[Shyamal Anand is a Principal Associate at Shardul Amarchand Mangaldas and Co and Divyansh Morolia a IV year student, National Law Institute University, Bhopal]
As commentators have observed, arbitration is essentially a private process, having party autonomy and consent at its core. The arbitration tribunal derives its jurisdiction from the agreement of the parties. However, under some limited circumstances, joining a third party to an arbitration proceeding is permissible. This usually happens when such party has either expressly, or impliedly, by the virtue of its conduct or relationship with another party, has consented to being a part of the proceeding. Through various precedents in international arbitration, a few specific grounds have developed for joinder of non-signatories. This includes the group of companies doctrine, which permits joining of parent or subsidiary companies in proceedings wherein one of the parties to the arbitration agreement comprises a ‘group’ with the third party; the ‘direct benefit theory’, which allows the addition of parties taking direct benefit of the contractual terms; agency, which permits the addition of a principal to proceedings concerning its agent; and the theory of implied consent, which takes into account the actions of the third party.
Efficiency vs. Party Consent: Striking the Right Balance in Joining Non-signatories
Most arbitration rules require tribunals to act in a manner that enhances cost- and time-efficiency (see e.g., ICC Arbitration Rules 2021, Art. 22(1)). Joining proper and necessary non-signatory parties to an arbitration proceeding usually results in such efficiency. Presume a buyer brings a proceeding for compensation against a seller who has entered into another contract with a third party, such that this contract governs the fulfilment of obligations of the original contract with the buyer. If a joinder of such a third party is not permitted, it would entail instituting a separate proceeding against such party. This will involve additional cost and time. More pertinently, this gives rise to a risk of conflicting awards being rendered in these separate proceedings on common issues involved. Such awards contradict the principle of public policy, and are liable to be set aside at the stage of enforcement (see, United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, Art. 5(2)(b)). In order to avoid such a scenario, it becomes necessary to permit joinder to non-signatories.
However, this is not free of concerns. At the outset, arbitration is based on party consent, and permitting joinder of a third party who is not a signatory of the arbitration agreement might violate this principle. The issue of jurisdiction is pertinent here, as there are authors who contend that a tribunal would not have a jurisdiction over a party who is not a signatory, as the jurisdiction arises out of the arbitration agreement. Further, in this case, the third party is not provided a right to choose the governing law in an arbitration proceeding and, more likely than not, will not be a part of the process of appointment of the arbitrator(s). Arbitration must be equal for all the parties, and this principle is considered to be contravened by joinder of non-signatories. However, an attempt has been made by commentators and arbitrators to address these concerns. Institutional rules have also made an attempt to overcome these obstacles. In cases wherein third party is joined before appointment of arbitrator(s), Art. 10 of the LCIA Arbitration Rules 2020 permits the joint claimants and respondents to collectively appoint an arbitrator. Further, a joinder is permitted only in cases wherein an express or implied consent exists, and it is believed that the arbitration agreement in such cases is signed on behalf of the third non-signatory party.
It becomes imperative to strive for cost and time efficiency in arbitration proceedings, but this should not come at the cost of party consent and autonomy. This can be ensured by permitting joinder of non-signatories based only on their consent, which can be inferred from their actions and relationship to the parties to the proceeding.
Developments So Far in the Indian Jurisprudence
The Indian Arbitration Act is silent on the issue of joinder. The initial position was that this silence entails that a non-signatory cannot be made a part of the arbitration proceeding. The Supreme Court in Indowind Energy Ltd. v. Wescare (I) Ltd did not permit the addition of a non-signatory despite the existence of an evidence showing its close connection with one of the parties, such that it impacted performance of contractual obligations. A similar judgment was also pronounced in Sukanya Holdings Limited v. Jayesh H. Pandya, wherein the Court held that there is no provision in the Indian Arbitration Act that allows the joining of non-signatories.
However, the group of company doctrine was recognised in the Chloro Controls case, and the wording of section 8 of the Arbitration Act was interpreted to permit joinder of non-signatories. This was followed by the cases of Cheran Properties Ltd. v. Kasturi and Sons Ltd., Ameet Lalchand Shah v. Rishabh Enterprises, Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited, and Mahanagar Telephone Nigam Ltd. v Canara Bank, where the Supreme Court reinforced the application of the group of companies doctrine in the Indian arbitration regime. More pertinently, in Oil and Natural Gas Limited v. M/s Discovery Enterprises Limited, it was held that multiple factors should be considered for determining joinder of non-signatories, such as ‘mutual intent, relationship of a non-signatory to the signatory, commonality of subject matter, composite transaction, and performance of the contract’. In fact, in Gemini Bay Enterprise v. Integrated Sales Services, it was held that even a foreign award can be enforced against a non-signatory.
However, it was still believed that such a joinder can only be facilitated by the courts under the group of companies doctrine, and the arbitral tribunal does not have the power to add third parties. This was observed in Arupri Logistics Pvt Ltd v. Shri Vilas Gupta, and Abhibus Services India Pvt. Ltd. v. Pallavan Transport Consultancies. Therefore, the law in this regard had to be settled in Cox and Kings Ltd. v. SAP India Pvt. Ltd., wherein the Constitution Bench of the Supreme Court ruled that the group of companies doctrine can be derived from section 7 of the Arbitration Act, which does not stipulate that an arbitration agreement must be signed by ‘all’ parties. Further, the Court noted that not just the courts, but even arbitral tribunals have the power to add non-signatories to a proceeding, and this flows from the concept of kompetenz-kompetenz.
Until this juncture, the joinder of non-signatories was majorly recognised on the basis of the group of companies doctrine. However, the Delhi High Court in Gaurav Dhanuka v. Surya Maintenance Agency ruled in favour of joining a third party who derives the benefit of the contractual stipulations notwithstanding the fact that it did not comprise a ‘group’ with either of the parties to the proceeding. This has opened the gateway for a broader recognition of joinder of non-signatories under the Indian legal system.
Institutional Rules on the Issue of Joinder
Unlike the Indian Arbitration Act, many institutional rules for arbitration recognise joinder of third parties to a proceeding. Although specific grounds for adding non-signatories have not been provided in such rules, the principle of joinder is present based on the consent of the third party. Article 6(4) of the ICC Arbitration Rules 2021 provides that the court shall decide whether and to what extent the arbitration shall proceed when a request for a joinder is made. In determining this, the court does not require the third party to actually sign the arbitration agreement, but it has to determine prima facie whether such party is bound by the agreement. This provides room for joinder of non-signatories. Similarly, the LCIA Rules (Art. 22.1) and the Swiss Arbitration Rules (Art. 4) permit the joinder of third parties after ‘consulting with the parties’ and taking ‘relevant factors into account’. The Indian Arbitration Act has been inspired by the UNCITRAL Model Law, which was initially silent on the issue of joinder, but even the Model Law has been amended to permit joinder of third parties (see UNCITRAL Arbitration Rules 2010, Art, 17).
Proposing an Amendment: A Way Forward
It might be argued that silence in the Indian Arbitration Act for joinder of parties is an express omission, and the Indian legislature does not intend to permit the same. However, this can be negated by the fact that the 246th Law Commission Report suggested amending the Arbitration Act to enable third party to participate in arbitration proceedings. Subsequently, section 8 of the Arbitration Act was amended to include to include the phrase ‘if a party to the arbitration agreement, or any person claiming through or under him’. However, section 8 provides for the power of the court to refer parties to arbitration, and a confusion still lies with regard to the power of the tribunal to add non-signatories to a proceeding. A draft bill to make further changes to the Arbitration Act has been recently floated, but even this bill is silent on the issue non-signatories. Therefore, an amendment to the Arbitration Act must be brought to expressly permit joinder of third parties. However, it is pertinent to note that such joinder requires an assessment of existence of consent, and this can be effectively analysed only on a case-by-case basis. Hence, any new provision must not be too restrictive in its approach, and should lay down broad guidelines for analysis of relevant circumstances. An inspiration can be taken from other institutional rules, as highlighted in this post. This will ensure that party consent persists to govern arbitration proceedings, while efficiency of such proceedings can be enhanced.
– Shyamal Anand & Divyansh Morolia