Arbitration Is Only Between Parties To Agreement; Non-Parties Can Be Added Only In Exceptional Circumstances: Karnataka High Court
The Karnataka High Court has held that arbitration could be only between parties to the Arbitration Agreement; non-parties cannot be made parties to arbitration unless exceptional circumstances exist.Justice Suraj Govindaraj held thus while allowing a petition filed by Lubna Shah. Shah and Varun Infra Projects (respondent No 3) had entered into a Joint Development Agreement on 27.06.2016,...
The Karnataka High Court has held that arbitration could be only between parties to the Arbitration Agreement; non-parties cannot be made parties to arbitration unless exceptional circumstances exist.
Justice Suraj Govindaraj held thus while allowing a petition filed by Lubna Shah. Shah and Varun Infra Projects (respondent No 3) had entered into a Joint Development Agreement on 27.06.2016, which is governed by an arbitration Clause in terms of Clause 22.
Shah, by a letter dated 27.01.2025, called upon Varun Infra Projects for amicable settlement. No amicable settlement having occurred, Shah invoked the arbitration Clause and issued a notice on 18.02.2025 nominating her arbitrator. Varun Infra Projects replied on 04.03.2025 seeking some time to respond to the notice. However, Shah approached the court, contending that there is no consent or concurrence and sought the appointment of an arbitrator.
The company argued that the directors of the company are not parties to the agreement and thus they cannot be made to undergo the Arbitral Proceedings.
However, Shah contended that the directors of the company (respondents 1 and 2) are Directors of Varun Infra Projects, and one of the directors is a signatory to the Joint Development Agreement, and as such, they are related parties and are required to be made part of the arbitral proceedings.
Moreover, Varun Infra Projects is a shell company and a special purpose vehicle which has been established for the purpose of this particular project. There being no assets in Varun Infra Projects apart from the subject matter of the present agreement, any order which may be passed in the said proceedings cannot be enforceable otherwise than against the directors and shareholders of the company.
The bench referred to the judgment in Salomon v Salomon & Co Ltd., [1897] AC 22. It said:
“Both the Directors and Company are treated to be different, and they cannot be brought on par with each other to make them party to an arbitration merely because there is a possibility that the company may not be able to make payment of the due amounts.”
It added: “If at all the company was not able to make payment of the awarded amounts, there could always be proceedings taken which Shah would be entitled to, and this cannot now be a ground to include the Directors of the company in the Arbitration Proceedings.”
Accordingly, it held: “The sanctity of arbitration is required to be limited to the parties to the agreement, and even a signatory to the agreement could stand on a different footing and would not be a party to the agreement.”
The court said that once a notice under Section 21 of the Act has been issued, the noticee is required to be provided with 30 clear days from the date of receipt of the notice to respond to the same in terms of Sub-section (4) of Section 11.
It then said: “If the proceedings are filed before the expiry of 30 days, in all cases, the same would not be required to be dismissed. If the noticee were to agree to the nomination made, then the said nomination could be accepted and proceedings disposed of. In the event of any other defence being taken, the same could be considered on merits, subject to the fact that hyper technicalities do not delay the initiation of arbitration.”
The court held: “In the present case, the petition had been filed before the expiry of the period of 30 days. However, the addressee, i.e., Varun Infra Projects, has not replied within 30 days and has replied subsequently. Apart from that, respondent No 3 has not concurred with the appointment of the arbitrator.”
It added: “I am of the considered opinion that on technicalities the said petition may not be dismissed, but taking into consideration the reply addressed by Varun Infra Projects, an order on merits could be passed.”
Since both counsels submitted that the matter may initially be referred to Mediation and thereafter an arbitrator could be appointed, the court directed the Director, Karnataka Mediation Centre, to appoint a mediator to resolve the dispute between the parties.
Appearance: Advocate Samarth Shreedhar for Shah.
Advocate Rakshith Pai for the directors of the company and Varun Infra Projects.
Citation No: 2025 LiveLaw (Kar) 416
Case Title: Lubna Shah v. B. M. Jayeshankar & Others
Case No: CIVIL MISC. PETITION NO. 155 OF 2025