Non-Signatories Bound By Arbitration Agreement If Their Actions Align With Those Of Signatories: Delhi High Court

The Delhi High Court Bench of Justice Jasmeet Singh held that if a non-signatory party actively participates in the performance of a contract, and its actions align with those of the other members of the group, it gives the impression that the non-signatory is a “veritable” party to the contract which contains the arbitration agreement. Based on this impression, the other party may reasonably assume that the non-signatory is indeed a veritable party to the contract and bind it to the arbitration agreement.Brief FactsThe present petition has been filed under Section 11(5) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) seeking appointment of Justice T.S. Thakur, Former Chief Justice of India as the sole arbitrator to adjudicate the disputes between the partiesThe petitioner no.1 is a registered company under the provisions of the companies act. It involves in the business of investment, consultancy, and business development across India. The petitioner n. 2 is also a registered company under the companies act which involves in the M2M and IoT services sector, providing subscription lifecycle management and IoT solutions.Respondent no. 2 was holding significant share in the company of the Petitioner no. 2 while holding formerly the post of Chief Solutions Officer. A share subscription and shareholders agreement was entered into between the petitioner no. 1 and 2 and proforma party no 1in which the petitioner acquired 50% shares and 49% voting rights in the petitioner no.2. Thereafter, a dispute arose with respect to the agreement signed. A petition under section 9 of the arbitration was filed and but later withdrawn as well as no amicable solution was reached.Due to fraudulent activities conducted by the respondents, the petitioner lodged an FIR against them. Consequently, a memorandum of settlement (MoS) and SPAs was executed in which the petitioner took over the petitioner no. 2 and Sensorise Smart Solutions Pvt. Ltd (SSS). This settlement was breached by the respondents by diverting business to other respondents. They also violated the non-compete clause and non-solicitation clause. Notices were issued and arbitration proceedings started against the proforma parties. The respondents challenged the arbitration proceedings on the ground that they could not be made parties as they were not signatories to the settlement agreement executed. Consequently, the petitioner issued a legal notice invoking the arbitration clause against the respondents. ContentionsThe petitioner argued that respondent no 2-6 although not signatories to the settlement agreement but they gave their implied consent to the arbitration clause due to their roles and obligations in the agreements. It was further contended that non signatories are bound by the agreement through implied consent due to the interconnectedness of the MoS and Share Purchase Agreements (SPAs). It was further argued that respondent 7-9 are bound due to the group of companies doctrine due to their involvement in the MoS-related transactions. It was further argued that consolidation of arbitral proceedings are allowed under the arbitration act for which reference of the international arbitration rules was also give.Per contra, the respondent 2-5 argued that since they were involved in the MoS negotiations, terms of the agreement were not binding on them. It was further contended that the main purpose of the agreement to resolve the dispute between major shareholders while SPAs dealt with share tranfers. It was further argued that SPAs are treated as separate agreements having distinct obligations. Since they were not signatories to the MoS, it indicated that they had no intention to be bound by it. It was further argued that the respondents were not included in the earlier arbitration notices. It shows that the disputes were not arbitrable therefore their attempt to consolidate the arbitration proceedings are not justified. It was further argued that group of companies doctrine is not applicable on individuals.Court's AnalysisThe court referred to the Supreme Court judgment in Ajay Madhusudan Patel v. Jyotrindra S. Patel, (2024) wherein it was held that role of the court at referral stage is to examine whether prima facie an arbitration agreement exists or not. This means that the court at this stage is not required to go deeper into the merits of the case or assess whether the arbitration agreement is valid and enforceable. The court held that courts under Section 11 shall confine their examination to the „existence‟ of an arbitration agreement. All that the Courts need to see is whether an arbitration agreement exists - nothing more, nothing less. It was further stated that jurisdictional issues concerning whether certain parties are bound by a particular arbitration under the group-company doctrine etc. in a multi-party arbitration raise complicated questions of fact which are best left to the tribunal to decide.The court further relied on the Supreme...

Non-Signatories Bound By Arbitration Agreement If Their Actions Align With Those Of Signatories: Delhi High Court

Mohd Malik Chauhan

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Non-Signatories Bound By Arbitration Agreement If Their Actions Align With Those Of Signatories: Delhi High Court

Mohd Malik Chauhan

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