Pre-Joinder Discovery and Document Production Requests Against Non-Signatories in Arbitration

The addition of non-signatories to arbitration proceedings has been a controversial, yet often-used strategic tool in complex commercial disputes. A non-signatory may be forced to grapple with various rungs in the arbitral process even if it ultimately succeeds in avoiding being added to the arbitration.

In ONGC Ltd. v. Discovery Enterprises (P) Ltd.¹ the Supreme Court of India (Supreme Court) dealt with one such rung — that of pre-joinder discovery and document production applications against a non-signatory, before it has formally been held to be a party to the arbitration. The Supreme Court set aside an interim award in which the non-signatory had been found to not be a party to the arbitration agreement, on the ground that the Tribunal had not decided a discovery application against the non-signatory (relevant to the issue of joinder) before making its interim award.

The Supreme Court referred to various earlier decisions, which affirm the position that a non-signatory may be treated as a party to an arbitration agreement on evidence of “mutual intent” to be bound by such arbitration agreement. The Supreme Court set aside the interim award of the Tribunal, holding that “the Arbitral Tribunal has made a fundamental error of law in not deciding the application by ONGC on discovery and inspection of documents before it ruled on jurisdiction … against principles of natural justice.” This raises several issues within the current framework of arbitration in India.

The Tribunal's (lack of) jurisdiction to order document production against non-parties

The Supreme Court appears to have effectively recognised the right of a party to make a document production request against a non-signatory even before a decision on whether the latter is a party to the arbitration agreement.

It is relevant to note that the Act does not grant any express powers to a tribunal to directly seek disclosures from a third party. Section 27² of the Arbitration and Conciliation Act, 1996 (Act) expressly allows a tribunal to seek a court's assistance in taking evidence from non-parties.

In Army Welfare Housing Organisation v. Sumangal Services (P) Ltd.³, a Bench of three Judges of the Supreme Court had held that a tribunal cannot directly order interim measures and directions against third parties under Section 17⁴ of the Act. Although this was a decision pertaining to interim measures, the rationale for this decision was that a tribunal to “cannot issue any direction which would go beyond … the arbitration agreement.” Issuing directions for document production to non-parties would similarly be beyond the powers derived from an arbitration agreement. Accordingly, the Bombay High Court has held that a tribunal cannot order the production of documents from a third party.

The Bombay High Court in Wind World (India) Ltd. v. Enercon GmbH⁵  referred to Article 3(9) of the IBA Rules on Taking of Evidence,⁶ which allows a party to seek the Tribunal's permission to take “whatever steps are legally available” to obtain production of documents from a non-party to the arbitration. The court ruled that this “legally available” step was limited to seeking court assistance under Section 27 of the Act and that the Tribunal cannot itself direct document production by a non-party, its jurisdiction being limited. The Court accordingly concluded that that an “ order passed by the Arbitral Tribunal … directing third parties to furnish such documents is contrary to Article 3(9) of the IBA Rules and Section 27 of the said Arbitration Act“.

Arbitration deeply bears its roots in the consent of parties, and (as has been often reiterated by the courts) is nothing but “a creature of contract which has been provided statutory backing”.⁷ Fundamentally, a tribunal that derives its authority from a contract cannot therefore purport to exercise authority over a non-signatory to that contract. As noted in a comparative analysis of third-party interfaces with arbitral jurisprudence, the “consensus is that arbitrators have no power over third parties”⁸ in the production of documents. Such exceptional powers of a tribunal can therefore only flow (if at all) from legislation.⁹ Accordingly, unless either the Arbitration Act provides clear powers to do so or, the non-signatory is first held to be a party to the contract (and is therefore no longer a non-party), a tribunal will find it hard to place the source of its authority against a non-signatory non-party.

ONGC v. Discovery¹⁰ appears to sidestep this issue of lack of jurisdiction to order document production against third parties (without court assistance). This decision of the Supreme Court could also be interpreted as creating an exception for a tribunal's power to seek document production from a third-party non-signatory in the limited situation where the purpose of that exercise is to decide whether the non-signatory is in reality a party to the arbitration agreement. However, without the Supreme Court having elaborated further or adequately reconciling its decision with the general lack of jurisdiction over non-parties, this decision results in a vague position which will need clarity in a subsequent ruling of the Supreme Court. Forcing a non-signatory to comply with a discovery process even before ascertaining its jurisdiction over such a person may therefore be seen as being against the basic premise of an arbitral process and an overreach of a tribunal's powers.

The inconsistency in seeking evidence of consent from the non-party

Further, identifying pre-joinder document production by a non-signatory as part of the applicant's natural justice rights unfairly raises the factual threshold for determination of whether a non-signatory is bound by an arbitration agreement. In ONGC v Discovery¹¹ the Tribunal had decided that ONGC did not have evidence showing the participation of the non-signatory justifying its addition as a party to the arbitration. In setting aside the Tribunal's decision, the Supreme Court held that this was not sufficient factual assessment to decide the joinder of the non-signatory.

It is relevant to note that the Supreme Court was considering the joinder of a non-signatory on the basis of the “group of companies doctrine”, which is generally understood as based on “implied consent”¹² and “mutual intent” of all the parties to be bound by the arbitration agreement.

Arguably, such consent and intent should be demonstrable on the basis of evidence available with the party seeking to add the non-signatory. The fact that the party seeking the joinder itself has no evidence of the non-signatory's intent or consent seems to be mutually destructive to the idea that such party could have relied on the non-signatory's intent/consent to the arbitration agreement at the time of its conclusion. An application to join a non-signatory (at least where consensual theories of joinder are being used) should therefore be capable of decision on the basis of the evidence available with the applicant alone, without forcing overreaching disclosures.

The creation of two different thresholds for assessment of a non-signatory's status

In several decisions, the Supreme Court has in fact decided the question of whether a non-signatory is bound by an arbitration agreement, on the strength of evidence placed by the party seeking joinder, without any elaborate document production process. In Reckitt Benckiser (India)(P) Ltd. v. Reynders Label Printing India (P) Ltd.¹³ in a petition for an appointment of an arbitrator in an arbitration against a non-signatory, the Supreme Court had found that there was no evidence to hold the non-signatory bound by the arbitration agreement. A petition for appointment of an arbitrator under Section 11¹⁴ of the Act is a summary exercise, where, as held by the Supreme Court in Vidya Drolia v. Durga Trading Corpn.¹⁵ a non-signatory can resist the appointment of an arbitrator by establishing “a prima facie (summary findings) case of non-existence of valid arbitration agreement”.

As compared with ONGC v. Discovery¹⁶, this results in two different thresholds of evidentiary assessments for the same issue. Where a petition is made to a Court for appointment of an arbitrator, the Court will decide whether a non-signatory is bound by an arbitration agreement on the basis of the limited evidence put forward by the applicant. However, where in the scheme of the applicable procedure, the non-signatory objects to its addition before the Tribunal, the Tribunal would be forced to decide the same issue more extensively, including considering discovery and document production applications against the non-signatory.

Potential for abuse

Treating document disclosure by a non-party as an extension of a party's natural justice rights — a party may seek to add a non-signatory, with little-to-no factual evidence to support grounds for doing so and then seek disclosures from the non-signatory. Evidence of basis to sue a party is indispensable to the existence of a cause of action. Without having any evidence of a non-signatory being bound by an arbitration agreement, such a pre-joinder discovery procedure may become a tool for a fishing exercise to explore if a cause of action can be made out against the non-signatory without having any prior credible basis for such belief.

As has been considered by the Singapore High Court in Manuchar Steel Hong Kong Ltd. v. Star Pacific Line Pte. Ltd.¹⁷ an application for pre-action discovery is not meant to help a party in building a cause of action itself — it is only to help in ascertaining facts related to a claim. Incidentally, in Star Pacific¹⁸, the Singapore High Court refused to order production of documents from a non-signatory, even where this was well within the power of the court under the court's procedural rules.

Conclusion — A less intrusive approach

Where the attempt to join a non-signatory is based on theories that rely on common intention of all parties, the party seeking joinder should usually be able to establish such intention on the basis of evidence in its possession or control, rather than seeking production by a non-party. Where the non-signatory is sought to be added on the basis of assumption of obligations from another signatory (assignment, subrogation, etc.), the evidence of such assumption should similarly be available with the undisputed signatory party whose status was assumed by the non-signatory.

In the rare circumstances that a tribunal finds a compelling need to ask a non-signatory (also being a non-party until that stage) to produce documents, the Tribunal can only seek the assistance of a court under Section 27 of the Act. In doing so, it may be prudent for a tribunal to note why the burden of obtaining evidence cannot be cast on one of the undisputed signatory parties. This would raise the threshold for the use of such pre-jurisdictional procedures against a non-signatory and be a check against potential abuse by applicants aiming to coercively drag a non-party through the arbitral process.