Impleading Parties in Arbitration: Unresolved Dilemmas

Introduction

This article addresses the ambiguity concerning the appropriate authority to implead parties in arbitration proceedings. Despite the landmark decision in Cox & Kings Ltd. v. SAP India (P) Ltd.¹ (Cox & Kings II), which vests the Arbitral Tribunal with the power to determine whether a non-signatory is bound by the arbitration agreement, the issue of impleadment remains unsettled.

A series of judgments by the Delhi High Court bear witness to this predicament. Before Cox & Kings II², the Delhi High Court in Arupri Logistics (P) Ltd. v. Vilas Gupta³ (Arupri) had held that the arbitrator does not have the authority to implead parties in the proceedings before it, a power which is vested with the courts under Order 1 Rule 10⁴ of the Code of Civil Procedure, 1908⁵ (CPC). However, the Delhi High Court in Indraprastha Power Generation Co. Ltd. v. Hero Solar Energy (P) Ltd.⁶ (Indraprastha) reopened this controversy and held that the arbitrator “may” have the power to implead parties subsequent to Cox & Kings II⁷. This dilemma has been acknowledged in the Delhi High Court decision of KKH Finvest v. Jonas Haggard⁸ (KKH Finvest).

This controversy gives rise to various uncertainties, inter alia, the issue of duplicative proceedings i.e. where Section 16⁹ applications have already been filed in the previous arbitration and simultaneously Section 11¹⁰ applications are filed in court. It also creates the need to address the question of consolidation of arbitration proceedings in such cases.

The position before Cox & Kings II: Arupri

The Single Judge Bench decision of the Delhi High Court in Arupri¹¹ clearly stated that the Arbitral Tribunal does not have the power to implead parties to arbitration proceedings. The case arose out of joint appeals filed under Section 37¹² of the 1996 Act¹³ against an order passed by the Arbitral Tribunal impleading the appellants i.e. M/s Arupri Logistics Private Ltd. and Taurus India Ltd. to arbitration proceedings, who were otherwise non-signatories to the arbitration agreement.

The Court observed that the Arbitral Tribunal exercised powers similar to those under Order 1 Rule 10 CPC, which are exclusively vested in national courts.¹⁴ It held that the Arbitral Tribunal, whose powers are derived from the arbitration agreement, institutional rules, or national statutes, cannot implead parties in the absence of any such authority explicitly conferred upon it or exercise such inherent powers which are exclusively reserved for courts.¹⁵ Rejecting the arguments of the respondents, the Court opined that these powers could not be derived from Sections 16, 17¹⁶ or Section 19¹⁷ of the 1996 Act.¹⁸ As regards Section 16 and the doctrine of kompetenz-kompetenz is concerned, it held that the same comes into operation after the parties are referred to arbitration, and after the Arbitral Tribunal is formed pursuant to a Sections 8¹⁹, 9²⁰ or Section 11²¹ order, and that any impleadment had the effect of fundamentally altering the reference.²² The Court held that the power to implead is also not contemplated under Section 17, as it is not an interim measure and the award would have a binding effect on the parties once they are impleaded.²³ As regards the argument under Section 19 is concerned, that the Arbitral Tribunal can apply powers vested with a civil court so long as it abides by the principles of natural justice, the Court opined that this provision could not be interpreted to confer additional powers upon the Arbitral Tribunal.²⁴

The Court recognised that in the 1996 Act, the power to implead a non-signatory is vested with the courts pursuant to the phrase “a party to the arbitration agreement or any person claiming through or under him” in Sections 8 and 45²⁵ of the 1996 Act. However, this power is not available to Arbitral Tribunals.²⁶ It also held that conferring the Arbitral Tribunal with the authority to invoke the alter ego or the group of companies principles could result in subjecting such parties to arbitration proceedings who may never have agreed to arbitrate in the first place.²⁷ This would result in the Arbitral Tribunal exceeding its jurisdiction and violating the core tenet of arbitration i.e. party autonomy. Broadly for these reasons, the appeals were allowed and the Tribunal’s order to implead the parties was set aside.

However, with Supreme Court’s decision in Cox & Kings II²⁸, the issue is once again in controversy and a manifestation of this is seen in subsequent Delhi High Court decisions.

Changing undercurrents: Cox & Kings II

Cox & Kings II²⁹ arose out of a reference made to a larger Bench in Cox & Kings Ltd. v. SAP India (P) Ltd.³⁰ (Cox & Kings I) for addressing the validity of group of companies doctrine in India. It held that the definition of parties as envisaged in Section 2(1)(h)³¹ of the 1996 Act included non-signatories as well³² and laid out a test for determining whether they were bound by the arbitration agreement. The Supreme Court held that given the complexity involved, this exercise is to be carried out by the Arbitral Tribunal³³, and that the mandate of the referral court is only limited to determining prima facie (a) whether there exists an arbitration agreement; and (b) whether the non-signatory is a veritable party to the arbitration agreement.³⁴ (also see Ajay Madhusudan Patel v. Jyotrindra S. Patel³⁵).

This determination includes a prima facie assessment of the non-signatory’s role, conduct and involvement in the underlying contract, and also includes factors such as its relationship with the signatories, commonality of subject-matter, mutual intent, performance of the contract and composite nature of transactions.³⁶ Further, an evaluation needs to be undertaken to judge the involvement of the non-signatory in the negotiation/performance of the contract and whether the same is positive, substantial and direct and not merely incidental.³⁷ If the referral court is prima facie satisfied that these factors exist, then it can refer the non-signatories to arbitration where the Arbitral Tribunal decides if they are proper and necessary parties.³⁸

What is relevant for the discussion is that since the reference was limited to substantive questions, the judgment is silent on the procedural aspects i.e. what happens in case the plea of joinder is raised directly before the Arbitral Tribunal in ongoing arbitral proceedings, surpassing the requirement to approach a referral court, and whether this is permissible in the first place. As per Arupri³⁹, the answer would be no. However, a Coordinate Bench of the Delhi High Court in Indraprastha⁴⁰ took a differing view and reopened the controversy.

Applying Cox & Kings II: Indraprastha

Indraprastha⁴¹ arises out of an appeal under Section 37(2)(b)⁴² of the 1996 Act⁴³ against an order passed by the Arbitral Tribunal whereby it had rejected a Section 16 application of the appellant to implead Ministry of New and Renewable Energy, GoI as additional party to the arbitral proceedings, who was otherwise a non-signatory to the arbitration agreement. The Court ultimately rejected the appeal on merits and held that the test to implead parties to the arbitral proceedings as laid down in Cox & Kings II⁴⁴ was not satisfied, as rightly held by the Arbitral Tribunal, nor in its view were the tests under Order 1 Rule 10 CPC satisfied.⁴⁵

However, the Court made an important observation regarding the issue of the Arbitral Tribunal’s powers to implead parties to the arbitration proceedings. While dealing with the judgment in Arupri⁴⁶, the Single Judge Bench highlighted that after the decision in Cox & Kings II⁴⁷, the issue was once again debatable.⁴⁸ It referred to the reliance placed by Cox & Kings II⁴⁹ upon Vidya Drolia v. Durga Trading Corpn.⁵⁰ and Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar⁵¹ to state that since the Arbitral Tribunal is the appropriate authority to decide whether a non-signatory should be bound by the arbitration agreement, it should, by corollary, also have the power to include the non-signatory in the arbitration proceedings. Hence, the Arbitral Tribunal “may” implead the non-signatories to the arbitration proceedings, who will then be bound by its outcome.⁵²

Expounding the confusion: KKH Finvest

A manifestation of this confusion was seen in the recent Delhi High Court decision rendered by the Single Judge Bench in KKH Finvest⁵³. This was a case arising out of a Section 11 petition seeking reference of the petitioners’ disputes with the respondents — who were non-signatories to the arbitration agreement.

Prior to filing this petition, the petitioners had filed a Section 11 petition against the pro forma parties (who were signatories to the arbitration agreement) which was allowed, and the disputes were referred to arbitration. The petitioners raised claims against the respondents in those arbitral proceedings and the arbitrator issued notices against them. Subsequently, the respondents filed Section 16 applications before the arbitrator, which were pending adjudication when the petitioners filed the present Section 11 before the Court.

This judgment highlights the tussle between Arupri⁵⁴ and Indraprastha⁵⁵, both Single Judge Bench judgments of the same court, and both technically still good law, however, both taking differing views on the Arbitral Tribunal’s powers to implead parties.⁵⁶ However, the Court in KKH Finvest⁵⁷ did not take a view on this, since the petition was anyway under Section 11 and, applying the test in Cox & Kings II⁵⁸, referred certain respondents to arbitration headed by the same sole arbitrator. As regards the pending Section 16 applications in the ongoing arbitration proceedings, the Court did not delve into the same and left it for the arbitrator to decide, which, it was of the view, was best equipped to take an independent view based on pleadings, arguments of the parties and facts of the matter.⁵⁹

This case also highlighted certain other issues which arise from this predicament, such as the Court’s powers to consolidate arbitration proceedings. Although arguments to this effect were made before the Court, the Court was of the view that the issue was premature at that stage in the absence of the Arbitral Tribunal’s decision of whether the respondents were in fact proper and necessary parties.⁶⁰ Therefore, it did not delve into the same.

Consequences of the predicament

The fact situation in KKH Finvest⁶¹ shows how irregularities in procedural law can create loopholes for parties to exploit and use as per their convenience before courts and the Arbitral Tribunals. Practically, it seems that party “A” can seek impleadment of a non-signatory before the arbitrator pursuant to Indraprastha⁶². The non-signatory “B” can then file a Section 16 application before the Tribunal and take a stance that pursuant to Arupri⁶³, it does not have to power to implead “B” to the proceedings. However, before court, party “A” can file a Section 11 application and take a contrary stance in stating that pursuant to Arupri⁶⁴, only the Court can implead a party to the arbitral proceedings. Before court, the non-signatory “B” then states that the arbitrator is already seized of the issue and has the jurisdiction to decide pursuant to Indraprastha⁶⁵. This creates a vicious cycle emanating from loopholes in procedure which drains valuable resources of money and time and causes duplicity of proceedings and obscurity. Even if the Court refers the parties to arbitration as in KKH Finvest⁶⁶, consolidation of proceedings remains an issue. Moreover, there is no clarity as to what the Arbitral Tribunal is to do with the pending Section 16 applications.

The consequence of following the principle in Indraprastha⁶⁷ would be that it reduces the need for judicial intervention and streamlines the process of arbitration since the Arbitral Tribunal is anyway vested with the power to decide on the substantial question of whether a non-signatory can be bound to the arbitral proceedings. It reduces the time and money spent for fulfilling a procedural requirement i.e. of impleadment. The consequence of upholding the principle in Arupri⁶⁸ would be that it creates an additional step for the parties to approach a court every time it seeks to implead a party to arbitral proceedings. Since Cox & Kings II⁶⁹ has crystallised that the issue of binding non-signatories to arbitral proceedings is to be decided by the Arbitral Tribunal given the complexity involved, the step of approaching the Court seems redundant. However, it is a helpful filter in weeding out cases where the non-signatories, even on a prima facie basis, cannot be subjected to arbitration, and curbs any efforts for impleadment with malicious/mischievous intent. At the same time, it also begs the question of whether this additional filter is required in the first place and whether this propagates a sense of mistrust in arbitral institutions.

Hence, there is an urgent need for a larger Bench/the legislature to put a finality to the matter, especially after Cox & Kings II⁷⁰ which gives the Tribunal the sole jurisdiction to determine whether the non-signatories are necessary parties to the arbitral proceedings or not. The need of the hour is to reduce multiplicity of proceedings and curb the problem of parties running from pillar to post to obtain reliefs which the 1996 Act is silent about.

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