Can a non-signatory or confirming party be made party to the arbitration? The position of non-signatory in an arbitration agreement

A dynamic position of law has arrived at crossroads: whether confirming party/parties can be made a signatory to contract or not? This question is astonishing at first due to the complexities it holds. The legal precedence at this matter is highly conflicting. In this article we aim to clarify the position of non-signatories and also determine the criteria in which non-signatories can be made a party to the arbitration agreement.

The concept of confirming party

A confirming party is a concept present under the tripartite contract. The sole intention of the tripartite pact is for the third party to act as a confirming party. For instance: when a registered society is added as a third party to an agreement for the purchase and sale of a flat, it confirms the transaction and means that the society has no objection to transferring the flat in the buyer’s name.

Herein, there is a necessary question that need to be addressed here:

(1) Whether a confirming party would be bound by the terms of the contract and arbitration can be initiated against them in the capacity of non-signatory to the agreement?

In order to answer this question, we must refer some crucial case laws.

In Yogi Agarwal v. Inspiration Clothes & U,1 this court observed:

“When Sections 7 and 8 of the Act refer to the existence of an arbitration agreement between the parties, they necessarily refer to an arbitration agreement in regard to the current dispute between the parties or the subject-matter of the suit. It is fundamental that an arbitration provision, to constitute an arbitration agreement for the purposes of Sections 7 and 8 of the Act, should satisfy two conditions. Firstly, it should be between the parties to the dispute. Secondly, it should relate to or apply to the dispute.”2

Now, constructing the above, it is quintessential that the dispute must be between the parties and only applies to them. Although, confirming parties may sign the contract, in the capacity, as to verify the terms of the contract. However, the crux of an arbitration is a dispute and a dispute occurs between the interested parties who have rights and obligations under the arbitration agreement. A mere observer that verifies the terms of the arbitration agreement is not covered under Section 7(1) of the Arbitration and Conciliation Act, 1996, “all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not”.3

Here, reference must be made to S.N. Prasad v. Monnet Finance Ltd.,4 this Court held:

“There can be a reference to arbitration only if there is an arbitration agreement between the parties. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non-parties to the arbitration agreement, reference to arbitration appointment of arbitration can be only with respect to the parties to the arbitration agreement and not the non-parties… As there  was   no arbitration agreement between the parties, the impleading of the appellant as a respondent in the proceedings and the award against the appellant in such arbitration cannot be sustained.”5

The Supreme Court has held in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya,6

 “that a person who is not a party to the arbitration agreement, cannot be roped into the arbitration proceedings, roped into an application under Section 9″.7

After the above references, it may seem conflicting that the distinction made is between parties and non-parties to the contract. However, one may argue that confirming party may be said to a party. This is where the crucial concept of “proper party” comes into play.

Under Order 1 Rule 10(2) CPC:8 By the virtue of this provision, the court can at any point add or remove a plaintiff or defendant. Now, this can be done only on two grounds:

(i) if the said party is a necessary party; or

(ii) if the said party is a proper party.

An individual or a group of people ought to be a necessary party in the case that if they do not join the case, no effective degree can be passed, additionally the case would be dismissed.9  While, a “proper party” is not a necessary party, however, a person whose intervention will allow the court to completely, properly, and appropriately adjudicate all issues in question in the suit, even though he is not a party in favour of or against whom the judgment is to be rendered.10 In the circumstance where it is neither a necessary party nor a proper party, the court does not have the authority to compel him to testify against the plaintiff’s wishes.

Hence, now the argument stands at the point that, confirming party is in no way a necessary party as the dispute is not in relation to the confirming party. Moreover, a non-proper party cannot be made liable or hold rights, hence it cannot join the suit as a plaintiff or a defendant. Hence, the confirming party cannot under the law be called as a “proper party” or there cannot be an invocation of the Order 1 Rule 10(2) CPC.

The same argument was taken in Svogl Oil Gas & Energy Ltd. v. Comet Overseas (P) Ltd.,11 wherein the court accepted the respondent’s argument and disposed of the case. Additionally, in support of this heavy reliance must be placed on the decisions of K.K. Modi v. K.N. Modi12 and the judgment passed on 29-3-2011 by the Supreme Court of India in the matter of Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar,13 in support of his submissions to further substantiate the above argument.

Now, in Svogl Oil Gas case14 (supra) the court referred to Deutsche Post Bank15 (supra) said that the confirming parties to the agreement are neither proper nor necessary parties to the arbitration. Now, let us look at this case. In Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar16.

The Supreme Court ruled that only parties to the deal should participate in the Arbitral proceedings. During the arbitration hearings, the bank was not present, and the only two parties were the purchaser who received the loan and the developer. A home financing corporation (HFC) cannot be considered a party to arbitration in conflicts between the developer and the buyer of a house until the HFC signed the arbitration agreement. In this case, the buyer of the house and the developer had an arbitration agreement. In this case, an arbitration deal existed between the house buyer and the developer. The HFC was not involved in it. When a conflict emerged between the buyer and the developer, the buyer requested the appointment under the Arbitration and Conciliation Act from the Andhra Pradesh High Court. The buyer claimed that there exists a conspiracy between the HFC and the developer, so the High Court assigned an arbitrator and made the HFC a party to the agreement. The HFC filed an appeal with the Supreme Court, claiming that he was not a party to the buyer-developer deal. The Supreme Court agreed with this argument and decided to dismiss the HFC from the arbitration.17

The concept of group of company’s doctrine

While discussing this, the question that needs to be addressed here is can an arbitration agreement bound a non-signatory, and if so, then in what situation? In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya,18 the Supreme Court of India stated that:

“Causes of action against various parties cannot be separated in a single arbitration and that an arbitration arrangement can only bind the parties who have entered into it.”19

A non-signatory to the arbitration agreement can become a party to the arbitration agreement by applying the “group of companies” principle. This principle in Indian jurisprudence was explained in Mahanagar Telephone Nigam Ltd. v. Canara Bank20 the Supreme Court observed that:

10.5 The “group of companies” doctrine has been invoked by courts and tribunals in arbitrations, where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group.

The doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.

10.6 The circumstances in which the “group of companies” doctrine could be invoked to bind the non-signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject-matter; the composite nature of the transaction between the parties.

A “composite transaction” refers to a transaction which is interlinked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.

10.7 The group of companies Doctrine has also been invoked in cases where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality. In such a situation, signatory and non-signatories have been bound together under the arbitration agreement. This will apply in particular when the funds of one company are used to financially support or restructure other members of the group.21

From the abovementioned case, a non-signatory can be made a party to the agreement if the following conditions are satisfied:

(1) It has been identified that the parties agreed for the arbitration arrangement to include both the signatory and non-signatory group companies.

(2) The non-signatory signatory has a direct association with the signatory party, or the parties are engaged in the conduct of a composite contract, and the subject-matter is similar.

(3) Where it can be demonstrated that the signatory and non-signatory parties are part of a tight association, the courts can use the “group of companies” doctrine.

An additional reference must be made to a case which lays down some conditions for non-signatory:22

“A non-signatory or third-party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the court would have to examine whether a composite reference of such parties would serve the ends of justice. Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore discussed.”23

By referring to the abovementioned cases, it is crystal clear that a non-signatory can be bound by it even if they did not consent to the same, if there is a composite transaction between the party to the agreement and the non-party to the arbitration agreement, the non-signatory can be made bound by it by following the group of companies’ doctrine.

Conclusion

The concept of confirming party in regard to non-signatories is clarified from the viewpoint of existence of dispute between the parties. The relevant observation here to be made is that there is no existence of dispute between a confirming party and other parties. Moreover, in regard to group of companies’ doctrine, where there is a composite transaction, non-signatories may be bound by the arbitration agreement subject to the facts and circumstances of each case.


4th Year law student, UPES, Managing Editor, UPES Student Law Review, International Review of Dispute Resolution Founder, Legisnations.com

†† 4th Year law student, UPES.

1 (2009) 1 SCC 372

2 Ibid.

3 S. 7(1) of Arbitration and Conciliation Act, 1996.

4 (2011) 1 SCC 320

5 Ibid.

6 (2003) 5 SCC 531

7 Ibid.

8 Or. 1 R. 10(2) of Civil Procedure Code, 1908

9 United Provinces v. Atiqa Begum, 1940 SCC OnLine FC 11

10 Baluram v. P.Chellathangam, (2015) 13 SCC 579

11 2016 SCC OnLine Del 1093

12 (1998) 3 SCC 573

13 (2011) 11 SCC 375

14 2016 SCC OnLine Del 1093

15 (2011) 11 SCC 375

16 (2011) 11 SCC 375

17 2016 SCC OnLine Del 1093

18 (2003) 5 SCC 531

19 Ibid.

20 (2020) 12 SCC 767, 779

21 (2003) 5 SCC 531

22 Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

23 Ibid.

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