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Non-Signatories to Arbitration – An Anathema?

Introduction
The question regarding a Non-Signatory’s right to participate in an arbitration proceeding is a
bone of contention in several cases. While some cases hold a view that 3 rd Parties may be
allowed to be a part of arbitration, some cases hold otherwise.

Section 2(1)(h) of the Arbitration and Conciliation Act (Hereinafter referred to as Act)
defines a party as a party to a contract. However the Law Commission in its 246th Report on
the Amendments to the Arbitration and Conciliation Act, 1996 had proposed an amendment
to the definition of party under Section 2(1)(h) of the Act so as to include any person
claiming through or under such party.i Such an amendment was proposed in light of the case
of Chloro Controls which would be discussed in the subsequent part of the article.ii

An arbitration agreement, as defined under Section 7 of the Act is a condition precedent for
any reference for an arbitration. This would mean that no arbitrator can be appointed and no
adjudication of disputes can take place between the parties in absence of an arbitration
agreement or mutual consent.iii For any arbitration under Section 8 of the Act the dispute
must be relating to the parties of the contract and the said dispute should relate to the
contract.iv The said two essentials are also to be fulfilled for a reference under Section 11. v
The initial views of the courts were that no reference can be made to an arbitrator with a non
– signatories being a party.vi However, for a reference under Section 37, there may not be a
bar as the legislature consciously excluded the term parties.vii

Arguments
In relation to the current issue, it is to be seen that there are two views as noted above:- The
liberal approach which allows a non-signatory to be a party to arbitration and the restrictive
approach which does not.

Liberal Approach

It is to be noted that joinder of non-signatory parties to an arbitration is not unknown to the

arbitration jurisprudence. The International Council for Commercial Arbitration (ICCA)
Guide to the Interpretation of the 1958 New York Convention provides for such situations,
and supports the same.viii

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 An argument in support of the liberal approach is that multiplicity of disputes would be
avoided by allowing connected parties to submit to a single arbitration.ix When multiplicity of
disputes is avoided, uniformity of decisions would also be ensured.x Non Signatory being a
beneficiary may also be a factor for consideration. xi Courts have also said that when the basis
of arbitration is the consent of the parties to an agreement, non-signatory parties to the
agreement can be referred to the arbitrator, on the basis of the implied or specific consent of
the said party or by judicial determination. xii Another view in this regards is that if a non-
signatory would be a person aggrieved, he can be a part of the arbitration.xiii

Restrictive Approach

The argument put forward in view of the restrictive approach is that arbitration is basically in
a consensual nature and a party who is not a signatory cannot be allowed to be a part of any
arbitration.xiv

Evolution of Law
When the courts had to decide upon this issue, Supreme Court had held that no application
can be made under Section 8 of the Act if in case the matter is outside the arbitration
agreement or if the parties are not parties to the agreement. xv Supreme Court has applied the
same logic and held that no such reference is allowed even under Section 11 of the Act. xvi If a
person who is not a party to the arbitration agreement is impleaded as a party to the petition
under section 11 of the Act, the court should either delete such party from the array of parties,
or when appointing an Arbitrator make it clear that the Arbitrator is appointed only to decide
the disputes between the parties to the arbitration agreement. xvii The main reason for such
reasoning of the courts was that Section 2(1)(h) of the Act provides for a restricted meaning
of a party.xviii In the Sumitomo Case, denial of arbitration reference was based upon the
reasoning that disputes related to the joint venture agreement to which the parties were not
signatories.xix But the problem here is that under Section 45 of the Act a reference to
arbitration can only be denied if the agreement is either void or null. This anomaly has
however been rectified by the Supreme Court through the case of Cloro Controls Case by
overruling Sumitomo Case.xx

Cloro Controls Case

The facts of the case were such that there was a mother agreement and there were several
other agreements and there were certain persons who were not signatories to the mother
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agreement but they were signatories to the subsequent agreements. In light of this the court
noted that the transaction is of a composite nature where performance of mother agreement
may not be feasible without aid, execution and performance of the supplementary or ancillary
agreements, for achieving the common object and collectively having bearing on the
dispute.xxi

In the said case the court takes note of the fact that the normal practice in relation to
arbitration agreements is that signatories to the agreement would be parties to the dispute. But
it may not always be the case. Such situations may create difficulties but they certainly do not
be obstructions. This is how the court notes that arbitration, thus, could be possible between a
signatory to an arbitration agreement and a third party if in case the party wanting it to
happen is able to show that it is claiming "through" or "under" the signatory party as
contemplated under Section 45 of the Act.xxii The court notes that this would be done in
exceptional cases.

Aftermath
Cloro Controls Case has opened a Pandora’s Box where by several decisions have been
unable to decide the scope of the said judgement. There are cases where Indian Courts have
allowed foreign tribunal awards whereby the parties to the arbitration were non-signatories to
the contract.xxiii

Following the Alter Ego Doctrine referred to in the Cloro Controls Case, courts have held
that the word "party", has to be with broader concept or understanding lifting corporate
veil.xxiv If, after lifting the corporate veil, one person is found to be the alter ego of another,
even a non-signatory is allowed to join the arbitration proceedings.xxv

Further, it is to be seen that a third party can be made a party to an arbitration without his
prior consent if there is a direct relationship between the party signatory and the non
signatory to the arbitration agreement, commonality of the subject-matter and the agreement
between the parties being a composite transaction. xxvi For proper dispensation of justice,
depending on the facts of the case, even a third party can be added or joined as a party for
appropriate relief and effective implementation under a Section 9 petition.xxvii

Supreme Court has, in a case of Ameet Lalchand Shah, concluded that in cases where the
agreements are inter-connected and several parties are involved in a single commercial
project executed through several agreements, all the parties can be made amenable to

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arbitration. This would hold true even where one of the agreements does not contain an
arbitral clause or a party to one agreement is a third party to another agreement.xxviii

Interpreting the verdict of Cloro Controls, it was held that the performance of all other
agreements by respective parties including third parties/non-signatories had to fall in line
with the principal agreement. In such factual background, it was held that all agreements
pertaining to the entire. But if however it does not relate to the original principal agreement,
the principle held in the case of Chloro Controls India will not apply. xxix However, in some
cases merely because the party was not a signatory to an agreement, arbitration was not
referred.xxx

Conclusion
As noted above, a Pandora’s Box has been opened by the Cloro Controls Case as the scope of
the said judgement could not be found out by courts. Hence a proper redressal of the said
issue is required. Regardless of the said problem, a general trend is emerging in favour of
extending arbitration agreements to non-signatories. Courts would only negate a request to
include a non-signatory to a contract to an arbitration dispute if it resorts to strict
interpretation of the provisions of law. It is however to be noted that as observed by the
Supreme Court, courts have to adopt a pragmatic approach and not a pedantic or technical
approach while interpreting or construing an arbitration agreement or arbitration clause.xxxi
However, it is also to be seen that if such a thing would be done, courts would be encroaching
upon the autonomy in the agreement which gave rise to such arbitration. Hence implied limits
are to be laid down in order to ensure that there is no judicial overreach.

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i
LAW COMMISSION OF INDIA, REPORT NO. 246 – AMENDMENTS TO THE ARBITRATION AND
CONCILIATION ACT, 1996 31 (2014), available at http://lawcommissionofindia.nic.in/reports/Report246.pdf, (last
visited August 26, 2019).
ii
Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641.
iii
Jagdish Chander v. Ramesh Chander, 2007 (5) SCC 719.
iv
Yogi Agarwal v. Inspiration Clothes, 2009 (1) SCC 372.
v
Deutsche Postbank Home Fin.Ltd v. Taduri Sridhar & Anr, 2017 (1) MLJ 681.
vi
S. N. Prasad v. Monnet Finance Ltd, (2011) 1 SCC 320.
vii
Prabhat Steel Traders Private Limited v. Excel Metal Processors Private Limited, MANU/MH/2545/2018.
viii
Imc Limited v. Deendayal Port Trust, MANU/GJ/1010/2018.
ix
Abu Dhabi Gas Liquefaction Co. Ltd. v. Eastern Bechtel Corporation, (1982) 2 Lloyd‘s Rep. 425 (CA) (U.K.).
x
H.D.I.L. v. Mumbai International Airport Private Limited, 2013 SCC OnLine Bom 1513.
xi
Ruhrgas AG v. Marathon Oil Co., 526 US 574 (1999).
xii
Jitender Singh And Others v. Viyom Networks Ltd., 2014 SCC OnLine Raj 215.
xiii
Chennai Container Terminal Pvt. v. Union Of India (Uoi), 2007 (3) ARBLR 218 Madras.
xiv
A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386.
xv
Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531.
xvi
Indowind Energy Ltd. v. Wescare (I) Ltd. &Anr, (2010) 5 SCC 306.
xvii
Deutsche Postbank Home Fin.Ltd v. Taduri Sridhar & Anr, 2017 (1) MLJ 681.
xviii
Sumitomo Corporation v. CDS Financial Services, (2008) 4 SCC 91.
xix
Ibid.
xx
Supra Note 2.
xxi
Supra Note 2.
xxii
Supra Note 2.
xxiii
Integrated Sales Services Limited v. Arun Dev, 2017 (2) Bom CR 845.
xxiv
Imc Limited v. Deendayal Port Trust, MANU/GJ/1010/2018.
xxv
IVRCL Limited. v. Gujarat State Petroleum Corporation Limited And Anr., MANU/GJ/1386/2017.
xxvi
Rv Solutions Pvt. Ltd. v. Ajay Kumar Dixit & Ors., 257 (2019) DLT 104.
xxvii
Bharat Sanchar Nigam Limited v. Siemens Financial Pvt Ltd., 2016 SCC Online Bom. 5317.
xxviii
Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678.
xxix
Astonfield Renewables Pvt. Ltd. v. Ravinder Raina, (2018) 247 DLT 115.
xxx
Shri. K. Gangadhara Gowda v. M/S. International Power, Karnataka High Court on 29 March 2019.
xxxi
Enercon (India) Ltd. & Ors. v. Enercon GMBH and Anr, (2014) 5 SCC 1.