This article is written by Himanshu Mahamuni, of Government Law College, Mumbai. This article analyzes the stance of Indian courts of non-signatories to the arbitration agreement and its effect on the arbitral award.
Table of Contents
Introduction
Recent trends in contracts have shown that contracts have become complex because of the scale of work it involves and the number of stakeholders involved in it. Large scale contracts usually have more than two parties to execute the project who are not signatory to the main contracts directly. These other non-signatories parties are involved through ancillary contracts connected to the main contracts and are liable for any damage or compensation as a result of the breach of any contract clause by either party. The parties to the dispute usually choose the path of alternative dispute resolution (usually arbitration) to resolve the matter before going to court. The disputes regarding the arbitration are judged on the lines of provisions of the Arbitration and Conciliation Act, 1996. This resolution brings the involvement of the non-signatory parties to the contract. The duties of the court consist of adjudging the amount of involvement of these parties in the contract which is entered by two signatory parties and the disputes related to the arbitral award. The High Courts and the Supreme Court have had different rigid and flexible stances throughout the judgments for the effect of the arbitral award on non-signatories to the main agreement, finally having a consensual judgement.
In this article, we will discuss the scope of arbitral awards in India and their awarding to the non-signatories to the arbitration agreement with the help of important case laws and precedence of Courts in India.
Scope of arbitral awards in India
The scope of arbitral awards in India is directed by Part I of the Act, which deals with the recognition and enforcement of arbitral awards to a domestic award of Indian seated arbitration, whereas Part II of the Act deals with the enforcement of the foreign award. The amount awarded by the arbitral tribunal is enforced in India in the same manner as it was a decree of the Indian Court.
The 2015 Amendment Act brought landmark changes in the enforceability of the award to the non-signatory parties given by the tribunal. Before the 2015 Amendment Act, Section 36 provided that, where the time limit for preferring an application under Section 34 of the Act has been expired or dismissed, the arbitral award shall be enforceable. The enforced award shall have the same effect as that of the decree of the court. This was interpreted by the Supreme Court in the case of Board of Control for Cricket in India v Kochi Cricket Pvt Ltd & Ors (2018) as an automatic stay on the enforceability of an order if it was challenged under Section 34 of the Act and dismissed the automatic stay unless a separate application was successfully made for it. This case also clarified that the 2015 Amendment will have a retrospective effect, which means that the new Section 36 of the Act will be applicable on the court proceedings even before the effective date of the amendment, that is 23rd October 2015.
This, later on, as amended by the substitution of new Section 36, which provided that the award will not have an automatic stay and rendered unenforceable by appeal under Section 36 of the Act unless it was granted by a stay order by the Court. The grant of stay for an arbitral award for payment of money has to follow the provisions of the grant of stay of money decrees given in the Code of Civil Procedure,1908.
The requirements for successful enforcement of arbitral awards include:
- A three-month lapse from the date of receipt of the award;
- Notice of effective service to the opposite party;
- Award on an appropriate value stamp paper;
- steps to attach, arrest or appoint a receiver; and
- To comply with the principles of Natural Justice.
The requirements for successful enforcement of a foreign arbitral award in India include:
- The original award or an authentic copy is presented; and
- The original agreement or certified copy of the contract.
The time limit for enforcement of an arbitral award, although absent in the Act but has been mentioned in the Limitation Act, 1963. A time limit of 12 years from the date of order to be enforceable as provided in Section 136 of the Limitation Act.
Doctrine of group of companies
The members of distinct judicial identity in the same economic reality should be taken into account by the arbitral tribunal when it rules on its jurisdiction as a group of companies on which the decision of one entity shall be binding on all. It is an important concept to understand if non-signatories are part of arbitration or not. This concept of a group of companies was introduced in the case of Dow Chemical v. Isover-Saint-Gobain(1982) in the ICC tribunal for the arbitral award.
In this case, the dispute arose between various contracts between subsidiaries of Dow Chemical Company and Isover but not directly between Dow Chemical Company and Isover itself. Here the Isover objected that the parties to the jurisdiction were not parties to the contract and had no claim to make under single arbitration. The ICC arbitral panel ruled in this case that merely the corporate ties between the companies are not enough to bind all the affected parties under a single arbitration. These companies can be parties of the arbitration if they play an essential role in the following stages of the contracts-
- Conclusion, or
- Performance, or
- Termination
An arbitration clause can be binding on the companies of the group if they are an essential part of the conclusion, performance or the termination of the contract.
When can non-signatories be bound to an arbitral award
The non-signatories can be bound by the arbitral award of the arbitral tribunal. The Indian Courts have arrived at this decision after a long drawn interpretation in various cases. The Supreme Court initially denied the right of parties to be bound by the principle of the group of companies in a single arbitration and the arbitration agreement was only binding on the people who entered the contract. However, over time, passing from judgement to judgment, the Courts have reverted from this stance and broadened the scope of adoption of the principle of the group of companies. This includes various important judgments of the High Court as well as the Supreme Court which are addressed below in the order for better understanding.
Important case laws
Sukanya Holdings Pvt. Ltd v. Jayesh H. Pandya & Anr, 2003
In the Sukanya case, the dispute was related to the same transaction between several parties out of which some were not even signatories to the arbitration agreement in the clause. The Supreme Court stated that, according to Section 8 of the Act, the non-signatories are not to be referred to a single arbitration. The arbitration proceeding was to be restricted to the parties to the agreement and the causes of action were not to be bifurcated in arbitration. The Supreme Court in the Sukanya judgement ruled that any person who is not a party to the arbitration cannot be asked or referred to be part of the arbitration.
This 2003 judgement of excluding non-signatory from arbitration without considering the involvement of the party to the business is not overruled to date but the Supreme Court has changed the stance from this judgment till the recent times.
Chloro Controls v. Severn Trent Water Purification Inc 2013
The Supreme Court in the case of Chloro Controls in 2013 gave a landmark precedent regarding the encompassing of non-signatories with the signatories to the arbitration clause, together in the same case of entire dispute resolution. One of the parties to the case was an Indian company and the other was a foreign company and the seat of arbitration was chosen to be London. Several interconnected contracts were not directly related to the parties. The Supreme Court while deciding whether the shareholders who are not signatory are party to the arbitration or not said that the Sukanya judgement was given in the context of Section 8 of the Act whereas this case is within the ambit of Section 45 of the Act. This gave a larger room for interpretation to the court for the Section. The Court passed a judgement based on the English law doctrine of the Group of Companies that the person appearing through or under Section 45 of the Act can be subject to arbitration even to non-signatory parties in exceptional circumstances. In this case, one of the important features to be considered before including non-signatory parties was to determine the intention of the parties.
Duro Felguera, S.A. v. Gangavaram Port Ltd, 2017
Section 8 of the Act was amended through the Amendment Act, 2015. Here the scope of ‘party’ was increased to ‘a party to the arbitration agreement or any person claiming through or under him’ by replacing the word party. This amendment along with the 246th report of the Law Commission of India was supposed to increase the scope of domestic arbitration to include the non-signatories as the Chloro Control case only ruled on foreign arbitration. The determination of whether the ratio of Chloro Control was applicable in domestic arbitration was further clarified in the Gangavaram Port Ltd (GPL) case (2017).
In this case, one party was an Indian company and the other was a French company. The French company entered into various contracts with the Indian company through its subsidiaries. The Indian Company argued that a single arbitration was to be initiated following the ratio provided in the Chloro Controls. In this case, the Supreme Court denied the request for a composite arbitration request. The contracts entered by the subsidiary companies and the main company at dispute had separate arbitration clauses in its contracts. Whereas in the case of Chloro Control, the agreements other than main agreements which did not have separate arbitration agreements were connected with the composite transaction of main parties at dispute and only the main agreement had an arbitration clause. The case interprets that the 2015 amendment is not applicable if the agreement was not consistent with the primary transaction between the parties and had other contracts that had a separate arbitration clause.
Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Ors, 2018
The Ameet Lalchand case also determined the scope of the party introduced in Section 8 of the Act by the 2015 Amendment Act. It answered whether the non-signatories were part of the single arbitration where there were several contracts, of which all of them did not have arbitration clauses. The contracts were related to the same project to which the main parties entered the agreement.
In this case, the Supreme Court held that where all contracts were intrinsically connected to the main project which was the main contract entered between two parties, agreements other than main agreements are to be called ancillary agreements. Since the main contract had the arbitration clause attached to it, all the parties involved in the dispute could be addressed through the single contract.
In this case, the Supreme Court diluted the judgment passed in the Sukanya case without overriding it to the extent of Section 8 of the Act. Thus the Sukanya case now has a very limited scope of acceptability in similar fact scenarios and parties can pass all their requests through one single arbitration forming the part of the same transaction even when they do not contain an arbitration clause in them. The test of the Sukanya case can be referred only to cases when all the parties to the single arbitration are necessary parties or the arbitration agreement itself was bad in law.
Cheran Properties Limited v. Kasturi and Sons Ltd, 2018
The Cheran Properties case addresses the issue of the binding effect of the arbitral award on the third party if they are subject to Section 35 of the Act, which contains the parties and persons claiming under them. In this case, the award-holder claimed the award against the third party, claiming that the party was the nominee of the judgment-debtor. Here the agreement containing the arbitration clause was entered between the award-holder and the judgment-debtor between whom the arbitral proceedings were held. The Court observed that the award can be made after cautious observation of certain factors such as the relationship of signatory and non-signatory, commonality of subject matter and the composite nature of the transaction. The facts and circumstances of the case are to be evaluated in the context before giving the award. The intention of the non-signatory to be bound by the arbitration has to be established beforehand. The non-signatory can be awarded with the award, but with proper cautious scrutiny.
Conclusion
The courts in India have been accepting of the stance to allow non-signatories to be part of the arbitration and further claim the award from the award they were not part of. The change from the Sukanya case of the non-signatories not being a part of composite arbitration to the case of Cheran Properties where not only non-signatories are part but can be a party to the award too. The Chloro Control and Ameet Lalchand case has played a prominent role for the courts in reaching the decision of Cheran Properties. The 2015 amendment to the Act and 246th report of the Law Commission of India has aided the extent of the principle presented in Chloro Control. Lastly, Cheran Properties laid down the scrutinised observation to be followed in awarding arbitral awards to non-signatory.
References
- https://www.lexology.com/library/detail.aspx?g=203e614f-dbb0-4d55-a011-75eddfabc895
- https://www.mondaq.com/india/arbitration-dispute-resolution/868694/binding-non-signatories-to-an-arbitration–charting-the-shifting-paradigms
- https://viamediationcentre.org/readnews/Mzg3/Whether-Arbitral-Award-can-be-binding-on-Non-Signatory-to-the-Arbitration-Agreement
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