SC on whether Arbitration Agreement can be Binding on Non-Signatory to the Agreement


April 25, 2018

Case name: Cheran Properties Limited v. Kasturi and Sons Limited and Ors.

Date of Judgment: April 24, 2018

In the case while deciding the issue whether a non-signatory to an arbitration agreement is bound by the same or not, the Apex Court has held that that in certain situations, an arbitration agreement between two or more parties may operate to bind other parties as well. The Court’s observation was that the fact that the appellant was not a party to the arbitral proceedings will not conclude the question as to whether the award can be enforced against it on the ground that it claims under a party.

Brief Facts of the case: In the case an arbitration agreement was entered into between KC Palanisamy (KCP), KSL and SPIL and a company by the name of Hindcorp Resorts Pvt. Ltd. (Hindcorp). Later on disputes arose between the parties resulting in the commencement of arbitral proceedings. Under the terms of the award, a direction was issued under which KCP and SPIL were required to return documents of title and share certificates contemporaneously with KSL paying an amount of Rs 3,58,11,000 together with interest at 12% p.a. on a sum of Rs 2.55 crores. KCP challenged the award of the arbitral tribunal under Section 34 of the Arbitration and Conciliation Act, 1996 on the ground that the arbitral award could not be executed against the appellant which is admittedly not a signatory to the agreement.

Bench’s Verdict:

The Three-Judge Bench of the Supreme Court headed by Chief Justice Dipak Misra dismissed the appeal and made the following observations in the case:

Whether a non-signatory to arbitration agreement is bound by the same?

The Court opined that in holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance.

The Court also made reference to the group of companies’ doctrine to state that the doctrine essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory.

Why does the law postulate that there should be a written agreement to arbitrate?

The Court held that the mandate to have a written agreement is to exclude the jurisdiction of national courts. Where parties have agreed to resolve their disputes by arbitration, they seek to substitute a private forum for dispute resolution in place of the adjudicatory institutions constituted by the state.

Does the requirement, as in Section 7  that an arbitration agreement be in writing exclude the possibility of binding third parties who may not be signatories to an agreement between two contracting entities?

In this context the Court remarked that the evolving body of academic literature as well as adjudicatory trends indicate that in certain situations, an arbitration agreement between two or more parties may operate to bind other parties as well.

The group of companies doctrine has been applied to pierce the corporate veil to locate the “true” party in interest, and more significantly, to target the creditworthy member of a group of companies. Though the extension of this doctrine is met with resistance on the basis of the legal imputation of corporate personality, the application of the doctrine turns on a construction of the arbitration agreement and the circumstances relating to the entry into and performance of the underlying contract.

While the alter ego principle is a rule of law which disregards the effects of incorporation or separate legal personality, in contrast the group of companies doctrine is a means of identifying the intentions of parties and does not disturb the legal personality of the entities in question.

Section 35 of Arbitration and Conciliation ActThe Apex Court also made reference to Section 35 of the Arbitration and Conciliation Act 1996 to state that the statutory provision postulates that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively”. The expression ‘claiming under’, in its ordinary meaning, directs attention to the source of the right. The expression includes cases of devolution and assignment of interest. The expression “persons claiming under them” in Section 35 widens the net of those whom the arbitral award binds. It does so by reaching out not only to the parties but to those who claim under them, as well.

That the expression “persons claiming under them” is a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings. Having derived its capacity from a party and being in the same position as a party to the proceedings binds a person who claims under it. The issue in every such a case is whether the person against whom the arbitral award is sought to be enforced is one who claims under a party to the agreement.

The Apex Court in the case has eventually held that the fact that the appellant was not a party to the arbitral proceedings will not conclude the question as to whether the award can be enforced against it on the ground that it claims under a party. Thus, in such cases the Court is called upon to consider whether the test embodied in Section 35 is fulfilled so as to bind the non-signatory party to the agreement.

The entire case can be accessed here.

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Shilpi Sharan

- Shilpi Sharan is the Editor at Vakilno1.com - an Advocate with extensive knowledge in myriad fields of Law. She has a flair of writing and has legal publications in national and international law magazines to her credit. She focuses on legal research and aims at raising public awareness of laws in India.