Requirement of the Consent of Non-Signatories in Appointment of the Arbitrator: A Continuing Enigma? Part II

INTRODUCTION

The Constitution Bench of the Supreme Court in Cox & Kings Ltd. v. SAP India (P) Ltd.¹, while answering the reference on the applicability of the Group of Companies Doctrine and the role of non-signatories during arbitration proceedings, interpreted the term “party” under Section 2(1)(h), Arbitration and Conciliation Act, 1996 (Act) to include non-signatories. However, the Constitution Bench ultimately left it to the Arbitral Tribunal to determine whether a non-signatory would be bound by the arbitration agreement.

This finding was critiqued in the earlier article for effectively curtailing the right of non-signatories to seek interim relief under Section 9 of the Act.² The issue surrounding non-signatories in arbitration proceedings continues to be contentious. One such emerging issue is their role in the appointment process, before their status as a veritable party is determined by the Arbitral Tribunal. This has created uncertainty and complications for signatories to the arbitration agreement, who may face delays and procedural challenges and has also raised significant concerns for non-signatories, who may be constrained to submit to the jurisdiction of a tribunal which is constituted without their participation/consent, thereby fundamentally undermining the principle of party autonomy.

In a recent case, the Delhi High Court in Yves Saint Laurent v. Brompton Lifestyle Brands (P) Ltd.³ had the opportunity to examine this contentious issue involving the role of non-signatories in the appointment of an arbitrator.

Background

The case arose from an application filed under Section 14 of the Act by Yves Saint Laurent (YSL), a leading fashion design house, which had entered into a franchise agreement (FA) with Beverly Luxury Brands Ltd. (Beverly) in 2019. Subsequently, Beverly entered into a sub-franchise agreement (SFA) with Brompton Lifestyle Brands Pvt. Ltd. (Brompton), without the consent or knowledge of YSL. While the FA did not contain an arbitration clause, the SFA provided for arbitration by a sole arbitrator.

YSL terminated the FA in 2021, following which Beverly terminated the SFA. Brompton issued a notice to Beverly and YSL invoking arbitration under the SFA, and by mutual consent of Beverly and Brompton (without YSL’s knowledge), an arbitrator was appointed. YSL challenged the jurisdiction of the arbitrator under Section 16 of the Act, contending that the arbitrator had no jurisdiction vis-à-vis YSL, as it was a non-signatory and had neither consented to arbitration nor to the appointment of the arbitrator.

The arbitrator dismissed YSL’s Section 16 challenge. Thereafter, YSL sought termination of the arbitrator’s mandate under Section 14 of the Act before the Delhi High Court, without seeking alternative relief for deletion of its name from the proceedings or for substitution of the arbitrator (Section 14 petition). The key issue before the Court was whether the appointment of the arbitrator by the signatories without the consent of YSL amounted to a unilateral appointment of the arbitrator rendering him legally incapable of performing his functions.

Findings

The Court observed that the requirement of consensus applies only to “parties” to the arbitration agreement as defined under Section 2(1)(h), and not to non-signatories. The Court relied on Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.⁴, where the Supreme Court observed that “a non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases”.

Accordingly, the Court held that the appointment of the arbitrator did not become unilateral merely because YSL’s (a non-signatory) consent was not obtained. The Court further noted that if YSL was improperly made a party to the arbitration, the appropriate remedy would have been to seek its deletion from the proceedings (a relief which was never sought).

Analysis

The issue of arbitrator appointment has undergone significant development since the 246th Law Commission Report and the consequent 2015 Amendment to the Act, which aimed to ensure the independence and impartiality of arbitrators. In Perkins Eastman Architects DPC v. HSCC (India) Ltd.⁵, the Supreme Court held that the unilateral appointment of a sole arbitrator was invalid. More recently, in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV)⁶, the Constitution Bench, in fact, held that the principle of equality enshrined in Section 18 of the Act also applies to the appointment process.

The process of appointing arbitrators has profound implications for the rights and obligations of all parties who may be affected by the arbitral award, including non-signatories. Fundamental principles of justice, equity and reasonableness demand that a non-signatory who may be bound by the outcome of the arbitration must be granted a meaningful opportunity to participate in all stages of the arbitral process, including appointment of the arbitrator. Excluding non-signatories from this process should not be permitted, particularly in cases where signatories are aware from the inception that participation/impleadment of non-signatories in the arbitration would be necessary.

The existing legal framework lacks clarity on this issue, leading to inconsistent application and leaving a problematic grey area. The Delhi High Court’s decision fails to address the foundational issue left unresolved by Cox and Kings⁷, namely, the rights of non-signatories throughout the arbitral process. This creates a catch-22: As per Cox and Kings⁸, the Arbitral Tribunal alone can determine the status of a non-signatory as a veritable party. But this approach effectively curtails the rights of non-signatories in the appointment process, thereby breaching the equality principle recognized in CORE.

Non-signatories are thus left in a precarious position with limited recourse until after the arbitration has concluded, underscoring the urgent need for a comprehensive declaration of law by the Supreme Court.

A way forward

A possible solution is to require the signatory initiating arbitration to issue a notice under Section 21 of the Act to all parties, including a non-signatory it intends to implead. This would ensure that a good faith effort is made to secure participation of the non-signatory in the appointment process. Alternatively, the signatory could approach the Court under Section 11 of the Act for appointment of an independent arbitrator or move for impleadment of the non-signatory in a Section 11 petition already filed, allowing the High Court or Supreme Court to render a prima facie determination on the status of a non-signatory as a veritable party and leaving the final decision on the same on the arbitrator so appointed.

Since the burden of proving that a non-signatory is a veritable party rests on the signatory seeking impleadment, this approach ensures consistency and prevents the signatory from later resiling from its position during the appointment of the Arbitral Tribunal.