state government is arbitrary and irrational. 

On the other hand, it was argued that the petitioners were not parties to the contract between the state government and KEONICS. Therefore, both the petitioners do not have any locus to maintain the petitions as they have no privity of contract with the state government. 

While deciding the dispute, Justice Aradhe noted that it was a settled proposition of law that Article 226 jurisdiction will not ordinarily be invoked if an arbitration clause exists, and that if disputed questions of fact and law arise for consideration, the parties should be relegated to the remedy of arbitration agreement.

After going through the facts of the case, the Court held,

“…even though the petitioners may not be parties to the contract between the State Government and KEONICS, the fact remains that KEONICS under the agreement had the authority to appoint subcontractors. It is also pertinent to mention here that bank guarantees furnished by the petitioners were accepted by the State Government. On account of rescission of contract, the petitioners’ rights have been affected. Therefore, they are the aggrieved persons and have locus to maintain the petitions.”

The Court also cited the Supreme Court’s decision in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. to note that arbitration could be possible between a signatory to an arbitration agreement and a third party, especially when the claimant has succeeded by operation of law to the rights of the named party in the contract. It held,

“Thus, the petitioners, in other words, have stepped into the shoes of the subcontractors and in reality, are a party to the contract although not named in it. The rights of the named party have devolved on the petitioners by operation of law and therefore, the petitioners have the authority to invoke the arbitration clause.”

Therefore, without going into the factual dispute arising out of the matter, the Court allowed the petitioners to take recourse to arbitration.

Spectrum Legal Partner Chintan Chinnappa and Associate Anandi Kamani appeared for Siddharth Infotech. Advocate KS Mahadevan appeared for Everonn Education.

Senior Advocate AS Ponnanna appeared for the state government through the Department of State Educational Research and Training.

Read the order:

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