Supreme court held that non-signatory parties to arbitration agreement can be subject to arbitration,

This landmark judgement will completely change the way in which international commercial arbitrations would now function. The Supreme Court of India was called upon to answer and interpret ‘the expression ‘person claiming through or under’ as provided under section 45² of the Arbitration and Conciliation Act, 1996 (“Act”).

The brief facts of the case is that there was a joint venture agreement (“the principal agreement”) between an American company (Capital Controls (Delaware) Company Inc.), an Indian company (Chloro Controls India Pvt. Ltd.) and the director of the Indian company (Mr. M.B. Kocha). The principal agreement also provided for several ancillary agreements required to be entered into between the Indian company, the group of companies to which the American Company belonged (the Severn Trent Group) and the director of the Indian company, amongst others. While the principal agreement contained an arbitration clause, a few of the ancillary agreements did not. Further, not all the Respondents in the original suit were parties to the arbitration agreement.

The Supreme Court relying upon jurisprudence internationally stated that there were two distinct schools of thought existing. One espousing a pro-arbitration approach, which even allowed non-signatory parties to be subject to arbitration, if the facts in the case justified the referral to arbitration, while the other school of thought had a narrow vision and adopted a strict approach providing that only if the subject matter of the dispute was covered by the arbitration clause and that the parties to the dispute were parties to the arbitration agreement could a matter be referred to arbitration.

The court held that if the Court is satisfied that there is a valid and enforceable arbitration agreement, then the expression ‘person claiming through or under’ provided under Section 45 of the Act indicates that the section does not refer to parties to the agreement but persons in general and if a party is able to establish that a person is claiming through or under the signatory to the arbitration agreement then the matter could be referred to arbitration. The court has clarified that such a reference can be made in only exceptional cases to justify a reference.

Following were certain important factors which the court provided would have to be considered while dealing with such an issue:

• Direct relationship to the party signatory to the arbitration agreement;
• Direct commonality of the subject matter;
• Agreement between parties being a composite transaction;
• Transaction should be of composite nature where performance of principal agreement may not be feasible without the aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute; and
• Whether a composite reference of such parties would serve the ends of justice.

The court thereafter deliberating upon the various agreements executed by the parties pointed out that they all formed part of a composite transaction where the Principal Agreement was similar to a mother agreement and the other agreements were executed were ancillary and for effective implementation of the Principal Agreement.

Finally the Court held that in facts of this case, the parties could be referred to arbitration even though certain parties were not signatories to the Principal Agreement.

This judgment is a clear indication of the robust pro-arbitration jurisprudence emerging in India. One of the major hurdles of foreign investors was the expensive and time consuming dispute resolution mechanism 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.

The Court clarified that the decisionas laid down in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya³ , was not to be considered as that case arose under section 8 of the Act, and not under section 45. It also stated that unlike the facts in Sukanya Holdings where the subject-matter of the suit was broader than the subject-matter of the arbitration agreement, the present case involved a principal agreement and some ancillary agreements with a composite transaction between the same parties or parties covered by section 45 of the Act.

Thus, the test adopted by the Court was whether applying the broad wording of section 45, the issue could be decided in its entirety by the arbitral tribunal. It noted: “Even if different forums are provided, recourse to one of them which is capable of resolving all their issues should be preferred over a refusal of reference to arbitration.”

1. CIVIL APPEAL NOS. 7135-7136 OF 2012 (Arising out of SLP (C) No.26514-26515 of 2011)

2. Section 45.Power of judicial authority to refer parties to arbitration.- Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

3. 2 (2003) 5 SCC 531

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