SWISS TIMING v.

ORGANIZING COMMITTEE
INDIA - ARBITRATION FRIENDLY- ALLEGATIONS OF FRAUD AND
CORRUPTION NO BAR TO ARBITRATION!
The Supreme Court has held that:
 Allegations of fraud and other malpractices are arbitrable.
 N. Radhakrishnan case does not lay down the correct law
 Contention of substantive contract being void / voidable is not a bar to arbitration and the
court must follow the policy of least interference
 Arbitration and criminal proceedings may continue simultaneously.

INTRODUCTION
The Supreme Court of India, in Swiss Timing Limited [“Petitioner”] v. Organising Committee,
Commonwealth Games 2010, Delhi [“Respondent”]1, has now held that the allegations of fraud
can be determined by arbitration where an arbitration agreement exists between the parties. This
sets a new, pro-arbitration tone to the issue of arbitrability of allegations of fraud in Indian seated
arbitrations.
Previously, the Supreme Court, in N. Radhakrishnan v. Maestro Engineers & Ors.2 [“N.
Radhakrishnan case”], had followed a conservative approach and held that serious allegations
of fraud were to be determined by courts and not arbitral tribunals, if the party against whom
such allegations were made so desired.

FACTS
The Petitioner, a Swiss company, entered into an agreement [“Contract”] on March 11, 2010
with the Respondent for providing timing, score, result systems and supporting services required
to conduct the Commonwealth Games in India. The Petitioner alleged that the Respondent had
defaulted in making the payments due under the Contract. The Petitioner invoked arbitration
under clause 38 [“Arbitration Agreement”] of the Contract. As the Respondent failed to
nominate its arbitrator, the Petitioner approached the Supreme Court under Section 113 of the
Arbitration and Conciliation Act, 1996 [“Act”] for constitution of the arbitral tribunal.

OBJECTIONS RAISED BY THE RESPONDENT

The Respondent, amongst other issues, raised the following primary objections:
 Under the Contract the parties had warranted that they would not indulge in corrupt
practices to induce the execution of the Contract. The Respondent contended that the Petitioner
had procured the Contract by indulging in corruption and hence, the Contract was void since its
very inception (void ab-initio) and there was no basis for invoking the arbitration.
Interestingly, the Respondent, to establish corruption during execution of the Contract, sought to
rely on the pending criminal proceedings initiated against Mr. Suresh Kalmadi (the then
 Chairman of the Respondent) and other officials of the Respondent on the allegations of
corruption, cheating and commission of other fraudulent acts.(petitioner insteadcrespondent)
 The Respondent further placed reliance on the N. Radhakrishnan case wherein it was
held that allegations of fraud and serious malpractices cannot be dealt with properly in
arbitration.
 Lastly, the Respondent argued that since the criminal proceedings were pending in the
trial court, simultaneous continuance of the arbitration could result in conflicting decisions
between the two forums causing unnecessary confusion.

FINDINGS OF THE SUPREME COURT

Fraud held arbitrable - N. Radhakrishnan case held per incuriam
The Court has clearly held that the judgment in the N. Radhakrishnan case did not lay down the
correct law as it failed to duly consider the earlier judgments of the Court in Hindustan
Petroleum Corp case4 and Anand Gajapathi Raju case5, wherein it has been held that a civil
court is obligated to direct parties before it to arbitration where there exists an arbitration
agreement between such parties.
The Court further cited non-consideration of Section 16 6 of the Act, as reason for the
incorrectness of the law laid down in N. Radhakrishnan case. It was affirmed that by virtue of
Section 16 and the frame of the Act, an arbitration clause is treated as independent from the
underlying contract. (THEORY OF SEPARABILITY)
Section 16 further provides that a decision by the arbitral tribunal holding the contract as null and
void would not lead to the invalidity of the arbitration clause contained in such a contract.
It was emphasized that parties cannot be permitted to avoid arbitration unless they satisfy that
doing so will be just and in the interest of all the parties.
Contention of substantive contract being void / voidable is no bar to arbitration
The Supreme Court highlighted that the courts should adopt a least interference policy in keeping
with the general principle under Section 5 of the Act. Having jointly read Sections 57 and 16 of
the Act the Supreme Court held that all matters including the issue as to whether the main
contract was void / voidable can be referred to arbitration.
Importantly, the Supreme Court has provided clarity on how objections regarding invalidity of
the contract as bar to reference to arbitration have to be dealt with. It has been held that where a
court may conclude that a contract is void without receiving any evidence, the court would be
justified in declining a reference to arbitration, though such cases would not be common.
Examples of situations where a court may reach such a conclusion without requirement of any
evidence and upon reading of the contract would be in situations of wagering agreements, where
both parties are under mistake of fact or where the consideration or object is forbidden by law.
Drawing a distinction between void and voidable contracts, the Supreme Court highlighted that
in cases where the defense taken is that a contract is voidable, it would not be possible to decline
reference to arbitration. Such cases would include unsoundness of mind, coercion, fraud, undue
influence and misrepresentation.
Accordingly, in respect of the Respondent’s contention that it had the right to terminate the
Contract as the Contract had been executed by corrupt means, it was held that these contentions
would have to be established in a proper forum on the basis of the oral and documentary
evidence, produced by the parties, in support of their respective claims. A mere claim of the
Contract being void would not suffice.
Interestingly, the Supreme Court has made an observation that defense of the contract being void
is routinely taken to delay reference to arbitration and that such grounds should be summarily
rejected unless there is clear indication of reasonable chance of success.

Arbitration and criminal proceedings may continue simultaneously

The Court rejected the contention of the Respondent that the arbitration should not be
commenced pending the adjudication of the criminal proceedings against the officials. The court
held that the possibility of conflicting decisions is not a bar against simultaneously proceeding
with arbitration and criminal proceedings. The Court relying on the judgment of M.S. Sheriff v.
State of Madras8, has held that the solitary consideration to restrain simultaneous civil and
criminal proceedings is the likelihood of embarrassment to the accused.
Lastly, the Court highlighted that if the criminal proceedings result in an acquittal, it would leave
little ground for challenging the validity of the underlying contract. Thereby any denial of
reference at this stage would unnecessarily delay the arbitration. However, the Court has opined
that if the award in arbitration was made in favour of the Petitioner, the Respondent would be at
liberty to resist enforcement on the ground of subsequent conviction of the officials in criminal
proceedings.

ANALYSIS
The judgment provides a much awaited respite to Indian seated arbitrations. In cases of fraud and
other malpractices, several arbitrations were stalled due to the objections to arbitrability of
allegations of fraud. Parties would renege on their obligation to refer disputes to arbitration with
such objections. The decision of the Supreme Court in the N. Radhakrishnan case would often
be cited in support the defense that claims pertaining to fraud could not be arbitrated.
Now, with this judgment being passed by the Supreme Court, in circumstances where allegations
of fraud and other malpractices have been made, the parties would be compelled to go before the
arbitral tribunal for resolution of disputes even where the arbitration is seated in India. The
judgment further indicates that allegations relating to corruption may also be capable of being
decided by arbitral tribunal.
Furthermore, the Court’s view that the defense of a contract being void should ordinarily be
summarily dismissed brings to fore the pro-arbitration progressive approach of the Indian
judiciary. It is appreciable that the Supreme Court has promoted the independent nature of
arbitration proceedings and encouraged the courts to merely act as vehicles of support which
would aide expeditious arbitrations.
 This judgment complements another watershed judgment of the Supreme Court, World Sport
Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd.9, which was pronounced earlier
this year. Thereunder, the allegations of fraud did not prevent the court from referring the parties
to a foreign seated arbitration under section 45 of the Act. Thus, the two judgments bring about a
uniform positive change in the India arbitration law stance on the issue of arbitrability of the
allegations of fraud.
---------------------------------------------------------------------------------------------------------------
1
 Arbitration Petition No. 34 of 2013
2
 (2010) 1 SCC 72
3
 For the text of Sections 5, 11 and 16 of the Act please click here
4
 Hindustan Petroleum Corp. Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503
5
 P. Anand Gajapathi Raju & Ors. v. P.V.G. Raju (Dead) & Ors. (2000) 4 SCC 539
6
 For the text of Sections 5, 11 and 16 of the Act please click here
7
 For the text of Sections 5, 11 and 16 of the Act please click here
8
 AIR 1954 SC 397
9
 AIR 2014 SC 968; Our analysis of the judgment can be viewed here

World Sport Group (Mauritius) Ltd v. MSM Satellite (Singapore)

Pvt. Ltd
ALLEGATIONS OF FRAUD NOT A BAR TO FOREIGN SEATED
ARBITRATION
 Supreme Court held that allegation of Fraud is not a bar to refer parties to foreign seated
arbitrations;
 The law does not require a formal application to refer parties to arbitration;
 If an arbitration agreement exists and a party seeks reference to a foreign seated
arbitration, court is obliged to refer the parties to arbitration;(reference to arbitration)
 The only exception is in cases where the court finds the arbitration agreement to be null
and void or inoperative or incapable of being performed.

INTRODUCTION
In a landmark decision the Supreme Court of India has expressly removed allegations of fraud as
a bar to refer parties to foreign seated arbitrations. The Supreme Court by its decision dated
January 24, 2014 in World Sport Group (Mauritius) Ltd (“WSG”) v. MSM Satellite (Singapore)
Pte. Ltd (“MSM”) set aside the judgment of the Division Bench of the Bombay High Court
(“Bombay HC”) in MSM Satellite (Singapore) Pte. Ltd v. World Sport Group (Mauritius)
Ltd  dated September 17, 2010 (“Impugned Judgment”). Previously as the law stood, allegations
of fraud were arguably not arbitrable under Indian Law. The Supreme Court has now clarified
the position, removing another possible hurdle that one could face while arbitration against
Indian Parties outside India.
BACKGROUND
The dispute pertained to obtaining media rights for the Indian sub-continent from the Board of
Cricket Control of India. In this regards WSG and MSM entered into a Deed for Provision of
Facilitation Services (Facilitation Deed”), where under MSM was to pay WSG ₹ 4,250,000,000
as facilitation fees. The Facilitation Deed was governed by English Law and parties had agreed
to settle their disputes through arbitration before the International Chamber of Commerce
(“ICC”), with a seat of arbitration in Singapore (“Arbitration Agreement”).
Eventually, MSM rescinded the Facilitation Deed alleging certain misrepresentations and fraud
against WSG and initiated a civil action before the Bombay HC for inter alia a declaration that
the Facilitation Deed was void an for recovery of sums already paid to WSG. WSG filed a
request for arbitration with ICC and ICC issued notice to the MSM to file its answer. In response
MSM filed initiated a fresh action seeking an anti-arbitration injunction against WSG from
proceeding with the ICC arbitration.

MSM’S CASE
It was MSM’s case that since the Facilitation Deed, which contained the Arbitration Agreement,
in null and void on account of the misrepresentation and fraud of WSG, the Arbitration
Agreement itself was void and could not be invoked.

WSG’S CASE
It was WSG’s case unless the Arbitration Agreement, itself, apart from the Facilitation Deed, is
assailed as vitiated by fraud or misrepresentation; the Arbitral Tribunal will have jurisdiction to
decide all issues including validity and scope of the arbitration agreement.(arguing on
separability)

IMPUGNED JUDGMENT
The Bombay HC had, in the impugned Judgment, held that disputes where allegation of fraud
and serious malpractice on the part of a party are in issue, it is only the court which can decide
these issues through furtherance of judicial evidence by the party and these issues cannot be
properly gone into by the arbitrator, thereby granting the anti-arbitration injunction sought for.
This decision of the Bombay HC was the only judgment where an Indian Court had held
allegations of fraud as a bar to foreign seated arbitrations, though such findings were prevalent in
the sphere of domestic arbitrations.

JUDGMENT OF THE SUPREME COURT

The Supreme Court, by re-enforcing its pro-arbitration approach, set aside the Impugned
Judgment and held that only bar to refer parties to foreign seated arbitrations are those which are
specified in Section 45 of the Indian Arbitration and Conciliation Act, 1996 (“Act”) i.e. in cases
where the arbitration agreement is either (i) null and void or (ii) inoperative or (iii) incapable of
being performed.
While explaining the term null and void, the Supreme Court clarified that the arbitration
agreement being a separate agreement does not stand vitiated if the main contract is terminated,
frustrated or is voidable at the option of one party. The Supreme Court held that a court will have
to see in each case whether the arbitration agreement is also void along with the main agreement
or whether the arbitration agreement stands apart from the main agreement and is not null and
void, thus accepting the submissions of WSG.(Separability)
The Supreme Court interpreted the terms inoperative and incapable narrowly, adopting the
interpretation of the international authors of these terms in Article II (3) of the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”).
The expression ‘inoperative’ is understood to cover situations where the arbitration agreement
has ceased to have effect such as where parties may have by conduct or otherwise revoked the
arbitration agreement. Further, ‘incapable of being performed’ covers situations where the
arbitration cannot be effectively set into motion and covers the practical aspects of the
prospective arbitration. Accordingly, the court held that arbitration agreements do not become
“inoperative and incapable of being performed” where allegations of fraud have to be inquired
into and the court cannot refuse to refer the parties to arbitration as provided in Section 45 of the
Act.
The Supreme Court also opined that no formal application is necessary to request a court to refer
the matter to arbitration under Section 45 of the Act and in case a party so requests even through
affidavit, a court is obliged to refer the matter to arbitration with the only exception being cases
where the arbitration agreement is null and void, inoperative and incapable of being performed,
thus limiting the scope of judicial scrutiny at the stage of referring a dispute to foreign seated
arbitrations.

ANALYSIS
This is a welcome decision for foreign parties having arbitration agreements with Indian counter-
parts. Before this judgment was delivered, Indian parties were increasing challenging
arbitrability of disputes where allegations of fraud were made against them, relying of the
Supreme Court’s own decision in the case of N. Radhakrishnan v. Masestro Engineers &
Ors1  (“N Radhakrishnan”). By this decision the Supreme Court has limited the applicability of
its decision in N Radhakrishnan to domestic arbitrations hence clarifying that, allegations of
fraud against a party or consequential rescission of the main agreement is not a bar on
arbitrability of disputes between the parties under Indian Law, when the seat of arbitration is
outside India.
 A. Ayyasamy v. A. Paramasivam & Ors.
ALLEGATIONS OF FRAUD ARE ARBITRABLE – EVEN IN DOMESTIC ARBITRATIONS
IN INDIA - N. RADHAKRISHNAN CONUNDRUM PUT TO REST
The Supreme Court has held that: 

 Allegations of fraud are arbitrable unless serious and complex in nature;

 N. Radhakrishnan did not make blanket exclusion of fraud from the purview of
arbitration;
 Swiss Timing does not over-rule N. Radhakrishnan since it arose under Section 11 of the
A&C Act;
 Issues of fraud are arbitrable unless the arbitration agreement itself is impeached. 

INTRODUCTION
The Supreme Court of India (“Supreme Court”), in A. Ayyasamy (Appellant) v. A.
Paramasivam & Ors. (Respondents)1 has held that disputes involving allegations of fraud
arising out of contracts bearing an arbitration clause shall be referred to arbitration.
Distinguishing, yet not casting away, the oft-cited ruling of the Supreme Court in the case of N.
Radhakrishnan v. Maestro Engineers2 in matters involving arbitrability of fraud, a division
bench of the Supreme Court has held that N. Radhakrishnan did not subscribe to the blanket
proposition of non-arbitrability of fraud and that allegations which could be adjudicated upon in
courts could also be adjudicated upon in arbitral proceedings, subject to certain carve-outs.

FACTS:
The parties entered into a partnership deed on 1 April 1994 for running a hotel. While the
Appellant was entrusted with administration, the Respondents alleged that the Appellant had
failed to make regular deposits of money into the common operating bank account and had
fraudulently siphoned off an amount of INR 10,00,050. In a separate raid conducted by the CBI
on premises of the Appellant’s relative, an amount of INR 45,00,000 was seized and alleged to
have been given by the Appellant for business of the hotel.
The Respondents filed a civil suit seeking right of administration of the hotel. The Appellant
sought reference of the dispute to arbitration under Section 8 of the Arbitration & Conciliation
Act, 1996 (“A&C Act”). The High Court rejected the Appellant’s application on the ground that
the dispute involved allegations of fraud. Aggrieved by the decision, the Appellant preferred an
appeal before the Supreme Court.

CONTENTIONS OF THE RESPONDENTS:

The Respondents made the following contentions: 
 The allegations constituted acts of fraud which were attributed to the Appellant.
 Where allegations of fraud are involved, civil courts are the appropriate forum for
adjudication. The Respondents took recourse to judgment of the Supreme Court in N.
Radhakrishnan wherein disputes revolved around serious malpractices, manipulation of accounts
and cheating by the partners. The Supreme Court had held that since the allegations were serious
and required evaluation of detailed evidence, they could “not be properly gone into by the
Arbitrator”. 

FINDINGS OF THE SUPREME COURT

Minimum intervention by courts & arbitrability of fraud.
The Supreme Court delved into the underlying objective of the A&C Act to minimize court
interference in disputes involving arbitration. It held that Section 8 of the A&C Act mandated
reference to arbitration unless, on a prima facie evaluation, the arbitration agreement was found
to be invalid. It noted that Section 8 offered little discretion to courts to assume jurisdiction and
made a conscious departure from the language of its equivalent provision under the UNCITRAL
Model Law where reference could be rejected on wider grounds (viz. where the arbitration
agreement was null and void, inoperative or incapable of being performed).
The Court held that Section 16 of the A&C Act also operated in the same vein while equipping
the arbitrator to rule upon its own jurisdiction and minimizing court intervention. Further, the
doctrine of separability (where the arbitration agreement survived nullity, even if embodied in a
contract assailed on the grounds of fraud), helped to retain powers of the arbitral tribunal and
adjudicate upon nullity of the contract. Thus, tribunals are vested with jurisdiction to consider
issues of fraud.
No demarcation of arbitrable and non-arbitrable disputes under the A&C Act
Noting that arbitrability is quintessential to ensure enforcement of awards and that the A&C Act
is silent on types of non-arbitrable disputes, the Supreme Court outlined judicially enumerated
issues which cannot be referred to arbitration - based on analysis of the types of rights involved
(rights in rem or in personam), conferment of jurisdiction on special courts or on public policy.
These include matters involving crimes, matrimony, insolvency and winding up, guardianship,
tenancy, testamentary matters,3 trusts4 and consumer protection5. However, it held that the law
did not exclude issues of fraud as being non-arbitrable.
N. Radhakrishnan is frequently misread
The Court held that N. Radhakrishnan involved serious allegations of fraud which necessitated
evaluation of detailed evidence. This could only be done properly by Courts. However, the
Supreme Court considered that in ruling so, N. Radhakrishnan had relied extensively on the
judgment of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak6 which arose under the
Arbitration and Conciliation Act, 1940 - offering wide discretion to courts to assume jurisdiction.
However, the A&C Act had limited court discretion and intervention under Section 8.
Despite the aforesaid observation, the Supreme Court did not expressly reject the reasoning in N.
Radhakrishnan and held that serious allegations of fraud were non-arbitrable, while mere
allegations of fraud would be arbitrable. It distinguished, by way of example, between simple
and serious allegations of fraud. However, it emphasized that it was incumbent upon courts to
sift through the materials and identify, on a prima facie basis, if the case involved allegations of a
serious nature. Since the present dispute did not involve complex issues but merely matters of
accounts, the Supreme Court held that the allegations could be easily ascertained by the
arbitrator.
Swiss Timing does not over-rule N. Radhakrishnan
The Supreme Court considered the ruling in Swiss Timings Ltd. v. Commonwealth Games 2010
Organizing Committee7 where a Single Judge of the Supreme Court held that N.
Radhakrishnan (delivered by Division Bench) was per incuriam. The Supreme Court clarified
that Swiss Timing dealt with Section 11(6) of the A&C Act which conferred power on the Chief
Judge of India or the Chief Justice of the High Court as a designate to appoint an arbitrator. The
exercise of power by the Court under Section 11 and the judgment so delivered could not be
deemed to have precedential value. Therefore, it cannot be deemed to have overruled the
proposition of law laid down in N. Radhakrishnan.
Reliance on foreign case law to focus on party intent (Fiona Trust & Holding Corporation vs.
Yuri Privalov )
Relying on decisions of the UK courts8, the Court held that it is inconceivable that ordinary
businessmen would engage in a contractual tug of war by intending that questions of nullity of
contract would be decided by the arbitrator while issues of fraud would be decided by the court.
Arbitration is intended to be a one-stop forum unless parties expressly excluded certain disputes
from its ambit. Therefore, unless the arbitration clause itself is impeached on grounds of fraud,
the disputes will be capable of reference to arbitration. However, it was rare for a party to
procure an arbitration agreement fraudulently, even in cases where the contract may have borne
connection with fraud.
Multiple allegations of civil and criminal wrongdoing
Rejecting the general notion that elements of criminal wrongdoing or statutory violation
detracted from the jurisdiction of the arbitral tribunal, the Supreme Court held that contractual
power did not conflict with statutory power. Parties could exercise the power under the
arbitration agreement; thereby giving teeth to the well accepted phenomenon of acceptance of
criminal and contractual procedures9.

ANALYSIS
The judgment is seminal in the arena of fraud related disputes arising out of contracts bearing
arbitration clauses in India seated domestic arbitrations. In case of foreign seated arbitrations, the
Supreme Court in  World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte.
Ltd.10 had held that allegations of fraud did not prevent the court from making reference to
arbitration under Section 45 of the A&C Act. However, in the case of India seated domestic
arbitrations, there was a cloud on efficacy of arbitral proceedings to resolve issues of fraud,
particularly in light of the ruling in N. Radhakrishnan.
The present judgment sets to rest the conundrum created by N. Radhakrishnan. It recognizes that
disputes which can be adjudicated upon by courts can, by default, be adjudicated upon by arbitral
tribunals and that exceptions to this rule lie in limited frontiers of public policy, statutory
legislation and rights in rem. It carefully pulls the rope bearing the weight of N. Radhakrishnan –
its primary reliance on the judgment in Abdul Kadir. It clarifies that N. Radhakrishnan can be
applied only where serious and complex allegations of fraud necessitating extensive evaluation
of evidence are involved. Pursuant to this ruling, N. Radhakrishnan cannot be used for the
purpose of making an unimpeachable statement on non-arbitrability of fraud, nor can it be used
as a subterfuge to detract from jurisdiction of the arbitral tribunal by masking allegations as
fraud. Every allegation of fraud would need to be weighed on a scale of seriousness and
complexity, with an eye that sifts through material to identify veracity of the allegations.
The Court has also subtly stated that allegations of fraud can be adjudicated upon in courts when
the person against whom such allegations are levelled desires to be tried in court. This will be an
additional factor to be considered by courts in deciding applications for reference to arbitration.
It will also be crucial for courts to scrutinize if fraud is directed at the arbitration agreement,
thereby impeaching the agreement (and the resultant arbitration, the same being creature of the
arbitration agreement), as contra-distinguished from the main contract.
The judgment acts as a fail-safe judgment as it takes into account universally-accepted principles
of kompetenz kompetenz, separability and party autonomy as the epicenter of arbitration, and
accords due respect to ordinary business rationale underlying arbitration clauses in contracts. It
fortifies the intention of the judiciary to be a partner in arbitral proceedings and offer support,
both in an active and passive manner, where questions arise with respect to reference to
arbitration.

1
 Civil Appeal Nos. 8245 and 8246 of 2016
2
 (2010)1 SCC 72
3
 Booz Allen & Hamilton vs. SBI Home Finance Ltd., (2011)5 SCC 532
4
 Vimal Kishore Shah vs. Jayesh Dinesh Shah, Civil Appeal No. 8614 of 2016
5
 Skypak Courier Ltd. Vs. Tata Chemical Ltd., (2000)5 SCC 294
6
 AIR 1962 SC 406
7
 (2014) 6 SCC 677. Our analysis of the judgment can be viewed here
8
 Fiona Trust & Holding Corporation vs. Yuri Privalov (2007)1 AllER (Comm) 891; Premium Nafta Products Ltd. vs. Fily
Shipping Co. Ltd. (2007) UKHL 40
9
 Hindustan Petroleum Corporation Ltd. Vs. Pinkcity Midway Petroleum, (2003) 6 SCC 503
10
 AIR 2014 SC 968; Our analysis of the judgment can be viewed here
Extension of Arbitration Agreements to Non-
Signatories: An International Perspective

With the ever-increasing complexity in contractual

frameworks and corporate structures, one the of
the common questions which both, arbitral
tribunals
and national courts face is whether a non-signatory can be held bound by an arbitration
agreement write Kunal Mimani and Ishan Jhingran.

Introduction
   
There is no decided formula which guides the arbitrators regarding which legal principles apply
in determining when to join non-signatories. Allegations of implied consent implicate a different
legal framework from arguments asserting lack of corporate personality. National law can come
into play, particularly the place of incorporation of a signatory company. In addition, arbitrators
often look to transnational norms established in other arbitral awards, as well as the law at the
arbitral situs and the enforcement forum. The general trend is that non-signatories will generally
not be bound to (nor able to compel) arbitration because there is no privity of contract. However,
there are exceptions to this general rule of privity of contract. As an arbitration agreement is
governed by the ordinary principles of contract law, non-signatories may be compelled to
arbitrate in a number of circumstances.

A range of legal theories have been developed to facilitate this determination either for or
against including such non-signatories. Parent companies, subsidiaries, contract assignees,
governmental and quasi-governmental entities, beneficiaries and other non-signatories to an
underlying arbitration agreement may find themselves bound by an arbitration agreement, and
by the subsequent arbitral award. Compelling a non-signatory to arbitrate involves complex
theories of contract and corporate laws that are themselves unsettled or at least highly fact
dependent in their application. Various national courts and arbitral tribunals, from both, common
law and civil law systems have evolved some of these theories: 

 Group of Companies doctrine

 Veil-piercing or Alter-ego
 Agency
 Incorporation by Reference
 Estoppel
 Assignment
 Third-Party Beneficiary

Consenting and Non-Consenting Non-Signatories

When a non-signatory asks to arbitrate against a signatory, the threshold for extending the
arbitration clause thus may be set at a lower level from its resting place when one side never
abandoned the right to present claims or defences in otherwise competent courts. The signatory
resisting joinder of the third party might argue that it never agreed to arbitrate with the particular
affiliate seeking to enter the proceedings. The argument has some force, albeit limited in nature
as the resisting party did agree that disputes related to the subject in question would be settled by
arbitration. On the contrary, when a non-signatory is sought to held bound by an arbitration
agreement, the very basis of arbitral jurisdiction – consent to arbitrate – is generally absent. The
party sought to be bound would argue that it never agreed to arbitrate with anyone at all, thus
requiring arbitrators to look fully for clear manifestation of consent – express or implied.

Consequently, arbitrators and judges often draw distinctions between what might be
called “consenting non-signatories” (which seek to arbitrate) and “non-consenting non-
signatories” (which resist arbitration). It is understandably easier to justify allowing a willing
party to join an arbitral proceeding than the converse. The position can be summed up by
Professor William W. Park’s opinion:

“Policy reasons as well as practical considerations make it difficult to compare a situation

where the non-signatory does want to arbitrate with one where the non-signatory does not want
to arbitrate. In the latter instance, the drawbacks of parallel proceedings must be weighed
against the serious countervailing considerations of imposing arbitration clearly unwilling
entities. When the non-signatory has never consented to arbitration more analytic rigor and
hesitation are in order before extension should be ordered. The very basis of arbitral
jurisdiction is prima facie absent.”

Group of Companies

The most widely known principle for the extension of arbitration agreements is the group of
companies’ doctrine, which evolved in the famous Dow Chemical case. This doctrine provides
that several companies that form part of a larger corporate group may be regarded as a single
legal entity or “une réalité économique unique”. Under the doctrine, a group of companies
constitutes one and the same economic reality - despite the legal independence of the individual
entities from one another - where the circumstances of the contract's conclusion, its
performance, its (possible) subsequent termination, and the degree of control executed among
the group companies warrants such an inference. However, in all “group of companies”
decisions, the finding of an express or implied consensus of the parties remains key in binding
non-signatories to an arbitration clause, and this doctrine is not applied due to mere affiliation of
the companies. In essence this doctrine states that when a non-signatory company of group of
companies is an active participant in the contractual relationship, then the arbitration agreement
can be extended to it.

TIn Dow Chemical, an ICC Tribunal sitting in Paris decided that the parent company, Dow
Chemical Company (USA) should become a party to an agreement applying to its subsidiary
Dow Chemical (France), for the following reasons:

Considering that it is indisputable – and in fact not disputed – that DOW CHEMICAL

COMPANY (USA)  has and exercises absolute control over its subsidiaries having either signed
the relevant contracts or, like  DOW CHEMICAL (FRANCE), effectively and individually
participated in their conclusion, their performance and their termination.”

In a similar decision, a Singapore International Arbitration Centre tribunal extended an

arbitration clause to a parent non-signatory company on the basis of “the true intent of the
parties on the basis of the evidence before it”. Further, in SARHANK V. ORACLE
CORPORATION, a tribunal sitting in Cairo decided, as a matter of Egyptian law:

“Despite their having separate juristic personalities, subsidiary companies to one group of
companies are deemed subject to the arbitration clause incorporated in the contract because
contractual relations cannot take place without the consent of the parent company owning the
trademark by, and upon which transactions proceed.”

However, the common law countries such as England and Australia have been reluctant to apply
this principle to bind the non-signatories. Peterson Farms , for instance, is a case where an
English Court rejected this doctrine in an outright manner. In that decision, the Commercial
Court held that “the group of companies’ doctrine . . . forms no part of English law”. In
Australia and Switzerland too, this doctrine has been rejected for the purpose of extending the
arbitration agreement to non-signatories. In India, the Supreme Court came across this situation
in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. However, it held that the mere fact that the
Signatory and Non-signatory companies had common shareholders or common boards of
directors did not make the two companies a single entity. The Court further held that the mere
existence of common shareholders or directors could not lead to an inference that one company
was bound by the acts of the other. Thus the extension of arbitration agreement was refused by
the court reasoning that only signatories are bound by the same.

Professor Habegger notes that scholarly debate of this issue continues, particularly among
French commentators. While one school of thought favours a stricter approach relying
predominantly on national laws, the other is more lenient, allowing extension based on
principles such as bona fides or good faith, lex mercatoria or other principles of private
international law.

Veil-Piercing or Alter-Ego

A number of arbitral tribunals and national courts have often had to consider whether an
arbitration agreement concluded by a company may be binding on its group affiliates or even a
natural person who is the group's ultimate controlling shareholder. Although main limiting
principle for the application of this doctrine is that corporate personality is created precisely in
order to contain liability within a particular corporate entity - in practice, construction of the
arbitration agreement in question, as well as the circumstances surrounding the entry into, and
performance of, the underlying contract need to be considered.

Under the alter ego doctrine, a corporation may be bound by an agreement entered into by its
subsidiary, regardless of the agreement’s structure or the subsidiary’s attempts to bind itself
alone to its terms, “when their conduct demonstrates a virtual abandonment of separateness”.
Alter ego determinations are highly fact-based, and require consideration of the totality of the
circumstances. No single factor is final and conclusive. The courts have developed extensive
lists of circumstances to guide alter ego determinations. In determining whether a non-signatory
is the alter ego of a signatory, a court or a tribunal failing to take into account all of the aspects
of the relationship between the non-signatory and the signatory commits an error of law. If it is
established that corporate form was used to effect fraud or another wrong on a third party, alter
ego determinations then revolve around issues of control and use. The courts explore the totality
of the environment in which the party and non-signatory operate.
In ALPHA S.A. v. BETA & Co., State Company of Ruritanian Law, the tribunal pierced the
corporate veil of the signatory state-owned entity to bind its non-signatory corporate parent to
the arbitration agreement entered into by its subsidiary. The tribunal discussed case law and
doctrine developed in connection with Swiss company law, in particular for so-called “one-man
companies”, and summarized that piercing the corporate veil was only warranted where (i) a
shareholder had total control over an entity, evinced by insufficient capitalization, confusion in
the administration and management, and confusion of assets, and (ii) the totality of
circumstances constituted an abuse of rights.

The veil-piercing issue generally includes those factors normally explored in the context of
parent-subsidiary alter ego claims, such as whether:

 The parent and subsidiary have common stock ownership;

 The parent and subsidiary have common directors or officers;
 The parent and subsidiary have common business departments;
 The parent and subsidiary file consolidated financial statements;
 The parent finances the subsidiary;
 The parent caused the incorporation of the subsidiary;
 The subsidiary operates with grossly inadequate capital;
 The parent pays salaries and other expenses of the subsidiary;
 The subsidiary receives no business except that given by the parent
 The parent uses the subsidiary’s property as its own;
 The daily operations of the two corporations are not kept separate; and
 The subsidiary does not observe corporate formalities.

Additional factors to consider in an alter ego determination include:

 Whether the directors of the “subsidiary” act in the primary and independent interest of
the “parent”;
 Whether others pay or guarantee debts of the dominated corporation; and
 Whether the alleged dominator deals with the dominated corporation at arm’s length.

The main limitation of an alter ego argument is that piercing the veil is an exception to a deeply
entrenched rule in our legal and economic system. In an arbitration setting, the weight of various
national authorities suggests that the veil should be pierced seldom. Moreover, an arbitration is
created by contract, unlike a court proceeding. It might, therefore, be argued that arbitrators
should be especially hesitant to pierce the veil. That is to say, since the doctrine is rarely applied
by even the higher national courts which possess inherent jurisdiction, arguably arbitrators
should be even more reluctant to pierce the veil.

Agency

Agency is “the fiduciary relation which results from the manifestation of consent by one person
to another that the other shall act on his behalf and subject to his control, and consent by the
other so to act.” An agency relationship may be demonstrated by:

“. . . written or spoken words or conduct, by the principal, communicated either to the agent
(actual authority) or to the third party (apparent authority).”

A principal will generally be bound by an arbitration clause in a contract signed by its agent. As
a result, arguments about whether a non-signatory should be compelled to arbitrate will only
arise where there is no explicit contract between the principal and its agent, and the principal
does not wish to be part of the arbitration. In China National, for example, the Federal Supreme
Court of Switzerland upheld the decision by the arbitral tribunal against a signatory agent based
on the fact that agent and principal held themselves out as one indistinguishable entity.
In Thomson-CSF, S.A. v. American Arbitration Association , considerations such as mutual
benefits derived from affiliation were rejected as insufficient to bind a non-signatory to an
arbitration agreement signed by an affiliate, on the basis of agency principles.

A United States district court had compelled Thomson-CSF to arbitrate with Evans &
Sutherland Computer Corporation (E&S) on the basis of an arbitration agreement between E&S
and Rediffusion Simulation Limited (Rediffusion), a Thomson-CSF subsidiary. The district
court applied a “hybrid” approach to compel arbitration by Thomson-CSF, a non-signatory to
the arbitration agreement, relying on various factual factors. The Second Circuit Court of
Appeals held that the district court had improperly extended the limited theories on which an
arbitration agreement can be enforced against a non-signatory. It also stated:

“The district court’s hybrid approach dilutes the safeguards afforded to a non-signatory by the
ordinary principles of contract and agency and fails to adequately protect parent companies, the
subsidiaries of which have entered into arbitration agreements. Anything short of requiring a full
showing of some accepted theory under agency or contract law imperils a vast number of parent
corporations. This Court did not intend such an outcome in prior opinions and does not adopt
such an approach here.”

A non-signatory cannot compel arbitration merely because he is an agent of one of the

signatories. Courts, however, differentiate between whether one signatory may compel the
principal of another signatory agent to arbitrate under an agreement that the agent signed as an
authorized representative of its principal:

“... and he who would bind the principal is bound to ascertain, not only the fact of agency, but
the nature and extent of the authority.”

The binding effect of an arbitration agreement concluded by an agent on behalf of a principal

involves questions of authority (i.e. the agent's ability to bind the principal to such agreements)
and allied questions of necessary form. Thus, an ICC tribunal while deciding whether a principal
was bound by an arbitration agreement concluded by its agent distinguished between the law
governing the arbitration agreement (in that case, the law of the seat of the arbitration), the laws
which governed the agent's capacity to conclude an arbitration agreement on behalf of the
principal (the law of the principal's registered office) and the form in which such capacity should
have been conferred on the agent (the law of the jurisdiction in which the agreement between the
agent and the principal was concluded).

National laws feature substantial differences on questions of necessary form (i.e. whether the
principal's written authorisation is required) and content (i.e. whether the principal's
authorisation need expressly envisage the conclusion of an arbitration agreement). For example,
both Swiss and Austrian law require the principal expressly to authorise an agent to enter into an
arbitration agreement on its behalf in order for a principal to be bound by such an agreement, but
only Austrian law requires such express authorisation to be in writing. Under Italian, French and
German law no particular form of authorisation is required.

Professor Sandrock, opines that an arbitration agreement concluded by an agent or

representative without the principal's written authorisation would bind that principal only if in
the circumstances third parties’ legitimate expectations required protection. To conclude, in an
agency analysis, courts and tribunals generally look at firstly, whether a non-signatory party was
made a party by formal representation or subsequent ratification and, as a secondly, whether the
appearance of an agency relationship between signatory and non-signatory and a good faith
reliance on this appearance to the counterparty's detriment warrants extending the arbitration
clause to the non-signatory. Courts and tribunals will reject good faith reliance where the
alleging party did not at least investigate the non-signatory's purported powers of representation.

Incorporation by Reference

It is possible to incorporate an arbitration agreement by reference. For example, standard

conditions may be described in a document separate from a contract, but referenced in that
contract. A party may therefore be a signatory to the main contract which references a secondary
document containing an arbitration clause, but a non-signatory to that secondary document.
However, under the theory of incorporation by reference that non-signatory may be subject to
the arbitration agreement and compelled to arbitrate. Both English and Canadian courts have
consistently held that the general words “all terms, conditions and exceptions governing the
charter party are hereby incorporated herein” in a bill of lading are insufficient to incorporate
an arbitration clause included in the charter party.

Where there is clear and specific wording, an arbitration agreement that is incorporated into a
bill of lading will be enforceable as in the case of Nanisivik Mines Ltd. v. Canartic Shipping
Co. The Canadian and British position is in accordance with the American jurisprudence
concerning incorporation by reference. Non-signatories have been compelled to arbitrate under
bills of lading and in the wider context. 

Estoppel

Equitable estoppel prevents a party who knowingly accepts the benefits of a contract containing
an arbitration agreement from avoiding the obligation to arbitrate. This theory has so far been
recognized only in the United States and Canada, where two theories have been recognized for
holding a party bound by an arbitration agreement under estoppel. The first theory is that a non-
signatory who knowingly accepts the direct benefits of a contract containing an arbitration
agreement can be compelled to arbitrate by a signatory. A leading case on this point is American
Bureau of Shipping v. Tencara , where Tencara contracted with a syndicate to build a yacht. The
contract required the American Bureau of Shipping (ABS) to classify the ship. Tencara entered
into a contract containing an arbitration contract with the ABS to classify the ship. The ship
sustained serious hull damage due to poor design and construction. Tencara sued the ABS in
Italy. The yacht’s owners sued the ABS in France. The ABS brought suit in New York to
compel all parties to arbitrate their claims together. The owners argued that they were not party
to the contract between Tencara and the ABS and, therefore, not a party to the arbitration
agreement. Following the first theory, the Court held that the owners were compelled to arbitrate
as non-signatories. Since the owners had received the benefit of the ABS’s classification (e.g.,
lower insurance rates), they were estopped from claiming that the arbitration provision did not
apply to them.

The second theory is that a non-signatory can compel arbitration with a signatory when the
issues the non-signatory is seeking to resolve are inherently inseparable or inextricably
intertwined with the agreement and the non-signatory is closely related to the signatory. The test
to determine when non- signatories will be allowed to compel arbitration was enunciated in MS
Dealer Serv. v. Franklin as follows:

“Existing case law demonstrates that equitable estoppel allows a non-signatory to compel
arbitration in two different circumstances. First, equitable estoppel applies when the signatory
to a written agreement containing an arbitration clause must rely on the term of the written
agreement in asserting its claim against the non-signatory. When each of the of the signatory’s
claims against a non-signatory makes reference to or presumes the existence of the written
agreement, the signatory’s claims arise out of and relate directly to the written agreement and
arbitration is appropriate. Second, application of equitable estoppel is warranted when the
signatory to the contract containing an arbitration clause raises allegations of substantially
interdependent and concerted misconduct by both the signatory and one or more of the
signatories to the contract...”

The second American theory of equitable estoppel can further be sub-divided into two categories
:

(a)  Permitting non-signatories to compel arbitration by signatories

Sunkist Soft Drinks, Inc. v. Sunkist Growers Inc., is an example of a non-signatory compelling
arbitration because the signatory had to rely on the terms in the arbitration agreement in
asserting its claim against the non-signatory. The defendant Sunkist had entered into a licence
agreement. The licensee was then acquired and absorbed by Del Monte. Del Monte, a non-
signatory, was allowed to compel arbitration for breaches of the license agreement because the
claims were “intimately founded in and intertwined with the license agreement.” Therefore,
Sunkist was estopped from avoiding arbitration.

a)  Permitting signatories to compel arbitration by non-signatories

The case of McBro Planning and Development Co. v. Triangle Electronic Construction Co.,
Inc. concerned a hospital renovation. Both McBro and Triangle had arbitration provisions in
their respective contracts with the hospital, but none with each other. Despite the lack of a
written agreement between the two parties, McBro nevertheless tried to compel an arbitration
proceeding between itself and Triangle. The Court held that Triangle was estopped from
refusing to participate in the arbitration because its claims were intimately founded on and
intertwined with McBro’s underlying contract with the hospital.

Learned academicians have opined that the first theory decision violates arbitration’s general
premise of consent as the resisting non-signatory never consented nor later consents to being
bound by the arbitration agreement , and moves away from the two traditional requirements of
estoppel, namely, misrepresentation and detrimental reliance by the party seeking the estoppel.
Commentators also note that in many estoppel cases, the same result could have been obtained
by applying the ordinary laws of contract.

Assignment

The issue of whether an arbitration agreement remains valid if the contract containing it is
assigned to another party is not dealt with in any of the main international conventions – the
New York Convention, the UNCITRAL Model Law and the European Convention on
International Commercial Arbitration. Consequently, the issue remains one for domestic laws,
to be determined by reference to the law governing the assignment, as well as the law governing
the arbitration agreement.

Given the separability of the arbitration agreement from the rest of the contract, it might be
supposed that special requirements apply to the assignment of the arbitration clause. This is the
judicial point of view in English law . By contrast, German law makes the assumption that the
arbitration clause will be assigned along with the main contract. Other laws such as French law
and New York law, an arbitration agreement will be considered as producing mostly duties -
rather than rights - and consequently requires express agreement on the part of the assignee in
order to produce effects for that party. The Swedish Supreme Court appears to have adopted a
middle position, namely that an arbitration clause will be presumed to be assignable if the
parties have not expressly agreed otherwise, but once assigned it will operate vis-à-vis the
assignee only if that party has actual or constructive knowledge of the arbitration clause.

Third-Party Beneficiary

While very similar to estoppel, the third-party beneficiary doctrine is somewhat distinct. Under a
third-party beneficiary theory, a court must look to the intentions of the parties at the time the
contract was executed. Parties are presumed to be contracting for themselves only. This
presumption may be overcome only if the intent to make someone a third-party beneficiary is
clearly written or evidenced in the contract. Primary indicia of a third-party beneficiary interest
will be whether the non-signatory files a claim against one of the signatory parties.

In the leading case of London Drugs Ltd. v. Kuehne & Nagel International Ltd., the Supreme
Court of Canada ruled that the strict rules of privity could be incrementally relaxed in order to
conform to the commercial reality and justice. The Court ruled that if an employer’s limitation
of liability clause extends its benefits to employees, then the employees are entitled to benefit
from the clause if they are acting within the scope of their duties and performing the services
provided for in the contract. It must be noted that the Court was cautious in its decision and
refused to overthrow the often criticized rule of privity of contract in its entirety.

In Mississippi Fleet Card v. Bilstat, Inc., a Federal United States Court compelled the non-
signatories to arbitrate as they were third-party beneficiaries of a contract containing an
arbitration clause. The Court stated the American test for establishing that an entity is a third-
party beneficiary as follows:

“(1) that the terms of the contract are expressly broad enough to include the third party either
by name or as one of a specified class and (2) the said third party was evidently within the
intent of the terms so used, the said third party will be within its benefits if (3) the promise had,
in fact, a substantial and articulate interest in the welfare of the said third party in respect to the
subject of the contract.”
Similar to agency and piercing the veil, even the outcome of arguments based on the third-party
beneficiary theory are fact driven. However, it appears well settled as a matter of principle that
non-signatories can compel arbitration through the third-party beneficiary theory.

Conclusion and Suggestions

Thus on analysis of various principles and case-laws, it can be inferred that in order to determine
whether a non-signatory is bound by an arbitration agreement, courts andtribunals usually look
at theories which revolve around implied consent or lack of corporate personality. Generally,
transnational norms are invoked which are based on decisions in landmark cases or opinions of
learned scholars. When the joinder is based on implied consent and related doctrines, the basic
contract and agency principles ofthe applicable lex contractus or lex situs are followed, whereas
when corporate law doctrines are used, the law of the place of incorporation of the company is
considered.

While most of such cases are fact-dependant, a general flow and considerations have evolved
from decided cases on the discussed doctrines. In essence, however, the issue boils down to, as
other issues in international arbitration, to the true and genuine intention of the parties in light of
good faith and equity. Perhaps acknowledging the controversy surrounding this
issue, UNCITRAL has recently suggested the following possible amendments to
the UNCITRAL Rules:

“The Swiss Rules, for instance, expressly provide, under Article 4, paragraph (2) that: ‘Where a
third party requests to participate in arbitral proceedings already pending under these Rules or
where a party to arbitral proceedings under these Rules intends to cause a third party to
participate in the arbitration, the arbitral tribunal shall decide on such request, after consulting
with all parties, taking into account all circumstances it deems relevant and applicable. The
Working Group might wish to consider whether an express provision on third party intervention
should be included in any revised version of the UNCITRAL Rules.”

A similar provision can be found in Article 22(5) of the Rules of the Chamber of Arbitration of
Milan. It is suggested that lawyers engaged in drafting contracts which contain arbitration
clauses must be sensitized to the fact that a non-signatory may be added to the arbitration. If this
risk exists, then clients must be advised of this risk, and, language be added to the contract and,
arbitration clause, to minimize the risk of a related non-signatory party being bound by the
arbitrator’s decision. Finally, it is submitted that with exceedingly frequent non-signatory
decisions, moreover, this controversy in international arbitration is on a path to gradually
approach the most precious of all grounds in dispute resolution: predictability.

The Joinder of Non-signatories to Arbitration: Discussion

on the Recent Ameet Lalchand Case
Introduction

Arbitration has come to the fore as a viable alternative to the Court system for
resolution of disputes. The Arbitration and Conciliation Act (“ACA”), 1996 governs the
procedural aspects of this mechanism. It has been modified multiple times over the
years to get into place an efficient dispute settlement mechanism. The statute is
divided into two parts – Part I applies to domestic arbitrations while Part II applies to
foreign-seated arbitrations. In the case of Balco[1], the Supreme Court confirmed this
separation and held that Part I and II would never apply simultaneously to an
arbitration proceeding. While the Arbitration and Conciliation (Amendment) Act, 2015
(“2015 Amendment Act”) under Section 8 has created some exceptions to this rule in
allowing parties to a foreign-seated arbitration to use provisions in Part I when dealing
with interim measures and Court-assisted taking of evidence, the broad scheme of the
Act continues to follow a separation between the two.

This divide gets problematic where the Court is called upon to compel non-signatories
to arbitration agreements, to arbitrate. Part I has received a very narrow interpretation,
leaving no scope whatsoever for a Court to compel a non-signatory to arbitrate. This
will be looked at through the lens of Sukanya Holding.

Part II, on the other hand, has been liberally interpreted to this respect, along the lines
of the interpretation of the New York Convention in other jurisdictions. This broad
interpretation adopted by Courts would be dealt through the observations extended
in Chloro Controls.

Finally, the judgment in the Ameet Lalchand case will be discussed to analyze the
application of Section 8 post the 2015 Amendment Act. The judgement has an effect on
above-mentioned separation between Part I and Part II with respect to the joinder of
non-signatories to arbitration.

Sukanya Holdings and Section 8 of ACA

The possibility of non-signatories being directed to arbitrate under Section 8 was in the
case of  Sukanya Holding[2]. In this case, the applicant sought to implead prospective
apartment owners to arbitration between the builder and the original landowner. The
Court interpreted Section 8 strictly holding that only signatories to the agreement could
be directed to arbitrate. This created a situation where the apartment owners could not
be directed to arbitrate even though they were necessary parties to the proceedings, as
their interests were inextricably linked with the subject matter of the dispute. Their
exclusion from the arbitration meant that no valid award could be rendered. As the
cause of action could not be bifurcated, the arbitration proceedings were terminated.

Chloro Controls and Section 45 of ACA

The narrow interpretation given to Section 8 in domestic arbitrations was the polar
opposite to the one given under Section 45 for international commercial arbitrations
in Chloro Controls[3]. It was held that Section 45 allowed a Court could make a
reference to arbitration to a non-signatory as long as the facts in a particular case
principally justified such a reference. It went on to identify certain factors could help
determine when such a reference was to be made. These include the relationship
between the signatory and non-signatory to the agreement and the consequences that
the subject matter of the dispute has for the non-signatory. The Court relied on the
words “person claiming through or under a signatory”  used in Section 45 to justify its
liberal approach towards international commercial arbitration.

Position of Law: Post the 2015 Amendment Act

The question now remains whether the strict approach as observed in Sukanya
Holdings may have been changed by the amendment to Section 8 under the 2015
Amendment Act. Pursuant to the amendment, Section 8 reads, “A judicial authority,
before which an action is brought in a matter which is the subject of an arbitration
agreement shall, if a party to the arbitration agreement or any person claiming
through or under him, so applies…. refer the parties to arbitration unless it finds that
prima facie no valid arbitration agreement exists.” The language of Section 8 has now
become similar to Section 45 of the ACA.

The Law Commission Report on Amendments to ACA relying on the Sukanya

Holdings case sought to distinguish between necessary parties and proper parties to
address the question of joinder of non-signatories to arbitration. The report
recommended that non-signatories would not be impleaded as parties to arbitration
where they are necessary parties to the dispute. Under civil procedure, necessary
parties are those parties that are indispensible to the extent that no effective decision
could be made without their presence in the suit. On the other had, the presence of
proper parties is required as the decision may affect their rights, however the
effectiveness of adjudication is not affected by such parties. Where non-signatories are
proper parties, they would be impleaded to the arbitral proceedings. The report
recommended that a proviso to this effect should be added to Section 8 of the ACA.
However, the legislature did not follow the recommendation and instead introduced
the language of Section 45 to Section 8 of ACA.

This warrants a discussion on the 2018 Ameet Lalchand[4] case. Here, there were

multiple contracts between three parties pertaining to the commission of a solar plant
however, one of the agreements though essential to the present dispute, did not
contain arbitration agreement. The court relied on the amended Section 8 and Chloro
Controls principles to adjudicate that all the parties to these different agreements will
be covered by the arbitration clause in the main agreement. The Court took into
account factors such as the inextricable interconnectedness of all agreements – all
contracts pursing a single commercial project, the ultimate relation between the
parties etc. It held that all parties entered into agreements to facilitate the same
purpose of installing and commissioning Dongri Solar Plant.

The court by applying Chloro Controls principles to Section 8 has blurred the separation

between Part I and Part II of the Arbitration and Conciliation Act (“ACA”) with respect to
the issue of joinder of non-signatories. Though the court did not overrule the holding
of Sukanya Holding, it seems that the case may not be applicable to proceedings under
Section 8 of the ACA, especially since the amended Section 8 provides that the court
can refer the parties to arbitration “notwithstanding any judgment, decree or order of the
Supreme Court or any Court.”  The court also did not expressly invoke the distinction
between necessary parties and proper parties to the dispute, thus making the
distinction moot for addressing the issue of joinder of non-signatories to arbitration. It
stated that “the dispute between the parties to various agreements could be resolved
only by referring all the four agreements and the parties thereon to arbitration”.

With this elucidation, the treatment of non-signatories in international commercial

arbitrations and domestic arbitrations seems similar. All factors that guide non-
signatory arbitrations under Section 45 (such as the nature of transaction, relationship
between parties etc.) apply to domestic arbitration.

[This blog post has been contributed by Advik Rijul Jha and Kamakshi Puri, fourth year
students of Jindal Global Law School, Sonipat]

[1]BALCO v. Kaiser Aluminium, (2012) 9 SCC 552.

[2]Sukanya Holding v. JayeshPandya, AIR 2003 SC 2252.

[3]Chloro Controls India v. Severn Trent Water Purification, (2013) 1 SCC 641.

[4] Ameet Lalchand Shah and Ors v. Rishabh Enterprises and Ors, Civil Appeal No. 4690
of 2018.