Binding non-signatories to an arbitration: Apex Court's highlights key factors

Introduction:
In a landmark decision, a three-judge bench of Justices Dr. DY Chandrachud (CJI), JB Pardiwala, and Manoj Misra addressed the issue of the Court’s jurisdiction in appointing an arbitrator and the role of the referral court in considering the participation of a non-signatory to a contract in arbitration. The Apex Court emphasised on the fact that a non-signatory’s conduct and other factors could allow a referral court to infer that the non-signatory is, in fact, a party to the arbitration agreement.

Factual Matrix:
The case arose in the context of an international commercial arbitration dispute involving multiple business groups; the AMP Group, JRS Group, and SRG Group. These groups had complex ownership structures in several joint business ventures. Most importantly, the AMP and JRS Groups were co-owners of various entities, while the SRG Group, a non-signatory to the arbitration agreement, held a significant stake in two companies, Millenium and Deegee. Disputes had arisen between the groups between 2013 and 2019, leading to multiple proceedings before various forums, including the National Company Law Tribunal (NCLT).

To resolve their issues, the parties had entered into a Family Arrangement Agreement (“FAA”), which outlined that the AMP Group would take over certain entities entirely, while the JRS and SRG Groups would retain co-ownership of others. The AMP Group sought to resolve the remaining disputes through arbitration, and a petition was filed under Section 11(6) and Section 11(9) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator. While the JRS Group did not contest arbitration, it objected to the inclusion of the SRG Group, arguing that SRG, being a non-signatory to the FAA, could not be bound by the arbitration proceedings.

Analysis:
Scope of Referral Court’s Jurisdiction: The court’s power to refer parties to arbitration is governed by Section 11(6) of the Arbitration Act, 1996. Historically, courts have held that non-signatories can be bound by arbitration agreements under certain circumstances, such as when they have a direct interest in the contract or have participated in its execution, as per decisions like Cox & Kings Ltd. v. SAP India Pvt. Ltd.., (2024) 4 SCC 1.

AMP Group contended that SRG Group, despite being a non-signatory, is a veritable party to the FAA due to their participation in the negotiations and indirect involvement in the transactions. However, emails such as those dated January 14, 2020, and May 8, 2020, demonstrate that SRG Group’s approval was required for the valuation and exit of the companies involved. The AMP Group also highlighted that SRG Group was copied in key correspondences related to the FAA’s implementation and actively participated in the valuation process for Millenium and Deegee. These interactions suggest that SRG Group was aware of and involved in the FAA’s terms.

On the other hand, SRG Group asserted that they cannot be forced into arbitration as they were not a signatory to the FAA. They argued that the FAA specifically refers to AMP and JRS Groups as parties, and SRG Group’s involvement was merely incidental. Moreover, the FAA’s “entire agreement” clause explicitly superseded any previous oral or written agreements, negating any implied consent on SRG’s part.

The principle of binding non-signatories to arbitration has evolved in Indian jurisprudence. In cases like Sasan Power Ltd. v. North American Coal Corporation, (2016) 10 SCC 813 and DLF Ltd, v. PNB Housing Finance Ltd., 2024 SCC OnLine Del 2165, courts have recognized exceptions where non-signatories can be compelled to arbitrate if there is a composite transaction or commonality of interests. The AMP Group argued that SRG Group’s participation fits within this framework, as they have a vested interest in Millenium and Deegee, and the FAA’s implementation affects their shareholding.

However, SRG Group emphasizes that without an arbitration clause binding them explicitly, forcing them into arbitration would violate the principle of party autonomy. They rely on the Supreme Court’s decision in Cox & Kings Ltd., which underscored that arbitration agreements bind only those who expressly consent to them.

Concluding Remarks:
The court must decide whether the SRG Group’s participation in negotiations and involvement in the execution of key FAA terms is sufficient to compel them into arbitration. Given the complexity of the business relationships and the indirect but significant involvement of SRG Group, the case raises important questions about the limits of binding non-signatories in arbitration. If the court finds that SRG Group’s role was integral to the FAA’s execution, it may refer them to arbitration. Otherwise, their exclusion would risk fragmenting the resolution process, leading to inconsistent outcomes across different legal forums.

By - - Swetalana Rout

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