Non-Issuance Of Notice Invoking Arbitration Is Not A Bar To Implead Parties In Arbitral Proceedings

The Supreme Court held that non-service of Notice under Section 21 upon the LLP and its CEO as well as no disputes having been raised against them therein “does not denude the arbitral tribunal of its jurisdiction to implead them as parties during the arbitral proceedings.”

The Hon’ble Supreme Court of India, in the case of Adavya Projects (P) Ltd. v. Vishal Structurals (P) Limited1, held that non-issuance of the statutory notice for invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996 (the “Act”) to a person/entity and non-impleadment of such person/entity in an application under Section 11 of the Act, does not automatically operate as a bar to implead such person/entity as a party to the arbitral proceedings.

Facts of the Case

In 2012, an agreement (the “Agreement”) was entered into between Adavya Projects Pvt. Ltd. and Vishal Structurals Pvt. Ltd., to form a Limited Liability Partnership by the name of Vishal Capricorn Energy Services LLP (“LLP”) to execute various projects related to the oil and gas sector. Mr. Kishore Krishnamoorthy, Director of Vishal Structurals, was designated as the Chief Executive Officer of the LLP (“CEO”).

Clause 40 of the agreement provided that any disputes or differences which may arise, inter alia, between the partners amongst themselves and/or between the partners and the LLP shall be referred to arbitration in accordance with and subject to the Act as amended from time to time.

In 2013, a Supplementary Agreement and a Memorandum of Understanding were entered into between Adavya Projects and Vishal Structurals for execution of a storage project by the LLP as a sub-contractor, which project was awarded to a consortium in 2012 by Oil India Limited of which Vishal Structurals was a member.

Disputes arose between the parties in 2018, which ultimately culminated in Advaya Projects invoking arbitration in 2020 by a notice addressed only to Vishal Structurals.

Procedural History

Advaya Projects filed an application for appointment of an arbitrator before the Delhi High Court against Vishal Structurals only, which was allowed by the Delhi High Court in 2021 and a sole arbitrator was appointed to adjudicate the disputes arising out of the Agreement as well as the Supplementary Agreement and MOU.

Adavya Projects filed a Statement of Claim in the arbitration proceedings impleading Vishal Structurals as well as the LLP and its CEO; however, reliefs were sought only against Vishal Structurals.

In the course of the arbitration proceedings, Vishal Structurals objected to the arbitral tribunal’s jurisdiction and maintainability of the proceedings against the LLP and its CEO and Adavya Projects applied to amend the prayers by including reliefs against the LLP and its CEO, which was allowed by the tribunal in 2023. The respondents’ application objections to the jurisdiction of the arbitral tribunal and maintainability of the proceedings against the LLP and its CEO were upheld by the arbitral tribunal in 2024, inter alia, holding that the arbitral proceedings are not maintainable against the LLP and its CEO because they were neither the recipients of the Section 21 Notice nor impleaded as parties in the Section 11 Application before the Delhi High Court. The arbitral tribunal also repelled Adavya Project’s contention that the tribunal is competent to implead non-signatories as necessary parties and further, inter alia, held that there does not seem to be any finding anywhere as to whether the LLP and its CEO are essential parties for adjudication of the disputes between the parties.

The Arbitral Tribunal’s order was challenged by Adavya Projects before the Delhi High Court which upheld the Tribunal’s order on similar reasoning - that nothing has been averred in relation to the disputes against the LLP and its CEO in either the notice invoking arbitration or the application for appointment of an arbitral tribunal. Further, that Adavya Projects in view of the aforesaid cannot seek to raise disputes in the Statement of Claim subsequent to the reference to arbitration. The Delhi High Court judgment was challenged by Adavya Projects before the Supreme Court.

Legislative Background

The provisions which primarily required interpretation were Sections 11, 16 and 21 of the Act. The Supreme Court in ONGC Ltd. v. Discovery Enterprises (P) Ltd.2, inter alia, laid down exhaustive factors for determining whether non-signatories are parties to the arbitration agreement or not and are bound by it. Relying on the said decision and considering Section 16 of the Act and the doctrine of kompetenz-kompetenz, i.e., that the arbitral tribunal can determine its own jurisdiction, a five-judge Bench of the Supreme Court in Cox and Kings Ltd. v. SAP India (P) Ltd.3, inter alia, held the referral Court while deciding an application for appointment of an arbitral tribunal cannot determine complex issues such as whether a party is a non-signatory to the agreement and such determination may be left to the Arbitral Tribunal to decide whether its jurisdiction extends to the non-signatory party or not.

Issues

The issues framed for consideration by the Supreme Court are as follows:

i. Whether service of a Section 21 notice and joinder in a Section 11 application are prerequisites to implead a person/entity as a party to the arbitral proceedings?

ii. What is the source of jurisdiction of an arbitral tribunal over a person/entity who is sought to be impleaded as a party to the arbitral proceedings? As a corollary, what is the relevant inquiry that the arbitral tribunal must undertake when determining its own jurisdiction under Section 16 of the ACA?

Supreme Court Judgement and its Analysis

In the present case, the Supreme Court allowed the appeal filed by Adavya Projects, thereby upholding the maintainability of the arbitral proceedings qua the LLP and its CEO despite non-service of the Section 21 Notice and non-impleadment as parties in the Section 11 Application before the Delhi High Court.

The appellant made three-fold submissions before the Supreme Court – firstly, the tribunal was empowered to implead the parties after entering reference in view of Section 16 of the Act and the doctrine of kompetenz-kompetenz embodied therein. Secondly, the LLP and its CEO are bound by Clause 40 of the agreement and the appellant also drew the analogy from Section 23(4) of the Limited Liability Partnership Act, 2008 read with Schedule I which provides for arbitration between the LLP and the partners. Thirdly, no separate notice was required under Section 21 of the Act as the LLP and its CEO had constructive notice through the notice issued to Vishal Structurals.

On the contrary, the respondents clarified that the issue is not whether the tribunal can implead a non-signatory; it is whether non-service of a Section 21 Notice on a person/entity and non-impleadment of such person/entity as a party in the Section 11 application, precludes joinder of a party to the arbitral proceedings. The respondents’ contentions were three-fold – firstly, the LLP and its CEO are not necessary parties for effective resolution of the disputes and accordingly, judgement passed in Cox and Kings (supra) is distinguishable. Secondly, the LLP and its CEO are not bound by the arbitration agreement as they are not parties to the same. Lastly, non-service of the Section 21 Notice on the LLP and its CEO as well non-impleadment in the Section 11 Application is contrary to the principles of natural justice.

Re: Issue No. (i) – Scope and effect of Section 21 and Section 11 of the Act

The Supreme Court reiterated that notice under Section 21 is aimed at crystallising the date of commencement of arbitration and provides for the limitation for completion of the procedural requirements as well as the proceedings in accordance with the Act, and lastly that it is a mandatory requirement for filing an application for appointment of an arbitral tribunal under Section 11 of the Act. The Court also observed that neither Section 21 of the Act nor any other provisions contemplate a bar to implead parties to arbitration merely because of non-service of the Notice under Section 21. The Supreme Court thus held that non-service of Notice under Section 21 upon the LLP and its CEO as well as no disputes having been raised against them therein “does not denude the arbitral tribunal of its jurisdiction to implead them as parties during the arbitral proceedings.”⁴.

As regards non-impleadment of the LLP and its CEO in the Section 11 Application, the Supreme Court considered the scheme and scope of Section 11 of the Act and well-established principles that the referral Court has very limited powers while deciding an application under Section 11(6) of the Act. As abovementioned, the referral court will not go into complex issues as to whether a person/entity is a non-signatory and can be made a party to the arbitral proceedings.

The Court also referred to the judgement of the Bombay High Court in Cardinal Energy & Infra Structure (P) Ltd. v. Subramanya Construction & Development Co. Ltd.⁵ where the Bombay High Court, held that determination of impleadment of parties who are non-signatories is within the competence of the arbitral tribunal and the tribunal is not dependent on whether the referral court empowered the arbitral tribunal to implead such person/entity as a party to the arbitral proceedings Khaitan & Co.

The Supreme Court reiterated that the referral court cannot conclusively determine as to who can be made party to the arbitration proceedings. In the facts of the case, it observed that absence of reference of specific disputes between Advaya Project and the LLP and its CEO to the tribunal or by the High Court also does not preclude them to be impleaded as parties to the arbitral proceedings. The Court thus, inter alia, held that non-reference of a certain party to arbitration “does not denude the jurisdiction of the arbitral tribunal from impleading them during the arbitral proceedings as the referral court’s view does not finally determine this issue”⁶.

Re: Issue No. (ii) – Interplay between Section 16 and Section 7 of the Act

The Supreme Court considering the terms of Section 16 of the Act, the doctrine of kompetenz-kompetenz embodied thereunder reiterated well-established principles that an arbitral tribunal is empowered to adjudicate whether it can exercise jurisdiction over a non-signatory to the agreement by making such non-signatory a party to the arbitral proceedings. However, while determining the same, the arbitral tribunal has to consider and examine the consent of the parties from the arbitration agreement inasmuch as the award which will be passed will be binding upon the parties to the arbitration. The Court, inter alia, held, “The arbitral tribunal must determine this jurisdictional issue in an application under Section 16 by examining whether a non-signatory is a party to the arbitration agreement as per Section 7 of the ACA.”⁷.

The Supreme Court thus concluded that although the LLP and its CEO were non-signatories to the arbitration agreement contained in clause 40 of the agreement, they are parties thereto because “their conduct is in accordance with and in pursuance of the terms of the LLP Agreement, and hence, they can be made parties to the arbitral proceedings.”⁸.

Conclusion

The Court followed the principles laid down by a five-judge bench of the Supreme Court in Cox and Kings and reiterated the authority of the arbitral tribunal to decide on issues which pertain to the jurisdiction of the arbitral tribunal itself.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.