Supreme Court clarifies the scope of Section 11(6) of the Arbitration Act in a Family Dispute: Ajay Madhusudan Patel & Ors. vs. Jyotrindra S. Patel & Ors. (20 September 2024)

LEGAL ISSUE: Scope of jurisdiction of the referral court under Section 11(6) of the Arbitration and Conciliation Act, 1996, and whether a non-signatory can be referred to arbitration.

CASE TYPE: Arbitration

Case Name: Ajay Madhusudan Patel & Ors. vs. Jyotrindra S. Patel & Ors.

[Judgment Date]: 20 September 2024

Date of the Judgment: 20 September 2024
Citation: 2024 INSC 710
Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J. (authored by J.B. Pardiwala, J.)

Can a non-signatory to an arbitration agreement be compelled to participate in arbitration proceedings? The Supreme Court of India recently addressed this crucial question, clarifying the scope of a referral court’s powers under Section 11(6) of the Arbitration and Conciliation Act, 1996, in a dispute arising from a family arrangement. The core issue revolves around whether a party not formally signed to a Family Arrangement Agreement (FAA) can be bound by its arbitration clause. This judgment provides clarity on the extent to which a referral court can examine the involvement of non-signatories in arbitration matters.

Case Background

The case involves a dispute between two groups of family members, the “AMP Group” and the “JRS Group,” who were previously engaged in various joint businesses. A third group, the “SRG Group,” was also involved in some of these businesses, specifically in two entities: Millenium Estates Pvt. Ltd. (“Millenium”) and Deegee Software Pvt. Ltd. (“Deegee”). Disputes arose between the AMP Group on one side and the JRS and SRG Groups on the other, leading to various legal proceedings, including those before the National Company Law Tribunal (NCLT).

To resolve these disputes, the AMP and JRS Groups entered into a Family Arrangement Agreement (FAA) on 28 February 2020, with an amendment on 15 May 2020. The FAA aimed to separate the shareholdings and businesses of the three groups. Crucially, the SRG Group was not a signatory to this agreement. However, the FAA included clauses that required the SRG Group to undertake certain actions, particularly concerning the exit of the AMP Group from Millenium and the exit of the JRS and SRG Groups from Deegee.

The AMP Group contended that the SRG Group was a party to the arbitration agreement due to their participation in negotiations and their involvement in the implementation of the FAA. The JRS Group, while agreeing to arbitrate with the AMP Group, argued that the SRG Group should not be included as they were not a signatory to the FAA. The SRG Group claimed that they were not bound by the arbitration agreement as they were not a party to the FAA and had no legal relationship with the petitioners.

Timeline

Course of Proceedings

The JRS Group initiated arbitration proceedings against the AMP Group, alleging failure to comply with obligations under the FAA. The AMP Group, in response, contended that the JRS Group had failed to perform their obligations and that the SRG Group was also bound by the terms of the FAA. The AMP Group proposed the appointment of Justice Akil Kureshi as the sole arbitrator for all disputes arising under the FAA, including those involving the SRG Group.

Upon failure to reach an agreement on the appointment of the Sole Arbitrator, the AMP Group filed an Arbitration Petition before the Supreme Court of India under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a Sole Arbitrator to adjudicate the disputes between the AMP Group, JRS Group, and SRG Group.

Legal Framework

The primary legal framework in this case is the Arbitration and Conciliation Act, 1996, specifically:

• Section 2(1)(f) of the Arbitration and Conciliation Act, 1996: Defines “international commercial arbitration.”
  
  “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—(i) an individual who is a national of, or habitually resident in, any country other than India; or (ii) a body corporate which is incorporated in any country other than India; or (iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country;
• Section 7 of the Arbitration and Conciliation Act, 1996: Defines “arbitration agreement.”
  
  (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
  (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
  (3) An arbitration agreement shall be in writing.
  (4) An arbitration agreement is in writing if it is contained in— (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
  (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
• Section 11(6) of the Arbitration and Conciliation Act, 1996: Deals with the appointment of arbitrators by the Supreme Court or High Court.
  
  (6) Where, under an arbitration agreement, the parties fail to agree on the arbitral tribunal or the procedure for appointment of the arbitral tribunal,—(a) a party may request the Supreme Court or the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment; (b) a decision on a matter entrusted by this sub-section to the Supreme Court or the High Court or any person or institution designated by such Court is final and no appeal lies from it.
• Section 11(6A) of the Arbitration and Conciliation Act, 1996: (Inserted by the 2015 Amendment) Stipulates that the Court shall confine its examination to the existence of an arbitration agreement.
  
  (6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.
• Section 16 of the Arbitration and Conciliation Act, 1996: Deals with the competence of the arbitral tribunal to rule on its own jurisdiction.
  
  (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
  (2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.
  (3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.
  (4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.
  (5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.
  (6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.

Arguments

Submissions on behalf of the Petitioner (AMP Group):

• The SRG Group, though not a signatory to the FAA, is a veritable party to the arbitration agreement because they participated in negotiations and continued to discuss implementation of the FAA.
• Successful implementation of the FAA depended on the SRG Group’s involvement and action, and it was understood that they would adhere to the terms of the FAA.
• Emails and meetings show that the SRG Group was aware of and involved in the negotiations and implementation of the FAA.
• The FAA was a transaction for separation of shareholding and businesses of the three groups, requiring SRG Group’s participation.
• The Share Purchase Agreements (SPAs), which were to be executed to implement the FAA, included the SRG Group as a party.
• The AMP Group conducted due diligence of Deegee with the knowledge and consent of the SRG Group.
• The nomenclature of the agreement as a “Family Arrangement Agreement” is irrelevant, and the description of parties is also irrelevant since most cases of non-signatory parties involve agreements where the non-signatory is not expressly included.
• There was commonality of subject matter and composite transactions, making the SRG Group liable to be referred to arbitration.
• The referral court should leave it to the Arbitral Tribunal to decide whether the non-signatory party is indeed a party to the arbitration agreement.
• It is critical to refer even the non-signatory to arbitration to avoid the risk that the non-signatory may disregard the arbitral award.

Submissions on behalf of the Respondent (JRS Group):

• The JRS Group has no objection to arbitration with the AMP Group, but the SRG Group cannot be part of the proceedings as they are not a party to the FAA.
• The FAA binds only the AMP and JRS Groups, and the clauses mentioning the SRG Group do not impose obligations on them.
• There was no exchange of consideration with the SRG Group in the FAA.
• Neither the JRS Group nor their chartered accountant, Mr. Kalpesh Parmar, ever represented the SRG Group.
• The FAA supersedes any prior oral or written agreements, making the SRG Group’s alleged involvement in negotiations inconsequential.
• The AMP and JRS Groups can fully execute the FAA without the SRG Group’s presence.

Submissions on behalf of the Respondent (SRG Group):

• The petition is a device to embroil strangers into an agreement between two family groups, as the SRG Group is not a party to the FAA or its arbitration agreement.
• The FAA is intended to operate between the AMP and JRS Groups, and its clauses only confer rights or obligations upon them.
• The arbitration clause in the FAA only refers to the parties to the FAA and does not impose any obligations on the SRG Group.
• There is no legal relationship between the SRG Group and the petitioners to justify the application of Section 7(1) of the Arbitration and Conciliation Act, 1996.
• Bringing non-signatories into arbitration is an exception, not the rule, and a dual test must be satisfied (agreement to the underlying contract and agreement to the arbitration clause).
• A vague awareness of negotiations or the marking of emails does not imply consent.
• The SRG Group has no business relationship or common interest with the other groups, apart from co-ownership in Millenium and Deegee.
• The FAA can be implemented without the SRG Group’s participation, and severing the clauses mentioning the SRG Group would not impact the FAA.
• The SRG Group was not a party to the mediation proceedings.
• The SRG Group never authorized the JRS Group or Mr. Kalpesh Parmar to represent them or bind them to any agreement.
• The SRG Group was first alluded to as a participant in the FAA only after a span of almost 4 years by the AMP Group, which is an afterthought.
• The prima facie threshold to warrant joinder of non-parties to arbitral proceedings has not been met.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the SRG Group, being a non-signatory to the FAA, should also be referred to arbitration along with the AMP and JRS Groups?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Cox and Kings Limited v. SAP India Private Limited and Another, (2024) 4 SCC 1* to determine that the issue of whether a non-signatory can be a party to an arbitration agreement should be decided by the arbitral tribunal.
• The Court referred to SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618* and National Insurance Company Limited v. Boghara Polyfab Private Ltd, (2009) 1 SCC 267* to establish the initial broad scope of the court’s power under Section 11, which was later narrowed by the 2015 amendment.
• The Court cited Duro Felguera S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729* to emphasize that after the 2015 amendment, the court’s role is limited to examining the existence of an arbitration agreement.
• The Court used Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd., (2) 9 SCC 209* to highlight the effect of Section 11(6A) on an arbitration agreement contained in an unstamped document.
• The Court referenced Vidya Drolia and Ors. v. Durga Trading Corporation, (2021) 2 SCC 1* to support the view that Sections 8 and 11 should have a similar standard regarding the scope of the referral court’s powers.
• The Court relied on In Re: Interplay Between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, (2024) 6 SCC 1* to clarify that the scope of examination under Section 11(6) is confined to the “existence of the arbitration agreement” and the “validity of an arbitration agreement” must be restricted to the requirement of formal validity.
• The Court cited SBI General Insurance Co. Ltd. v. Krish Spinning, (2024) SCC OnLine SC 1754* to understand the scope and standard of judicial scrutiny under Section 11(6) when a plea of “accord and satisfaction” is taken.
• The Court also referred to Sasan Power Ltd. v. North American Coal Corporation (India) Private Ltd., (2016) 10 SCC 813* to reiterate that the nomenclature of an agreement is not determinative of its character.

The Supreme Court held that the referral court under Section 11(6) is required to prima facie rule on the existence of the arbitration agreement and whether the non-signatory party is a veritable party to the arbitration agreement. However, recognizing the complexity of such a determination, the arbitral tribunal was considered the proper forum since it can decide whether the non-signatory is a party to the arbitration agreement on the basis of factual evidence and application of legal doctrine. In this process, the non-signatory must also be given an opportunity to raise objections regarding the jurisdiction of the arbitral tribunal in accordance with the principles of natural justice.

The Court emphasized that the referral court’s role is limited to a prima facie assessment, and the arbitral tribunal is the appropriate forum to decide on the merits of the case, including whether the non-signatory should be bound by the arbitration agreement.

Ratio Decidendi

The ratio decidendi of the judgment is that while a referral court under Section 11(6) of the Arbitration Act must prima facie determine the existence of an arbitration agreement, the decision of whether a non-signatory is bound by the arbitration agreement should primarily be left to the arbitral tribunal. The referral court’s examination is limited to the existence of the agreement and the formal validity of the agreement, but the arbitral tribunal is the appropriate forum to examine the factual and legal aspects of whether a non-signatory should be bound by the arbitration agreement.

Ratio Table

Decision

The Supreme Court allowed the petition and appointed Justice Akil Kureshi as the sole arbitrator to adjudicate all disputes between the AMP Group, JRS Group, and SRG Group, with the proviso that the SRG Group would be at liberty to raise all objections before the Arbitral Tribunal.

Flowchart of the Decision

Sentiment Analysis

The judgment reflects a balanced approach by the Supreme Court, aiming to ensure that arbitration agreements are not unduly expanded to include non-signatories, while also ensuring that parties who are genuinely involved in the underlying transaction are not excluded from the arbitration process.