Non-Signatories bound by Arbitration Agreement

Bombay High Court: While interpreting an arbitration agreement, a bench comprising of Mohit S. Shah, CJ and M. S. Sonak, J held that in an agreement between two groups, group entities which are not signatories to the agreement may also be made party to the arbitration agreement if they are referred to in the contract.

In the present case, a joint venture company was set up by two groups through a joint venture agreement. Under the agreement, the definition of the appellant group included such other entities controlled by him or his immediate relatives or his group companies directly or indirectly. Similarly, the definition of the respondent group included “…and their immediate relatives taken together and such other entities controlled by them or their immediate relatives directly or indirectly. Disputes arose between the parties when the appellant group alleged that the respondent group were carrying on a competitive business. The appellant group thus approached the Court to seek interim relief under Section 9 of the Arbitration and Conciliation Act, 1996.

The Court after listening to the arguments on both sides, observed that the joint venture agreement was entered into between the two groups and not between specific individuals or entities. Thus, the immediate relatives and the entities controlled by the respective groups were also held to be bound by the terms of the agreement. The Court also observed that the legislative intent of the Act was to encourage arbitration. Therefore it was held that the aforesaid principles were required to be applied to the agreement and the arbitration agreement therein.

The Court thus reiterated that an arbitration agreement ought to be construed in a broad and common sense manner and that the arbitration agreement should be interpreted having regard to words and phraseology therein and no term or phrase should be treated as meaningless, especially if they are consistent with the other parts of the agreement. Rakesh S. Kathotia vs. Milton Global Ltd., 2014 SCC Online Bom 1119, decided on 22-09-2014

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