Supreme Court: Discussing the scope of the Court’s jurisdiction and the role to be played by the referral court in the appointment of an arbitrator especially with reference to the participation of the non-signatory in the performance of the underlying contract, the 3-judge bench of Dr. DY Chandrachud, CJI and JB Pardiwala and Manoj Misra, JJ held that the conduct of the non-signatory party along with the other attending circumstances may lead the referral court to draw a legitimate inference that it is a veritable party to the arbitration agreement.
“The mutual intent of the parties, relationship of a non-signatory with a signatory, commonality of the subject matter, composite nature of the transactions and performance of the contract are all factors that signify the intention of the non-signatory to be bound by the arbitration agreement.”
Background
The Court was dealing with an International Commercial Arbitration dispute wherein the parties had filed a petition under Section 11(6) read with Section 11(9) of the Arbitration and Conciliation Act, 1996 seeking appointment of a Sole Arbitrator to adjudicate the disputes between them in terms of the Family Arrangement Agreement entered into between the petitioner AMP Group and respondent JRS Group. The two groups, represented by co-brothers married in the same family, were jointly engaged in various businesses and co-owned several entities. Subsequently, the SRG Group had joined hands with the AMP Group and JRS Group in two entities i.e. Millenium and Deegee. SRG Group presently holds 40% equity shares in Millenium.
Between 2013 & 2019, various disputes arose between the groups which led to the filing of several proceedings before various forums including the National Company Law Tribunal. The parties eventually decided enter into a Family Arrangement Agreement to put an end to all the issues between them with the understanding that the AMP Group would completely takeover various entities and that the JRS and SRG Groups would co-own other entities.
However, further disputes arose between AMPGroup on one hand and JRS and SRG Groups on the other. When the appointment of a sole arbitrator was sought it was contended before the Supreme Court that the SRG Group, being a non-signatory to the FAA, cannot be referred to arbitration.
It is important to note that the JRS Group raised no objection to resolve the disputes with the AMP Group by way of arbitration. Their primary objection was only that the SRG Group cannot be a part of the arbitration proceedings.
Analysis
Noting that the definition of “parties” under Section 2(1)(h) read with Section 7 of the Act, 1996 includes both the signatory as well as non-signatory parties, the Court held that persons or entities who have not formally signed the arbitration agreement or the underlying contract containing the arbitration agreement may also intend to be bound by the terms of the agreement. Further, the requirement of a written agreement under Section 7 of the Act, 1996 does not exclude the possibility of binding non-signatory parties if there is a defined legal relationship between the signatory and non-signatory parties. Therefore, the issue as to who is a “party” to an arbitration agreement is primarily an issue of consent. Actions or conduct could be an indicator of the consent of a party to be bound by the arbitration agreement.
The Court stated that the fact that a non-signatory did not put pen to paper may be an indicator of its intention to not assume any rights, responsibilities or obligations under the arbitration agreement. However, the courts and tribunals should not adopt a conservative approach to exclude all persons or entities who intended to be bound by the underlying contract containing the arbitration agreement through their conduct and their relationship with the signatory parties.
The Court explained that the intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances that surround the participation of the non-signatory party in the negotiation, performance, and termination of the underlying contract containing such an agreement.
“When the conduct of the non-signatory is in harmony with the conduct of the others, it might lead the other party or parties to legitimately believe that the non-signatory was a veritable party to the contract containing the arbitration agreement. However, in order to infer consent of the non-signatory party, their involvement in the negotiation or performance of the contract must be positive, direct and substantial and not be merely incidental.”
The Court took note of the following crucial points derived from the FAA:
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While the AMP Group is supposed to exit from Millenium and acquire shares in Deegee, the JRS and SRG Groups are supposed to exit from Deegee and, the SRG Group would acquire shares in Millenium.
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Agreements are to be executed with or by the SRG Group to record and finalize the understanding with respect to the exit of AMP Group from Millenium and the exit of JRS and SRG Groups from Deegee.
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Recognising the interdependent nature of the transactions contemplated with respect to Millenium and Deegee, FAA also states that the exit of Millenium and Deegee should be endeavoured to be undertaken simultaneously on the same day.
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It requires the AMP Group to irrevocably and unconditionally withdraw all litigations filed in connection with Deegee by the AMP Group before the NCLT at Mumbai wherein Respondent No.9 of the SRG Group is one of the respondents.
The Court, hence, noted that the aforesaid points give an impression, though prima facie, that the SRG Group may be connected to the FAA and forms part of the settlement contemplated therein. Hence, a detailed examination of numerous disputed questions of fact are imperative in deciding whether the SRG Group participated in the negotiation and performance of the underlying contract and can be bound by the arbitration agreement.
The Court reiterated that under its limited jurisdiction under Section 11(6) of the Act, 1996 it should not conduct a mini trial and delve into contested or disputed questions of fact and that these aspects should be looked into more closely by the Arbitral Tribunal.
Hence, considering the complexity involved in the determination of the question whether the SRG Group is a veritable party to the arbitration agreement or not, the Court directed it would be appropriate for the arbitral tribunal to take a call on the question after taking into consideration the evidence that may be adduced by the parties before it. The Court appointed Justice Akil Kureshi, Former Chief Justice, High Court of Rajasthan, to act as the sole arbitrator in the matter.
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