Non-Signatories Can Be Joined In Arbitration If Dispute Affects Their Rights: Supreme Court
The Supreme Court has held that a non-signatory to an arbitration agreement may be included in arbitration proceedings when the dispute substantially affects their rights, emphasising that the determination of whether someone is a “veritable party” depends on the facts and circumstances of each case.
A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that the question cannot be resolved through a rigid formula, as the relationship between the parties and their interests in the subject matter of the dispute must be considered.
“…the Courts and Tribunals cannot adopt a rigid approach to exclude all persons or entities, who through conduct and relationship with the signatories intended to be bound by the underlying contract containing the arbitration clause.”, the Supreme Court observed, while setting aside the Bombay High Court's decision to decline the request to implead the non-signatories to the arbitration agreement in arbitration proceedings, noting that when the outcome of the proceedings have a substantial impact on the rights of the non-signatories, they cannot claim severance from the proceedings merely because they were non-signatories.
The case concerned a commercial property in Mumbai originally owned by a partnership firm. The appellants disputed a 1995 retirement deed recording their retirement from the partnership, alleging that it was forged. They claimed that the property continued to belong to the original partnership, while the first and second respondent relied on subsequent partnership arrangements to assert their rights over it.
The third and fourth respondents, who were not signatories to the 1985 partnership deed containing the arbitration clause, had subsequently acquired rights under a new partnership arrangement.
Aggrieved by the Bombay High Court's decision to decline the Appellant's plea to implead the third and fourth respondents in the arbitration proceedings, an appeal was filed before the Supreme Court.
Setting aside the impugned order, the judgment authored by Justice Chandran observed that the outcome of the arbitral proceedings regarding the genuineness of the 1995 deed qua the Appellants would have a direct impact on the non-signatories, the third and fourth respondents, since they have been inducted as partners after the retirement of the Appellant based on the 1995 deed.
“If the deed of retirement of 03.07.1995 is found to be invalid on the allegations raised, then necessarily the parties revert to the partnership of 09.12.1985. In which event, it would affect the rights of the 3rd and 4th respondents, who were inducted by the 1st respondent, as partners who obtained rights over the 'subject asset' by that partnership deed, in which neither the appellants nor the 1st and 2nd respondents are partners.”, the Court said.
“Looking at the factors holistically, it could be inferred that the non-signatories, by virtue of their relationship with the signatory parties and active involvement in the performance of commercial obligations which are intricately linked to the subject-matter, are not actually strangers to the dispute between the signatory parties.”, the Court quoted from the Constitution Bench decision of Cox and Kings Ltd v. SAP India Pvt Ltd, 2023 LiveLaw (SC) 1042.
As a result, the impugned order was modified only to the extent of finding the 3rd and 4th respondents to be veritable parties to the arbitration, despite the said respondents not being signatories to the partnership deed of 1985.
Appearance:
For Petitioner(s) :Mr. Ashim Sood, Adv. Ms. Amrita Panda, AOR Mr. Debesh Panda, Adv. Mr. Ashish Venugopal, Adv. Mr. Ruchir Joshi, Adv. Mr. Piyush Pandit, Adv. Ms. Shubhra Swami, Adv. Mr. Kartikeya Jaiswal, Adv.
For Respondent(s) :Mr. Ritin Rai, Sr. Adv. Ms. Gagan Deep Kaur, Adv. Ms. Priyanka Kakkar, Adv. Mr. Dinkar Kalra- 1964, AOR Mr. Sanjay Sarin, Adv. Ms. Bhavya Kohli, Adv. Mr. Pushkar Karni Sinha- 3776, AOR