IMPLEADING OF NON-PARTIES IN ARBITRATION

PROCEEDINGS

HEMANT CHAUHAN

ABSTRACT

Arbitration law imposes some strict form requirements on arbitration

agreements, but once these are met, the subsequent question of who is a
proper and eligible party to the agreement may be determined without
reference to similar requirements. One such question is whether a third
party, which is not a party (or ‘signatory’) or non-parties to the contract
containing the arbitration agreements, may nevertheless be bound to
arbitrate. While various legal doctrines in various jurisdictions permit third
party non-signatories to be bound to contracts, arbitral tribunals encounter
difficulty in deciding which law, rule or principle should ultimately
determine the above matter.

INTRODUCTION

The issue regarding the position of third parties or non- parties under
the Indian Arbitration and Conciliation Act, 1996 needs to be looked into
with respect to the sections 7, 8, 9, 11, 34, 44 and 45 of the Indian
arbitration and Conciliation Act, 1996. Section-7 of the Indian arbitration
and Conciliation 1996 Act which provides for an arbitration agreement,
when read with the section-8, provides for a judicial authority to refer the
parties to arbitration, who have, in a well defined legal relationship agreed to
arbitrate any dispute arising between them to. The question which often
arises while interpreting section-7 with section-8 is that whether a third
party or non-parties which is not a signatory to the arbitration agreement
and not in a well defined legal relationship can ask a judicial authority
before whom an action has been brought to refer the matter to arbitration.

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“As long as this question is determined by reference to national laws,
transnational business actors face a juridical framework that is complex,
but predictable nonetheless. However, some arbitral tribunals have decided
this question by reference to a broader set of principles including ‘lex
mercatoria’ , bona fides, or agreement of the parties.”1
The availability to Arbitral Tribunals of divergent laws, principles and steps
to resolving this question creates considerable uncertainty for trans-national
actors.

The Supreme Court tried to answer this question in Sukanya Holdings Pvt.
Ltd. v Jayesh H. Pandya & Anr.2 and held that whenever a suit is
commenced – ‘as to a matter’ which lies outside the arbitration agreement
and is also between some of the parties who are not parties to the
arbitration agreement, there is no question of application of Section-8. The
judgment in this case, however, was concerned more with bifurcation of the
cause of action and not directly dealt with the position of third parties. The
court finally held that section-8 cannot be interpreted in a manner so as to
allow bifurcation of the cause of action or the subject-matter of the suit.
Bifurcation of the suit between parties who are parties to the arbitration
agreement and others is not possible. Moreover, such bifurcation of the suit
in two parts, one to be decided by the Arbitral Tribunal and other to be
decided by a civil court would cause delay to the proceedings.

Some of the clarity regarding the position of the third parties or non-parties
was provided by the Supreme Court in Deutsche Post Bank Home Finance
Ltd. v Taduri Sridhar & Anr.3 wherein it was held by the Supreme Court that
in case of tripartite agreement between Respondents and Appellant, where
the Respondent had not raised any dispute against the Appellant with
reference to an arbitration agreement, the Appellant could not be made a
party to the arbitration.

1. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=980483
2. AIR 2003 SC 2252, (2003) 5 SCC 531, (2003) 3 SCR 558
3. AIR 2011 SC 1899, (2011) 11 SCC 375, 2011 (2) Arb LR 1 (SC)

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The existence of an arbitration agreement between the parties to the petition
under section 11 of the Arbitration and Conciliation Act, 1996 and existence
of dispute/s to be referred to arbitration are conditions precedent for
appointing an Arbitrator under section 11 of the Act. A dispute can be said
to arise only when one party to the arbitration agreement makes or asserts a
claim/demand against the other party to the arbitration agreement and the
other party refuses/denies such claim or demand. If a party to an
arbitration agreement, files a petition under section 11 of the Act impleading
the other party to the arbitration agreement as also a non-party to the
arbitration agreement as respondents, and the court merely appoints an
Arbitrator without deleting or excluding the non-party, the effect would be
that all parties to the petition under section 11 of the Act (including the non-
party to arbitration agreement) will be parties to the arbitration. That will be
contrary to the contract and the law. If a person who is not a party to the
arbitration agreement is impleaded as a party to the petition under section
11 of the Act, the court should either delete such party from the array of
parties, or when appointing an Arbitrator make it clear that the Arbitrator is
appointed only to decide the disputes between the parties to the arbitration
agreement.

CASE-Deutsche Post Bank Home Finance Ltd. v Taduri

Sridhar & Anr

The owners of certain land entered in to a development agreement with a

developer”) for construction of houses and apartments on the Land. Taduri
Sridhar wanted to acquire an apartment on the Land and entered in to an
agreement for sale with the Landowners. For the said purpose the Buyer
took a loan from the Deustsche Post Bank Home Finances Ltd. and paid the
entire sale price to the Developer through the Lender.

The Buyer had entered into a construction agreement with the Developer
under which the Developer acknowledged the receipt of the total cost of

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construction from the Buyer and agreed to complete construction of the
apartment and deliver the same to the Buyer with a grace period of 3
months. The Agreement contained an arbitration clause according to which
parties agreed to settle disputes relating to the Agreement by arbitration.
Thereafter the Buyer issued notice to the Developer; alleging delay in
construction and delivery of the apartment and invoking the arbitration
clause in the Agreement. Since there was no response from the Developer
the Buyer filed a petition in the Andhra Pradesh High Court for the
appointment of arbitrator to settle the dispute. The Buyer added the Lender
in the dispute by impleading it as a respondent. The Buyer alleged that
Lender had released the loan amount to the Developer without ensuring that
there was sufficient progress of construction and without verifying the
‘ground realities’ and therefore failed to perform its minimum obligations as
a Lender.

The Lender argued that it was not a party to the arbitration agreement and
thus could not be included in the dispute between the Buyer and the
Developer. Since the High Court appointed an arbitrator without considering
the above contention of the Lender, the Lender appealed to the Supreme
Court.

The Supreme Court held that if a person who is not a party to the
arbitration agreement is impleaded as a party to the petition under Section
11 of the Act (for the appointment of arbitrator), the court should either
delete such party from the group of the parties, or when appointing the
arbitrator make it clear that the arbitrator is appointed only to decide the
disputes between the parties to the arbitration agreement. As the Lender
was not a party to the arbitration agreement between the Developer and the
Buyer the petition filed in the Andhra Pradesh High Court was not
maintainable against it.

Though the appointment of the arbitrator by the High Court remained

undisturbed the Supreme Court made it clear that since the Lender was not

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a party to the arbitration agreement no arbitration proceeding can be
instituted against it.

This judgment of the Supreme Court reiterated the position that arbitration
proceedings can resolve disputes only between parties to an arbitration
agreement, therefore reference to arbitration or appointment of an arbitrator
can only be with respect to the parties to arbitration agreement and not
non-parties.

Example – “If ‘X’ enters into two different contracts, one with ‘M’ and
another with ‘D’, each containing an arbitration clause providing for
settlement of disputes arising under the respective contract, in a claim for
arbitration by ‘X’ against ‘M’ in regard to the contract with ‘M’, ‘X’ cannot
implead ‘D’ as a party on the ground that there is an arbitration clause in
the agreement between ‘X’ and ‘D’. In this case, the Court took a strictly
contractual view of the arbitration agreement and held that non-signatories
cannot be made a party to the arbitral proceedings.”4

“The existence of an arbitration agreement between the parties to the

petition under section 11 of the Arbitration and Conciliation Act, 1996 and
existence of dispute/s to be referred to arbitration are conditions precedent
for appointing an Arbitrator under section 11 of the Act. A dispute can be
said to arise only when one party to the arbitration agreement makes or
asserts a claim/demand against the other party to the arbitration agreement
and the other party refuses/denies such claim or demand. If a party to an
arbitration agreement, files a petition under section 11 of the Act impleading
the other party to the arbitration agreement as also a non-party to the
arbitration agreement as respondents, and the court merely appoints an
Arbitrator without deleting or excluding the non-party, the effect would be

4. https://thegavelandbeyond.files.wordpress.com/2014/09/position-of-third-parties-
under-the-indian-arbitration-act.docx

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that all parties to the petition under section 11 of the Act (including the non-
party to arbitration agreement) will be parties to the arbitration. That will be
contrary to the contract and the law. If a person who is not a party to the
arbitration agreement is impleaded as a party to the petition under section
11 of the Act, the court should either delete such party from the array of
parties, or when appointing an Arbitrator make it clear that the Arbitrator is
appointed only to decide the disputes between the parties to the arbitration
agreement.”5

5. http://supremecourtofindia.nic.in/scr/2011_v5_piii.pdf

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