The Jurisdictional Tug-of-War: Court vs. Tribunal in Non-Signatory Joinder in Arbitration

– Yogitha Jammula¹

The inclusion of non-signatories in arbitration proceedings presents a significant challenge to both courts and arbitral tribunals alike, as it challenges the foundational principles of consent and party autonomy in arbitration. In corporate transactions involving interconnected entities, determining who can be compelled to arbitrate has become increasingly uncertain giving raise to critical questions: When can a non-signatory be compelled to participate in arbitration? To what extent should the court intervene in determining non-signatory joinder?

This article examines the scope of judicial intervention and arbitral tribunal’s autonomy in non-signatory joinder, focusing on the Hon’ble Supreme Court’s decision in Ajay Madhusudan Patel & Ors. v. Jyotrindra S. Patel & Ors.² It analyses the complexities in compelling non-signatories to participate in arbitration proceedings while also evaluating the limitations of referral courts in determining non-signatory inclusion.

In Ajay Madhusudan Patel³ the dispute involved three companies— AMP, JRS, and SRG, shareholders in Millenium Estates and Deegee Software. AMP and JRS entered into a Family Arrangement Agreement (FAA), to resolve disputes, separate shareholding, and define exit strategies. Although the FAA referenced SRG, it was not a formal signatory to the agreement. When conflicts arose vis-à-vis execution of the FAA, AMP initiated arbitration proceedings against both JRS and SRG asserting that SRG would be bound by the FAA despite being a non-signatory. SRG contested this claim, asserting that it could not be compelled to arbitrate under an agreement it had not signed. Ultimately, AMP approached the Apex Court seeking appointment of an Arbitrator.

The crux of the dispute boiled down to whether SRG, a non-signatory to the FAA could be referred to arbitration, if so, on what basis?

To address this question, the Hon’ble Supreme Court revisited the landmark cases – Cox and Kings⁴ and Vidya Drolia⁵ which outlined the limited scope of a referral court’s jurisdiction U/S. 11(6) of the of the Arbitration and Conciliation Act, 1996.

A referral court is primarily empowered to only assess the existence of an arbitration agreement⁶ and whether a non-signatory is a veritable party to it or not. Veritability of parties, here, being determinable only when a signatory seeks joinder of a non-signatory to the agreement or when a non-signatory itself seeks inclusion as a party to the agreement. In both instances, the referral court’s role is limited to conducting a preliminary assessment of existence of an arbitration agreement and whether a non-signatory could potentially be a party to the proceedings or not.⁷

In fact, in Vidya Drolia⁸ the court clarified that where complexity arises in determining whether a non-signatory is a veritable party or not, the matter should be deferred to the arbitral tribunal.

While this approach limits the referral court’s intervention and prioritizes the role of the arbitral tribunal, it may at first glance seem that the role of a referral court has been reduced to a mere formality. However, the courts have through several judicial decisions, time and again illustrated the extent to which court intervention is warranted in referring a matter to the tribunal, particularly in case of non-signatory joinder.

Coming to the question of non-signatory joinder, a non-signatory can be bound by an arbitration agreement by evaluating their conduct, under two broad categories of legal theories: consensual and non-consensual.⁹

Consensual theories are grounded in the mutual intention of the parties and arise from doctrines such as guarantee, agency, implied consent, assignment, and the transfer of contractual rights and obligations. These theories are invoked when a non-signatory, through its conduct or involvement in a contract, demonstrates an intention to be bound by the arbitration agreement.

Non-consensual theories, on the other hand, are rooted in equitable considerations and include doctrines like alter ego/piercing the corporate veil, joint venture relations, estoppel, succession, and apparent authority. They do not rely on the parties’ intention but rather on the force of the applicable law.¹⁰ These doctrines are invoked where a non-signatory has played a significant role in a contract or has benefited from it despite not being a formal party to an agreement, making it inequitable for them to avoid arbitration.

The fact that a non-signatory did not put pen to paper maybe indicative of its intention to not assume any rights, responsibilities or obligations under the Arbitration Agreement. However, the Courts cannot adopt a conservative approach so as to exclude entities that intend to be bound by the underlying contract containing the arbitration agreement, through their conduct and relationship with the signatory. A non-signatory can be compelled to participate in arbitration by evaluating the factors as laid down in Cox and Kings¹¹ – the mutual intent of parties, relationship of a non-signatory with a signatory, commonality of subject matter, composite nature of transaction(s) and performance of contract. The parties’ intention to be bound by the arbitration agreement can also be gauged by closely examining the circumstances that surround the participation of a non-signatory in the negotiation, performance, and termination of the underlying contract containing the arbitration agreement. However, to infer consent their involvement in the negotiation or performance of contract must be found to have been positive, direct and substantial and not merely incidental.

In Ajay Madhusudan,¹²both parties disputed facts and raised counter-allegations warranting a thorough inquiry. In light of the limited jurisdiction accorded U/S. 11(6) of the Act, the Court decided to refrain from deciding whether SRG is to be considered a veritable party to the arbitration, ascertaining that the arbitral tribunal was best equipped to conduct a detailed examination of evidence and determine the veritability of parties. Further, making note of the fact that neither of the parties had disputed the existence of an arbitration agreement, the Court concluded that an arbitration agreement existed between the parties and directed that any objection regarding non-signatory joinder be made before the arbitral tribunal.

Conclusion

The jurisdictional tension between courts and arbitral tribunals when it comes to non-signatory joinder underscores the delicate balance between judicial intervention and arbitral autonomy. While referral courts are limited to a prima facie assessment of the existence of an arbitration agreement and the potential veritability of a non-signatory, the ultimate determination is left to the arbitral tribunal. The decision in Ajay Madhusudan Patel¹³ reflects a nuanced approach, reinforcing that courts must avoid overstepping their limited role U/S. 11(6) of the Act. Entrusting complex determinations to the arbitral tribunal ensures a more efficient, fact-specific, and holistic resolution process, thereby preserving the integrity and efficiency of arbitration as a preferred mode of dispute resolution.

References

1. Legal Researcher & Associate, Karavadi & Associates.
2. 2024 INSC 710.
3. Supra.
4. Cox & Kings Ltd. vs. SAP India (P) Ltd. (2022) 8 SCC 1.
5. Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1.
6. Section 11(6A), The Arbitration and Conciliation Act, 1996.
7. Supra note 4, para 164.
8. Supra note 5.
9. Supra note 4, para 185.
10. Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc, (2013) 1 SCC 641, para 100.
11. Supra note 4.
12. Supra note 2.
13. Supra note 2.