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Third Parties to Arbitration Agreement


Third Parties to Arbitration Agreement
Third Parties to Arbitration Agreement

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THIRD PARTIES / NON-SIGNATORIES TO AN ARBITRATION AGREEMENT


The legal landscape in India regarding the stance of non-signatories to an arbitration agreement has undergone significant evolution in recent years. This evolution necessitates consideration of two legislative stances.



Initially, the law as it existed before the 2015 Amendment to the 1996 Arbitration Act, and subsequently, the law in its current form following the 2015 Amendment.


 
 

Pre-2015 Amendment


In the domain of domestic arbitration, Section 8 of the 1996 Arbitration Act vested Indian courts with the authority to direct two or more conflicting parties to arbitration provided a valid arbitration agreement among all the parties was in place.



In contrast, concerning international commercial arbitration, Section 45 empowered Indian courts to refer 'parties [to an arbitration agreement] or any person claiming through or under [them]' to arbitration.



This provision allowed Indian courts to compel both signatories and third parties claiming under them, albeit not signatories themselves, to arbitration.



During the pre-2015 Amendment period, the Supreme Court grappled with the status of non-signatories to arbitration agreements for the first time in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. 



In this case, Sukanya Holdings sought to enforce an arbitration agreement against non-signatories by filing an application under Section 8 of the Act before the Bombay High Court. The Bombay High Court dismissed the application on the grounds that not all parties were signatories to the arbitration agreement.



It remarked that arbitration was viable only against certain parties, emphasising that the Act did not empower the judiciary to include non-signatories in arbitration agreements. The Supreme Court upheld the Bombay High Court's decision on appeal.



Consistently, in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr, the Supreme Court declined to appoint an arbitrator under Section 11 of the Act when a non-signatory was sought to be added as a party to the arbitration proceeding.



Despite the non-signatory being an alter ego of the signatory, and both sharing a registered office, the court, applying strict rules of interpretation, held that the existence of an arbitration agreement between the disputing parties was essential for arbitration to be invoked.



In the realm of international commercial arbitration, before the amendment, the Supreme Court initially applied the reasoning from Sukanya Holdings to international commercial arbitration proceedings under Section 45.



Despite Section 45 expressly permitting the extension of an arbitration agreement to third parties (i.e., non-signatories) claiming through or under signatories, the Supreme Court, in cases like Sumitomo Corporation v. CDS Financial Services, declined to refer non-signatories to arbitration.



This was despite the provision's clear language allowing such extension, creating an anomalous situation by applying Section 8 reasoning to Section 45 proceedings.



However, in Chloro Controls India Pvt. Ltd. v. Severn. Trent Water Purification Inc. & Ors, a Division Bench of the Supreme Court rectified this anomaly. The main issue before the court was defining the scope of Section 45 and determining whether a composite reference to arbitration under Section 45 was permissible under multiple arbitration agreements. 



The court noted the consistency between the wording of Section 45 and Article II of the New York Convention, stressing the broader scope of Section 45 due to the inclusion of 'any person' requesting arbitration. It emphasised that courts were obligated to make a reference as requested unless the arbitration agreement was null, void, or incapable of performance.



The court also applied the 'group of companies' doctrine, recognizing the interconnectedness of multiple agreements forming part of a single transaction, thereby permitting a single reference to arbitration.

 
 

Post-2015 Amendment


In light of the Supreme Court's ruling in Chloro Controls, the 2015 Amendment modified the language of Section 8(1) of the Act to encompass any party claiming through or under such a party to an arbitration agreement.



Consequently, in domestic or Indian-seated international arbitrations, an arbitration agreement may now extend to non-signatories if they are claiming through or under a signatory.



It's worth noting that the Law Commission of India, in its 246th Report on the Amendments to the Arbitration and Conciliation Act, 1996 (LCI Report 246), had recommended an amendment to the definition of party under Section 2(1)(h) of the Act to include 'any person claiming through or under' such a party. 



The Law Commission clarified that this was to ensure that the term 'party' encompassed any person deriving their interest from such a party, as per the Chloro Controls decision. However, the 2015 Amendment did not include this proposed amendment to Section 2(1)(h), although it did amend Section 8 accordingly.



Furthermore, the 2015 Amendment clarified that a judicial authority tasked with assessing a request for reference to arbitration under Section 8(1) of the Act must 'refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.'



However, this clarification does not extend to Section 45, which still lacks explicit language requiring a prima facie inquiry. 


Consequently, it currently appears that the findings and decisions of a judicial authority under Section 45 of the Act must still be made after a full trial and remain final, not subject to subsequent review by an arbitral tribunal. In contrast, the decision of a judicial authority under Section 8(1) must be made on a prima facie basis and is subject to subsequent review by the tribunal.




Assignment


The Act does not explicitly address the validity of an arbitration agreement in the event that the contract housing the arbitration clause is assigned to a different party. Judicial decisions have clarified that if the arbitration agreement is capable of assignment, the assignee of such an agreement effectively assumes the position of the assignor post-assignment. Consequently, an assignee can rightfully be considered a party to the arbitration agreement.



Agency


A principal is typically obligated by an arbitration agreement signed by its agent. Disputes regarding whether a non-signatory will be obligated by such an arbitration agreement typically arise in scenarios where there is no explicit contract between the principal and its agent, and the principal contests being bound by the arbitration agreement.



When an agent enters into an arbitration agreement on behalf of the principal, issues of authority surface. Courts will differentiate between the legal framework governing the arbitration agreement and the laws dictating the agent's authority to enter into such an agreement on behalf of the principal, as well as the manner in which such authority should have been conferred upon the agent.



The method through which authority should be conferred would be contingent upon national legislation.



Subcontracts


The court will examine the parties' intention to determine whether they intended to integrate the entirety of the main contract into the subcontract. If there is no explicit indication of the applicability of the arbitration clause, no inference of intention will be drawn.



The entirety of the main contract is typically customised to fulfil the needs of the contract between the principal and contractor, rather than the subcontractor. Consequently, as a general principle, an arbitration clause in the main contract would not extend to disputes arising in connection with a subcontract.

 
 

Multiparty Agreements


Multiparty agreements come in two forms: (1) involving several parties to one contract and (2) involving several parties to several contracts.



Several Parties to One Contract


When more than two parties are bound by an arbitration agreement within a contract, various issues may arise, potentially causing delays, increased costs, and affecting overall procedural efficiency. To mitigate these issues, careful consideration must be given to drafting the arbitration clause. 



For example, parties can stipulate that the number of arbitrators appointed under the arbitration agreement is an odd number, thereby enhancing the likelihood of a majority arbitral award.



Opting for an institution that recognizes multiparty arbitrations and is capable of appointing arbitrators in the absence of party consensus can facilitate smooth arbitral proceedings. It's also essential to ascertain whether the law governing the arbitration seat permits parties to waive their right to appoint an arbitrator in favour of an institution in cases of disagreement.



Several Parties to Several Contracts


The 1996 Arbitration Act does not explicitly address the possibility of consolidating or connecting two or more related arbitrations involving similar legal or factual questions. Indian courts frequently encounter disputes involving multiple parties and contracts with distinct choice-of-law and arbitration clauses.



In P.R. Shah Shares & Stock Brokers v. BHH Securities, the Supreme Court ruled that when a party has claims against two different parties with whom it has separate arbitration agreements, it is fair and reasonable to allow a single arbitration addressing both claims.



The Supreme Court emphasised that conducting separate arbitrations for the same claim against different parties could lead to conflicting decisions and injustice. Therefore, consolidation of arbitrations is warranted to avoid such conflicts.



To facilitate the consolidation of arbitrations, parties should take proactive steps during the drafting stage of the arbitration clause.


They should assess the likelihood of related or linked disputes and incorporate provisions for consolidation into the arbitration clause in the different contracts. This approach helps accommodate the consolidation of arbitrations under various contracts.

 
 


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