National Law University, Jodhpur: (CA Towards The Fulfillment of The Assessment in The Subject of ADR)

NATIONAL LAW UNIVERSITY, JODHPUR
BALANCING TWO PRINCIPLES OF ARBITRATION WHEN NON SIGNITORIES ARE

INVOLVED
(CA towards the fulfillment of the assessment in the subject of ADR)
SUBMITTED BY: SUBMITTED TO:
JAI KIRTI PROF. NIDHI GUPTA
ROLL NO- 1211 FACULTY OF LAW
UG- SEMESTER IX NATIONAL LAW UNIVERSITY
JODHPUR
NATIONAL LAW UNIVERSITY, JODHPUR
SUMMER SESSION
(JUL- NOV, 2019)

According to the principle of competence, an arbitral tribunal in a given case has full
authority to rule on its own jurisdiction. Articles 8 and 16 of the UNCITRAL Model
Law re-affirm this principle. Article 16(3) of Model Law provides that the arbitral
tribunal may rule on an objection that it lacks jurisdiction either as a preliminary
question or in an award on the merits; the choice is left with the tribunal itself.
Similarly, section 16 of the Arbitration and Conciliation Act, 1996 (the “Act”)
incorporates the principle into Indian statutory law.
This principle has been extended to include cases pertaining to non-signatories.

Arbitral tribunals in various jurisdictions have unanimously agreed on the application
of the competence-competence rule in even cases involving non-signatories. National
courts have also examined the Model Law to understand their obligation and decided
accordingly1. A court also upheld the arbitrator’s power to decide, subject to judicial
review, what parties are bound by the arbitration clause .2
Supreme Court of India in Ameet Lalchand Shah v Rishabh Enterprise and

Anr 3revisited the question of extending the scope of arbitration agreements to non-
signatory third parties. According to the facts of the case, there were two principal
agreements entered into by the respondents for setting up a solar plant. They had also
entered into ancillary contracts with the appellant for leasing the photovoltaic
products for the purpose of energising the solar plant. Their agreement with the
appellants did not contain an arbitration clause. However, the principal agreements
with another company did have a valid arbitration clause. Upon accrual of dispute
between the appellant, the Court was posed with the question of enforceability of
arbitration clause to appellants despite absence of an arbitration clause in their
contracts. The appellants contented that the said agreements were inter-connected
with the principal agreements. A single judge decided against the contention.
On appeal to the division bench, the Court looked at the factual relationship between
the said agreements. It considered some of its previous pronouncements. In Chloro
1 Pan Liberty Navigation v. World Link (H.K) Res. Ltd, (2005) BCCA 206
2 Builders Federal v Turner Construction, 655 F. Supp.1400 (S.D.N.Y 1987)
3 (2003) 5 SCC 531

Controls India Pvt. Ltd. Vs. Severn Trent Water Purification Inc. & Ors .,4the Court
had examined the scope of section 45 under the Part II of the Arbitration &
Conciliation Act, applicable to international commercial arbitration, which gives the
judicial authority the power to refer the parties to arbitration. According to the section,
the court may refer the parties to arbitration at the request of either party or any
person claiming through or under them.Chloro Controls judgment is a clear indication
of the robust pro-arbitration jurisprudence which has developed in India. This
judgment further demonstrates the shift in the intent and mindset of the judiciary,
towards a more pro-arbitration stance. An onerous, expensive and the dawdling
dispute resolution mechanism was one of the major apprehensions of foreign
investors and arbitration was adopted as an answer to the problem. The judgment now
makes it clear that in situations of composite transactions, transactions involving
group companies, arbitration clauses in the principal agreements would be acted upon
in an international commercial arbitration.
Previously, the law as laid down in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh
H. Pandya5 was said to hold the field, whereby if a dispute involved non-signatories
or included subject matter which was not strictly within the arbitration agreement, the
matter could not be referred to arbitration. However, the present judgment has clearly
distinguished between the Sukanya case, which now applies only to domestic
arbitrations and where an application under section 8 of the Act is made. Thus, in
international commercial arbitrations, parties claiming through or under a signatory to
an arbitration agreement can also be referred or apply for the dispute to be referred to
arbitration, whereas in a purely domestic scenario that may not be the case.
Further, in relation to composite transactions, the dispute resolution clauses would

now have to be looked at more holistically. In a number of transactions such as in case
of joint ventures, lending agreements involving security creation, acquisitions where a
number of agreements are executed, particular care needs to be taken while
incorporating the dispute resolution clauses. In an attempt to broaden the scope of the
dispute resolution clause by use of terms such as ‘disputes arising out of or in
connection with', care would have to be taken that in such scenarios disputes, which
do not solely relate to the said agreement may also be covered leading to non-parties
4 (2013) 1 SCC. 641
5 infra
being subject to arbitration which may include group entities and directors. The Court
decided that the phrase “any person claiming through or under him” must be read to
include a non-signatory third party. Provided that “the transaction should be of a
composite nature where performance of the mother agreement may not be feasible
without aid, execution and performance of the supplementary or ancillary agreements,
for achieving the common object and collectively having bearing on the dispute.
Besides all this, the court would have to examine whether a composite reference of
such parties would serve the ends of justice”.
In this case the Court acknowledges that the pre-amendment section 8, applicable to
the domestic arbitration, did not allow for integration of parties to a dispute if not
specifically agreed upon by them. Following the 2015 amendment to the Act, section
8 has been brought in line with section 45 to include the phrase “if a party to the
arbitration agreement or any person claiming through or under him”. The Court
decided that the principal agreement lays down the purpose of the onward lease and
acknowledges the contract between the respondents and appellants for the same. They
agreed that the three agreements were for the same commercial project and inter-
twined. The performance of one would be contingent on the other.
Internationally Parties cannot be precluded by considerations of good faith from

acting inconsistently with their own statements or conducts The Swiss Supreme
Court, while relying on the principle of good faith enshrined in Article 2 of the Swiss
Civil Code, held that in cases where one entity signs a contract but the actual
performance is undertaken by a third party, an extension of the arbitration agreement
can be made to compel the said non-signatory third party to be attached as a party to
the arbitration proceeding6. In this case, the Court emphasized on the exception to
the rule of privity when there is confusion with regard to the respective spheres of
activity of a subsidiary and its parent (one of which is a signatory). They emphasized
on the principle of reliance in order to protect the party’s erroneous, but reasonable,
belief that it entered into a contract with the parent rather than the subsidiary, or with
both. In such cases, to allow the parent company to avoid the agreed-to dispute
resolution mechanism would be contrary to the principle of equity. In a subsequent
case, the German Court opined that “to allow [a plaintiff] to claim the benefit of the
6 (Decisión 4A_450/2013 , Swiss Supreme Court, 2013)

contract and simultaneously avoid its burdens would both disregard equity and
contravene the purposes underlying enactment of the Arbitration Act.” 7 Various
jurisdictions have attempted to apply the ‘group of companies’ doctrine to justify the
extension of an arbitration agreement to a third party. According to the French group
of companies doctrine, arbitration agreements are extended within the group if a
representative of the non-signatory group company is involved in any way in the
contract negotiations and performance of the contract, if this has occurred, as the true
party to the main contract and the group company benefits or is expected to benefit
from this occurrence.
In the aforementioned case, the interpretation by the Supreme Court brings to

uniformity the laws for governing both domestic and international commercial
arbitration. The Supreme Court does a fair job in extending the arbitration agreement
to the non-signatories in this case by examining the true purpose of the said
agreements. However, the Supreme Court does not attempt to answer the question of
voluntariness of the parties, which is a key principle in arbitration.
As a general principle of arbitration, a formal writing requirement is imposed by the

New York Convention, the UNCITRAL Model law and most other national regimes.
They fail to discuss in detail the application of these mandates in cases involving non-
signatories. However, some authorities have argued that the formal requirements
apply only to the arbitration agreement itself and not the extra contractual
mechanisms by which an entity may succeed to or assume a party’s obligation and
rights under that agreement. Validity of the arbitration agreement and determination of
parties should be seen as two different issues. Hence, the formal requirement5) of
writing cannot strictly be applied to the third parties. Additionally, it has been agreed
upon by courts of various jurisdictions that in certain cases pertaining to estoppel,
certain behaviour may substitute the compliance of a formal requirement on the basis
of good faith8
7 (International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 418 (4th
Cir.2000)
8 (DFT 4A_376/2008, Swiss Federal Tribunal).

For the extension of the arbitration agreement, 9 the active participation of the non-
signatory party and its own direct interest in the conclusion of the contract are
decisive. A non-signatory will be bound by the arbitration agreement if it can be
shown that it was an active participant in the conclusion and execution of the contract
and it had a direct interest in this contract. This approach is followed in French
jurisprudence, where the prevailing opinion extends the arbitration clause to a non-
signatory based on ‘trade practices’, where the participation of the non-signatory with
The scope of an arbitration agreement has always been a contentious issue. It is
difficult to reconcile the principles of voluntary submission to alternate dispute
resolution vis-à-vis the practical attempts to prevent parties from abusing the
mechanism to avoid liability. Courts have constructed various factors like the
interconnectedness of the agreements and the relationship between the group of
companies. These judicially recognisable principles have been introduced to set a
boundary in an otherwise vague understanding of the ‘parties’ to a dispute. Thus far,
the Indian position was clear on this issue as far as international commercial
arbitration was concerned.
Hence from the above position of laws analyized both in domestic and international
spheres it can be seen that in modern times it has become essential to manage the two
very important principles of arbitration i.e managing the consenual nature of
arbitration and making the arbitration meaningful by involving parties which are
closely related to the case and without whose involvement the entire process would
become meaningless. It can be said however that while not diluted the scope of the
first principle mentioned here has been expanded in cases like Chloro Control by
enhancing the ambit and width of the word consent and not merely restricting it to me
to be explicit. Which according to me is the correct approach to take in order to make
arbitration meaningful in modern area where very complex and convulated
transactions take place.
9 Marc Blessing. Introduction to Arbitration – Swiss and International Perspectives. Swiss Commercial
Law Series vol. 10

National Law University, Jodhpur: (CA Towards The Fulfillment of The Assessment in The Subject of ADR)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

National Law University, Jodhpur: (CA Towards The Fulfillment of The Assessment in The Subject of ADR)

Uploaded by

Copyright:

Available Formats

NATIONAL LAW UNIVERSITY, JODHPUR

BALANCING TWO PRINCIPLES OF ARBITRATION WHEN NON SIGNITORIES ARE

(CA towards the fulfillment of the assessment in the subject of ADR)

SUBMITTED BY: SUBMITTED TO:

JAI KIRTI PROF. NIDHI GUPTA

ROLL NO- 1211 FACULTY OF LAW

UG- SEMESTER IX NATIONAL LAW UNIVERSITY

NATIONAL LAW UNIVERSITY, JODHPUR

(JUL- NOV, 2019)

This principle has been extended to include cases pertaining to non-signatories.

Supreme Court of India in Ameet Lalchand Shah v Rishabh Enterprise and

2 Builders Federal v Turner Construction, 655 F. Supp.1400 (S.D.N.Y 1987)

3 (2003) 5 SCC 531

Further, in relation to composite transactions, the dispute resolution clauses would

Internationally Parties cannot be precluded by considerations of good faith from

6 (Decisión 4A_450/2013 , Swiss Supreme Court, 2013)

In the aforementioned case, the interpretation by the Supreme Court brings to

As a general principle of arbitration, a formal writing requirement is imposed by the

8 (DFT 4A_376/2008, Swiss Federal Tribunal).

You might also like