[Anushka Kanabar is a third-year student at the National Law School of India University, Bangalore]
The conception of parties “claiming through or under” parties to an arbitration agreement has undergone a significant evolution since the Supreme Court judgement in Cox and Kings v. SAP India. Appearing in sections 8, 35, 45, 54, and 73 of the Arbitration and Conciliation Act, 1996 (“the Act”), this phrase enshrines the right of a class of non-signatories to an arbitration agreement to refer a dispute to arbitration, as well as their obligation to be bound by the resulting award. Cox and Kings departs from the jurisprudence before it by clarifying that such parties only exercise the right to arbitrate in a subordinate capacity, i.e., after deriving the right from one of the parties to the arbitration agreement. It also adopts the common law position that this capacity is conferred once “an essential element” of the signatory’s cause of action or defence vests in the non-signatory.
The archetypical case of a party claiming “through or under” is an assignee. However, a more contentious yet common scenario is that of a subsequent transferee of the subject matter of the arbitration. Take, for example, a situation wherein X and Y are parties to a sale agreement containing an arbitration clause. If X, the vendor, breaches the agreement by transferring the property to a third party, Z, can Z be impleaded to the arbitration between X and Y? If so, must Z be impleaded to ensure that the subject-matter of the arbitration (which now implicates a third party’s rights) is arbitrableunder Indian law? This post discusses recent judgements by high courts giving divergent answers to these questions, applying not only the test of derivative capacity but also the Group of Companies doctrine to refer subsequent transferees like Z to arbitrations between X and Y.
Subsequent Transferees as ‘Parties Claiming Through or Under’
High Courts dealing with cases involving subsequent transferees have correctly recognized the significance of the clarification that parties “claiming through or under” exercise a derivative right to arbitrate. However, there is a significant lack of clarity in how they deduce the vesting of such a right.
In Devtree Corp v. Bhumika North Gardenia, the Karnataka High Court dismissed an objection to the maintainability of section 9 proceedings against a subsequent transferee, holding that it was an “assignee” stepping into the shoes of the original vendor for the purposes of the sale agreement, including its arbitration clause. An obvious problem here is the idea that assignees can be compelled to arbitrate, but even more fundamentally, it is questionable if a subsequent sale of the property (that was the subject-matter of the arbitration) qualifies as an assignment of the sale agreement. This distinction, between a transfer of the subject-matter of the arbitration and a transfer of the rights under an arbitration agreement, is well established in section 9 jurisprudence as having a bearing on whether the subsequent transferee is claiming an independent or a derivative right to arbitrate. While some cases that expounded this proposition (availablehere and here) were canvassed before the Court in Devtree Corp, the judgement rejected their application on the circular reasoning that the non-signatories in them were not claiming “through or under.”
The judgement in Devtree Corp was applied by the Calcutta High Court in Basant Kumar Khemka v. City Shoppe Estates, in which flat owners – removed from the original sale agreement by two subsequent transfers – were impleaded to an arbitration between the original vendor and purchaser. This was primarily on the ground that the original sale agreement defined “flat owners” as including their successors-in-interest. As in Devtree Corp, the Court circumvented the question of whether the flat owners are objectively the original purchasers’ successors-in-interest quathe arbitration agreement. Moreover, the Court mistakenly cites Devtree Corp for the proposition that “parties claiming through or under” are included within the definition of a ‘party’ under section 2(1)(h) of the Act, something that was proposed by the 246th Law Commission but not incorporated by the legislature. The consequence of this is the extension of the courts’ powers to refer such parties to arbitration under section 11 of the Act (which, unlike section 8, does not feature the phrase “parties claiming through or under”).
Another factor influencing these judgements was that the subsequent transfers in both cases took place during the pendency of court proceedings for interim relief. The Karnataka High Court in Devtree Corp, and the Calcutta High Court in Maa Vaishno Devi Enterprises v. Samujjal Enterprise applied the principle of lis pendens, holding that since the subsequent transferee is bound by the outcome of the section 9 proceedings, he must be impleaded in the arbitration. Relying on this to hold that the subsequent transferee is a necessary party to the arbitration itself is an unwarranted logical leap at three levels: first, in that the subsequent transferees with notice are not necessary partieseven to civil suits. This was correctly recognized by the Delhi High Court in GLS Foils v. FWS Turnit Logistic Park, in which it upheld an arbitrator’s decision not to implead a subsequent transferee.
Second, such reasoning conflates being bound by the outcome of the arbitration with the outcome of court proceedings undertaken to assist it. While this may hold true for cases in which the court issues, say, a perpetual status quo order, it is not that the outcome of an arbitration always binds a subsequent transferee after court proceedings have concluded. This was noted by the Guwahati High Court in Brahmaputra Realtors v. GG Transport, a case that overturned a court-issued status quo order against a third party on the ground that there was no subsisting suit at the time the subject-matter of the arbitration was transferred. As a result, the Court correctly concluded that the subsequent transferee’s claim was independent of the original purchaser’s title and the former was not “claiming through or under” the latter.
The final and most important issue with this reasoning is simply its circularity: it holds to the effect that a non-signatory that is bound by an arbitral award must be impleaded in an arbitration. A subsequent transferee can be so bound – under section 35 of the Act – if held to be a party “claiming through or under” a party to the arbitration agreement. Establishing this derivative capacity necessarily requires a standard that does not inquire whether he is already bound by the outcome of the arbitration.
Subsequent Transferees as ‘Parties’
Nothing in Cox and Kings precludes subsequent transferees from being impleaded to arbitrations under the Group of Companies doctrine, provided that the overarching requirement of mutual intention (to confer the right to arbitrate upon such a transferee) is met. However, the way the doctrine has been applied in such cases exhibits familiar problems entailed by an over-emphasis on the subject-matter of the arbitration.
There is an interesting continuity of reasoning between cases pre-dating the incorporation of the Group of Companies doctrine into Indian law and those following it. A key example of the former is Aerens Goldsouk v. Samit Kavadia, a case in which the Rajasthan High Court referred a subsequent transferee to arbitration, holding that the two sale deeds formed part of the same transaction and that the subsequent transferee could be “deemed” to know about the original sale. This was followed, and grounded in the Group of Companies doctrine, by later cases such as Nirmala Jain v. Jasbir Singh, in which the Delhi High Court impleaded a non-signatory auction purchaser on the grounds that the sale deeds featured a “commonality of subject-matter” and the “interdependence or intertwining of transactions.” Needless to say, this logic would apply to every case involving a subsequent transferee (since there was nothing to lead the Court to arrive at a finding of “interdependence” except that the auction notice mentioned the original sale). To add to the confusion, the Delhi and Karnataka[1] High Courts have relied on this position to hold that the subsequent purchaser claims “through or under” the original vendor.
The reformulation of the Group of Companies doctrine in Cox and Kings does not remove the basis for this kind of reasoning; rather, it simply marks a terminological shift from “deemed consent” to “mutual intention.” This can be seen in Suresh Kumar Kakkar v. Ansal Properties, in which the Delhi High Court extensively cites Cox and Kings and applies the intertwined estoppel theory to implead subsequent transferees on the ground that the sale agreements concerned the same parcel of land. As William Park notes, the intertwined estoppel theory – rendering interconnected disputes to arbitration together – can very well be subsumed within the logic of “deemed consent.” The continuation of this approach after the incorporation of the Group of Companies doctrine into Indian law is perhaps a consequence of the vagueness of some of the indicators of mutual intention, as established in ONGC v. Discovery Enterprises and upheld in Cox and Kings. Tests such as the commonality of subject-matter and the composite nature of transactions are not well-suited to cases involving subsequent transferees because these are simply the necessary implications of a subsequent transfer. Indeed, the application of Group of Companies to such cases is arguably an instance of what Stavros Brekoulakis describes as an artificial extension of the notion of “consent” to refer interconnected disputes to arbitration as a matter of policy.
Finally, it is clear that the case of subsequent transferees blurs the line between parties to an arbitration agreement and parties claiming “through or under” them (resulting in Courts inappropriately placing reliance on judgements that may be dealing with the other question). This overlap – caused primarily by the emphasis placed on the commonality of subject-matter – can be avoided by paying sufficient attention to the source of law that governs both questions. Unlike the Group of Companies doctrine, the question of whether a subsequent transferee can claim “through or under” the original vendor has nothing to do with the scope of the arbitration clause in the original sale deed, or for that matter, the relationship between the two transfers. The indispensable requirement for a party claiming “through or under,” remains the vesting of the right to arbitrate in the form of a derivative (not independent) cause of action. The UK Court of Appeal in Lifestyle Equities v. Hornby Street noted that such vesting requires a principle of law external to the arbitration agreement to impose the right to arbitrate on the subsequent transferee. As this post has shown, the mere transfer of the subject-matter of the arbitration (during court proceedings or otherwise) is insufficient for that purpose.
– Anushka Kanabar
[1] In M Krishna Reddy v. Excel Dwellings Oxigen Private Limited, 2021:KHC:9000.
