Citation: 2019 SCC Online Del 6531 CS Comm 745/2017
Coram: Jayant Nath
Date: 15thJanuary, 2019
The Delhi High Court held that a non-signatory or third party could be subjected to Arbitration without its consent only in exceptional cases. For it to be exceptional, there needs to be a direct relationship with the signatory party to the Arbitration Agreement or there must exist commonality of the subject matter, or composite transactions in the agreement between the parties.
The plaintiff, R. V. Solutions Pvt. Ltd., is a company providing quality mobile repairing and maintenance and IT services and solutions to its clients which has established itself. The Defendants, Ajay Kumar Dixit being one of them, are ex-employees of the plaintiff and had occupied senior managerial positions in the plaintiff company but left and subsequently joined the company referred to as Defendant no. 5. It was pleaded by the plaintiff company that Defendant No. 1 being the CEO for Defendant No. 5 misused the private and confidential information of the plaintiff company to solicit clients, vendors and staff of the plaintiff which has resulted in huge losses for the plaintiff. Here, it is to be decided whether the matter can be referred to for arbitration because as contended by the plaintiff company, Defendant No. 5 is a foreign entity with whom there is no agreement for collaboration with exists.
Can the dispute be referred to for arbitration as under Section 8 of the Arbitration and Conciliation Act?
On a reading of Section 8 of the Arbitration and Conciliation Act, the Court held that it is the duty of the Court before which the action is brought to refer the matter to arbitration and it is only in situations when the Court cannot find a valid arbitration agreement prima facie that this is not an obligation. The Court also looked at the case of Ayysamyin order to establish this fact.
Moreover, the Court also relied on the Chloro Controlscase in order to enumerate circumstances where non-signatories could also be referred to for arbitration. However, it becomes pertinent to note that this would only happen in exceptional circumstances and in order to refer a non-signatory for arbitration the following threshold would have to be met. This threshold requires a direct relationship to the party signatory to the arbitration agreement, commonality of the subject-matter and the agreement between the parties being a composite transaction.
In the present case, the Court held that due to the plaintiff’s own contention that there was collusion which existed between the defendants which led to the plaintiff incurring losses, there existed a commonality of parties and of interest.
In this particular case it was held that the parties could be referred to for arbitration even though Defendant no. 5 did not have an arbitration agreement with the plaintiff company. They not only based this on the fact that there was a commonality of parties and subject matter but also on the fact that the plaintiff company used the argument that the defendants had colluded and due to their mala fide intention, the plaintiff company had incurred losses.
A.Ayyasamy vs. A.Paramasivam and Ors., AIR 2016 SC 4675
Chloro Controls India Private Limited vs. Severn Trent Water Purification Inc.& Ors., (2013) 1 SCC 641