Arbitration has come to the fore as a viable alternative to the Court system for resolution of disputes. The Arbitration and Conciliation Act (“ACA”), 1996 governs the procedural aspects of this mechanism. It has been modified multiple times over the years to get into place an efficient dispute settlement mechanism. The statute is divided into two parts – Part I applies to domestic arbitrations while Part II applies to foreign-seated arbitrations. In the case of Balco, the Supreme Court confirmed this separation and held that Part I and II would never apply simultaneously to an arbitration proceeding. While the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”) under Section 8 has created some exceptions to this rule in allowing parties to a foreign-seated arbitration to use provisions in Part I when dealing with interim measures and Court-assisted taking of evidence, the broad scheme of the Act continues to follow a separation between the two.
This divide gets problematic where the Court is called upon to compel non-signatories to arbitration agreements, to arbitrate. Part I has received a very narrow interpretation, leaving no scope whatsoever for a Court to compel a non-signatory to arbitrate. This will be looked at through the lens of Sukanya Holding.
Part II, on the other hand, has been liberally interpreted to this respect, along the lines of the interpretation of the New York Convention in other jurisdictions. This broad interpretation adopted by Courts would be dealt through the observations extended in Chloro Controls.
Finally, the judgment in the Ameet Lalchand case will be discussed to analyze the application of Section 8 post the 2015 Amendment Act. The judgement has an effect on above-mentioned separation between Part I and Part II with respect to the joinder of non-signatories to arbitration.
Sukanya Holdings and Section 8 of ACA
The possibility of non-signatories being directed to arbitrate under Section 8 was in the case of Sukanya Holding. In this case, the applicant sought to implead prospective apartment owners to arbitration between the builder and the original landowner. The Court interpreted Section 8 strictly holding that only signatories to the agreement could be directed to arbitrate. This created a situation where the apartment owners could not be directed to arbitrate even though they were necessary parties to the proceedings, as their interests were inextricably linked with the subject matter of the dispute. Their exclusion from the arbitration meant that no valid award could be rendered. As the cause of action could not be bifurcated, the arbitration proceedings were terminated.
Chloro Controls and Section 45 of ACA
The narrow interpretation given to Section 8 in domestic arbitrations was the polar opposite to the one given under Section 45 for international commercial arbitrations in Chloro Controls. It was held that Section 45 allowed a Court could make a reference to arbitration to a non-signatory as long as the facts in a particular case principally justified such a reference. It went on to identify certain factors could help determine when such a reference was to be made. These include the relationship between the signatory and non-signatory to the agreement and the consequences that the subject matter of the dispute has for the non-signatory. The Court relied on the words “person claiming through or under a signatory” used in Section 45 to justify its liberal approach towards international commercial arbitration.
Position of Law: Post the 2015 Amendment Act
The question now remains whether the strict approach as observed in Sukanya Holdings may have been changed by the amendment to Section 8 under the 2015 Amendment Act. Pursuant to the amendment, Section 8 reads, “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies…. refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.” The language of Section 8 has now become similar to Section 45 of the ACA.
The Law Commission Report on Amendments to ACA relying on the Sukanya Holdings case sought to distinguish between necessary parties and proper parties to address the question of joinder of non-signatories to arbitration. The report recommended that non-signatories would not be impleaded as parties to arbitration where they are necessary parties to the dispute. Under civil procedure, necessary parties are those parties that are indispensible to the extent that no effective decision could be made without their presence in the suit. On the other had, the presence of proper parties is required as the decision may affect their rights, however the effectiveness of adjudication is not affected by such parties. Where non-signatories are proper parties, they would be impleaded to the arbitral proceedings. The report recommended that a proviso to this effect should be added to Section 8 of the ACA. However, the legislature did not follow the recommendation and instead introduced the language of Section 45 to Section 8 of ACA.
This warrants a discussion on the 2018 Ameet Lalchand case. Here, there were multiple contracts between three parties pertaining to the commission of a solar plant however, one of the agreements though essential to the present dispute, did not contain arbitration agreement. The court relied on the amended Section 8 and Chloro Controls principles to adjudicate that all the parties to these different agreements will be covered by the arbitration clause in the main agreement. The Court took into account factors such as the inextricable interconnectedness of all agreements – all contracts pursing a single commercial project, the ultimate relation between the parties etc. It held that all parties entered into agreements to facilitate the same purpose of installing and commissioning Dongri Solar Plant.
The court by applying Chloro Controls principles to Section 8 has blurred the separation between Part I and Part II of the Arbitration and Conciliation Act (“ACA”) with respect to the issue of joinder of non-signatories. Though the court did not overrule the holding of Sukanya Holding, it seems that the case may not be applicable to proceedings under Section 8 of the ACA, especially since the amended Section 8 provides that the court can refer the parties to arbitration “notwithstanding any judgment, decree or order of the Supreme Court or any Court.” The court also did not expressly invoke the distinction between necessary parties and proper parties to the dispute, thus making the distinction moot for addressing the issue of joinder of non-signatories to arbitration. It stated that “the dispute between the parties to various agreements could be resolved only by referring all the four agreements and the parties thereon to arbitration”.
With this elucidation, the treatment of non-signatories in international commercial arbitrations and domestic arbitrations seems similar. All factors that guide non-signatory arbitrations under Section 45 (such as the nature of transaction, relationship between parties etc.) apply to domestic arbitration.
[This blog post has been contributed by Advik Rijul Jha and Kamakshi Puri, fourth year students of Jindal Global Law School, Sonipat]
BALCO v. Kaiser Aluminium, (2012) 9 SCC 552.
Sukanya Holding v. JayeshPandya, AIR 2003 SC 2252.
Chloro Controls India v. Severn Trent Water Purification, (2013) 1 SCC 641.
 Ameet Lalchand Shah and Ors v. Rishabh Enterprises and Ors, Civil Appeal No. 4690 of 2018.