Impleadment of Non-Signatories: Assessing the Arbitral Tribunal’s Authority

This article attempts to break down the issues surrounding the impleadment of non-signatories in arbitration proceedings. The same can be better explained by examining the recent decision rendered by the Delhi High Court in the case of M/s. Arupri Logistics Pvt. Ltd. v. Shri Vilas Gupta & Ors.[1] wherein the Court set aside the order of the Sole Arbitrator dated December 23, 2021, impleading the appellants, non-signatories to the agreement, in the arbitration proceedings. The issue at hand that many have found perplexing was simple – whether the arbitrator is vested with the power to implead a non-signatory into the proceedings in the post-referral stage.

Brief Facts

The respondents were engaged in a family business conducted through the agency of three companies, Taurus India Limited, Taurus Polymers Pvt. Ltd., and Taurus Englobe Ltd. The Memorandum of Family Settlement entered into by the respondents on April 28, 2007, provided for an arbitration clause. In light of the execution of this memorandum, the case pending before the Company Law Board regarding the alleged mismanagement and oppression in the affairs of Taurus India was disposed of.

When the Company Law Board was approached again, a facilitator was appointed for the due implementation of the memorandum’s terms, who came up with an interim arrangement. In the meantime, an agreement for the sale of an industrial plot in Mayapuri was executed for a consideration of Rs. 6.35 Cr., between the appellants, Taurus India Limited and M/s. Arupri Logistics Pvt. Ltd. on October 21, 2010. Later, a conveyance deed was executed on May 23, 2012. The same was done disregarding the terms of the memorandum which provided for the division of the said industrial plot between the respondents (who were categorised into Group I and Group II). However, the validity of the sale was confirmed by the facilitator in May 2013.

These events led to a petition being filed under Section 11 of the Arbitration and Conciliation Act, 1996, before the Delhi High Court following which a Sole Arbitrator was appointed. The said Sole Arbitrator entered upon reference on February 12, 2021. Subsequently, respondent no.1 filed an application for impleading the appellants in November 2021, and the Sole Arbitrator allowed this application on December 23, 2021. Aggrieved by this decision, the appellants approached the Delhi High Court.

Arbitral Tribunal Owes its Origin to Agreement, Institutional Rules and National Statutes

After hearing the parties, the Court expressed that through agreement, the parties cannot confer powers upon the arbitral tribunal “which are otherwise reserved to be exercised by Courts and judicial institutions created by the State”.

Further, the Single Judge Bench of Justice Yashwant Varma clarified that the power to rule on its jurisdiction under Section 16, the power to issue interim measures under Section 17, or the procedural flexibility accorded under Section 19 to not be bound by the provisions of the Civil Procedure Code, 1908, or the Indian Evidence Act, 1872 do not empower the arbitral tribunal to implead parties.

Court’s Power of Impleadment under the Civil Procedure Code

As per Order I Rule 10(2) of the Civil Procedure Code, 1908, the Court may strike out or add parties at any stage of the proceedings. Such an express provision is not contained in the Arbitration and Conciliation Act, 1996. In this context, the Court observed that the Sole Arbitrator overlooked the absence of a provision in the Act that expressly conferred the power to implead parties. Moreover, the hallmark of arbitration, or for that matter, any Alternative Dispute Resolution (ADR) mechanism, lies in the consent of the parties to the dispute. Therefore, the Arbitral Tribunal cannot act against the consent of the parties by impleading them against their will and forcefully subjecting them to its jurisdiction as it would defeat the purpose of arbitration.

Group of Companies and Alter Ego Doctrines

The Court expressed that if the arbitral tribunals had the authority to invoke the doctrines of alter ego or group of companies to implead non-signatories in the proceedings, the same would “not only result in the AT travelling far beyond the contours of the arbitration agreement but negate against the fundamental tenet of arbitration which is founded on consensus and agreement”.

Pertaining to the reliance placed by the respondents on the Court’s decision in GMR Energy Limited vs. Doosan Power Systems India Private Limited & Ors.[2] wherein it was held that the arbitral tribunal could rule on the issue of alter ego, the Court pointed out that the arbitration in the GMR Energy case was covered under Part II of the Act and was being conducted under the Singapore International Arbitration Centre (SIAC) Rules which expressly provided for the joinder of parties.

Analysis

The cyclical nature of proceedings that would arise from this decision of the Delhi High Court remains unaddressed; the aggrieved parties would have to continuously run from pillar to post to seek those remedies which have not been enshrined explicitly. The decision diminishes the power exercised by the arbitral tribunals as the Claimant would have to knock on the doors of the Court in pursuit of such remedies, which ultimately defeats the whole point of arbitration and access to speedier modes of justice. One hopes that the growing effectiveness of arbitration as the preferred mode of dispute resolution would not be affected by the Court’s ruling.

References:

[1] 2023 SCC OnLine Del 4297.

[2] 2017 SCC Online Del 1162.

Image Credits:

Photo by DG-Studio: Arbitration agreement. Legal resolution conflict – Photos by Canva 

The Court expressed that if the arbitral tribunals had the authority to invoke the doctrines of alter ego or group of companies to implead non-signatories in the proceedings, the same would “not only result in the AT travelling far beyond the contours of the arbitration agreement but negate against the fundamental tenet of arbitration which is founded on consensus and agreement”.

Related Posts

POST A COMMENT

Validity of Unstamped Arbitration Agreements: A Scrutiny of Dissenting Opinions

A five-judge Bench of the Supreme Court comprising Justice K.M. Joseph, Justice Aniruddha Bose, Justice C.T. Ravikumar, Justice Hrishikesh Roy, and Justice Ajay Rastogi while deciding an appeal on 25th April 2023, held that an arbitration agreement in an unstamped contract which is liable to be stamped will not be considered valid in law. Until now, arbitration clauses were considered as separate agreements and this pronouncement will have a deep-rooted effect on the law of the land.

Introduction

Settling the long-standing debate around the validity and enforceability of an unstamped arbitration agreement and putting an end to contradictory judicial pronouncements surrounding the issue, the Apex Court delivered the judgment in N.N. Global Mercantile v. Indo Unique Ltd.[1] by a 3:2 majority, while Justice Ajay Rastogi and Justice Hrishikesh Roy dissented and were of the view that arbitration agreements are valid till the pre-referral stage. In this article, we analyse the majority and minority views while referring to the concepts of separability and Kompetenz-Kompetenz.

Background

The Petitioner and Respondent had entered into a subcontract which contained an arbitration clause. The case began when the Respondent approached the Commercial Court invoking arbitration proceedings against the Petitioner under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act) when certain disputes arose between the two pertaining to the invocation of a bank guarantee furnished by the Petitioner. On rejection of the application by the Commercial Court, the Respondent filed a revision application before the Bombay High Court. Consequently, the Bombay High Court allowed the Respondent to withdraw the revision application and approach the Court by way of a writ petition[2], wherein the Court held that the Section 8 application was maintainable before it and the issue of unenforceability of the arbitration clause owing to the unstamped and unregistered subcontract can be raised before the Arbitral Tribunal under Section 11 of the Act. Aggrieved by the decision of the Bombay High Court, the Petitioner filed a Special Leave Petition before the Supreme Court which was heard by a three-judge Bench. When faced with this issue, the court, overturning the decision laid down in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co.[3] and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd. held that the independence of the arbitration clause will be deemed supreme and will not be vitiated owing to the insufficient stamping and thus cannot be a ground for refusing the arbitrator’s appointment[4].

The bone of contention, however, persisted regarding the enforceability of the arbitration clause in the unstamped subcontract and the Supreme Court referred the matter to a five-judge bench for the very reason that in the case of Vidya Drolia v. Durga Trading Corpn[5], a co-ordinate bench held differently.

The Majority View

Fast forward to 2023, the five-judge Bench held arbitration agreements in unstamped contracts as invalid by a majority. The Supreme Court held that an instrument containing an arbitration clause which is bound to be stamped and registered but is not, does not fit within the definition of a contract under Section 2(h) of the Indian Contract Act, 1872 and hence cannot be enforceable in law. The majority view reasoned that the doctrine of arbitration will be followed and that in case of an original agreement being produced which is unstamped, the Court under a Section 11 application is bound by law to proceed as per Sections 33 and 35 of the Indian Stamp Act, 1899 and impound such an agreement and the Courts must follow the law as per due procedure to ultimately remove the defect.

Prior to NN Global, the Supreme Court while examining the same issue in SMS Tea Estates, held that an arbitration clause in an unstamped arbitration agreement cannot be acted upon for the appointment of an arbitrator owing to the rationale that an instrument which mandatorily needs to be registered and is chargeable under the Stamp Act cannot be admitted into evidence and loses credibility.

A two-judge bench in Garware Wall Ropes also upheld the rationale in SMS Tea Estates while adding that the introduction of Section 11 (6-A) does not alter the position of law and the existence of the arbitration clause will survive only if the contract is stamped and registered, being duly valid in law as the arbitration clause cannot be culled out of the main contract and be considered a separate entity[6]. Recently in 2021, a three-judge bench in Vidya Drolia also affirmed the findings in SMS tea estates and Garware wall ropes.

Merit in Dissent

The objective of the Indian Stamp Act, 1899 is primarily to generate revenue for the State. In this regard, Section 33 of the Act empowers the Authority to examine and ascertain whether the stamp duty on an instrument presented before them has been duly paid. In case of a situation to the contrary, the Authority is to impound the document and direct the parties to pay the stamp duty with or without levying a penalty.

A perusal of Section 35 further reveals that no instrument can be admitted in evidence which does not carry the requisite stamp duty the instrument is liable for. However, the proviso to said Section further provides a cure in case of this defect by allowing its admission into evidence after payment of the requisite stamp duty and the penalty. Thereby revealing that such a defect can be cured even at a later stage and that an unstamped or insufficiently stamped instrument can be turned valid in law by fulfilling the criteria laid out in the proviso to Section 35. Justice Rastogi, on similar lines, noted his dissent by opining that the Stamp Act is not rigid in making the instrument invalid in law and provides for a mechanism to rectify and fulfil the criteria prescribed under Section 35 even at a later stage. Following this scheme, Section 42 of the Stamp Act further envisages that in case of an impoundment under Section 33, such an instrument can be endorsed by the Collector so authorized and then be admitted in evidence. Hence, the law clearly provides for the admissibility of such instruments which may lack or suffer from insufficient stamp duty and nowhere envisions their complete invalidity in law.

Moving on to the Arbitration and Conciliation Act, 1996, he further held that the legislative intent behind the enactment of the Act was to avoid arduous litigation procedures and hasten the dispute resolution processes. A harmonious interpretation of the Indian Stamp Act, 1899 and the Arbitration and Conciliation Act, 1996 needs to be adopted to provide an interplay between the two to meet the ends of justice. The applicability of Section 33 and 35 of the Indian Stamp Act, 1899 to a Section 11 application under the Arbitration and Conciliation Act, 1996 which deals with the appointment of an arbitrator essentially defeats the purpose of speedy disposal of cases by focusing on procedural irregularities which can be cured. Section 11, following the doctrine of Kompetenz-Kompetenz, provides that the Court may restrict its interference only to the “existence” of an arbitration agreement and leave subsequent issues such as validity and scope for the tribunal to adjudicate. It can be inferred that impounding and invalidity of the arbitration agreement at the pre-referral stage will only create more roadblocks and increase interference by courts thereby defeating even the purpose of the Arbitration and Conciliation Act, 1996 and will have no effect on the existence of the arbitration agreement.

Justice Roy in his dissenting opinion was also of the view that a non-stamped or an insufficiently stamped instrument would still be enforceable for the appointment of arbitrators under Section 11 and courts should restrict their scrutiny only to the existence of the agreement to keep judicial interference in check in order to meet the objective of the 2015 amendment.

The Gordian Knot

While arriving at the decision in N.N. Global, the well-established principle of separability[7] in arbitration jurisprudence has not been considered which puts India in a precarious position in its quest to become a hub for Commercial Arbitration. The principle of separability acknowledges that an arbitration agreement is autonomous from the commercial contract it forms a part of[8]. This autonomy is based on the concepts of separability and kompetenz-kompetenz. This doctrine further implies that the invalidity or ineffectiveness of the underlying commercial contract will not vitiate the arbitration agreement. This has also been embodied in Section 16 of the UNICITRAL Model Law which allows the Arbitral Tribunal to rule upon its own jurisdiction including matters regarding existence and validity[9].

Conclusion

The authors believe that this landmark ruling will have far-fetched consequences. The principle of separability of the arbitration agreement will have to see a complete metamorphosis to align itself with the ruling. The question of stamping is not related to the jurisdiction of the Arbitral Tribunal, but it relates to the issue of admissibility. At the pre-arbitral stage, the dissent of N.N Global intrigues the way in which the discourse of arbitration “should be”. It would be axiomatic to state that the majority has set the law of the land by laying down a parameter to be checked in a Section 11 petition.

References:

[1] N.N. Global Mercantile v. Indo Unique ltd, 2023 SCC OnLine SC 495.

[2] Article 226, The Indian Constitution, 1950.

[3] SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (2011) 14 SCC 66.

[4] N.N. Global Mercantile v. Indo Unique ltd, 2021 SCC OnLine SC 13

[5] Vidya Drolia v. Durga Trading Corpn, (2021) 2 SCC 1.

[6] Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd, (2019) 9 SCC 209.

[7] Heyman v. Darwins Ltd. 1942 AC 356 (HL).

[8] Ibid.

[9] §16(1), United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985: with amendments as adopted in 2006 (Vienna: United Nations, 2008), available at www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf.

Image Credits:

Photo by Motortion: https://www.canva.com/photos/MADqQhzGreg-arbitration-agreement-table-gavel-lying-on-sound-block-conflict-settlement/

While arriving at the decision in N.N. Global, the well-established principle of separability[7] in arbitration jurisprudence has not been considered which puts India in a precarious position in its quest to become a hub for Commercial Arbitration. The principle of separability acknowledges that an arbitration agreement is autonomous from the commercial contract it forms a part of[8]. This autonomy is based on the concepts of separability and kompetenz-kompetenz. This doctrine further implies that the invalidity or ineffectiveness of the underlying commercial contract will not vitiate the arbitration agreement. This has also been embodied in Section 16 of the UNICITRAL Model Law which allows the Arbitral Tribunal to rule upon its own jurisdiction including matters regarding existence and validity[9].

Related Posts

POST A COMMENT