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Applicability of Arbitration Agreement to Third Parties

November 15th, 2019arbitration lawyer india

Arbitration Agreement in India

In certain situations, the arbitration agreement signed by two or more parties may be applicable to a non-signatory to said arbitration agreement. There have been various cases in India wherein this issue has been discussed across different courts. In the case of Prabhat Steel Traders Private Limited vs. Excel Metal Processors Private Limited, the Bombay High Court in 2018 dealt with the issue concerning the locus of a non-signatory to the arbitration agreement under the Arbitration and Conciliation Act, 1996 with respect to section 37 of the Act which provides for Appealable orders, that a non-signatory to the arbitration agreement can challenge the interim orders issued by a sole arbitrator or an arbitral tribunal under section 17 of the Act.

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Case Background

In the aforesaid mentioned case, arbitration petitions filed under section 37 of the Act, the petitioners, who were non-signatories to the arbitration agreement, prayed for leave to appeal against the order passed by an arbitral tribunal and also prayed for setting aside the said impugned order, on the grounds that the interim measure was causing severe prejudice to the interests of the petitioners. The Court first summarized the facts in one of the arbitration petitions which was argued as the lead matter and in view that the facts in the other petitions were identical, the judgment in the lead matter was applied to the other petitions.

Case Facts

  • The Respondent No. 1 was the parent company of the Respondent No. 3 and had common directors and were sister concerns/group companies. The Respondent No. 2 was the original claimant in the arbitral proceedings before the learned sole arbitrator.
  • The Petitioner had bought 46 HR steel coils.
  • The Petitioner entered into a Conducting Agreement with the Respondent No. 3, whereby the Petitioner gave the said coils to the Respondent No. 3 for storing, handling and recoiling on job work basis.
  • When the Petitioner visited the warehouse of the Respondent No. 3 to take delivery of the said coils from the Respondent No. 3, the Petitioner noticed that some of the coils including the said coils of the Petitioner were marked as “SIPL” in yellow paint. At that point of time, the officers of the Respondent No. 1 and the Respondent No. 3 informed the Petitioner about certain arbitration proceedings pending between the Respondent No. 1 and the Respondent No. 2 and that the coils of the Petitioner were identified amongst 5092.860 MT HR coils which were purportedly claimed by the Respondent No. 2 and have been attached/injuncted pursuant to an order dated 27th December, 2016 (“impugned order”) passed by the arbitral tribunal.
  • The Petitioner thereafter learned that the Respondent No. 2 had invoked the arbitration proceedings against the Respondent No. 1.
  • The Respondent No. 1 was given a notice by the Respondent No. 2 to appear at the hearing of the application under section 17 of the Act filed by the Respondent No. 2 against the Respondent No. 1 before the arbitral tribunal. The Respondent No. 1 however, failed to appear before the arbitral tribunal. By the impugned order, the arbitral tribunal appointed the Court Receiver, High Court, Bombay in respect of the said 5092.860 MT HR coils and also granted injunction against the Respondent No. 1 from dealing with the entire coils at the warehouse the Respondent No. 3.
  • The Petitioner vide its letter addressed to the arbitral tribunal reiterated its case of ownership of the said coils.
  • Since there was no response from the arbitral tribunal to the applications made by the Petitioner, the Petitioner filed these 13 petitions under section 37 of the Act for seeking leave of the Hon’ble Court and also thereby impugning the impugned order passed by the arbitral tribunal under section 17 of the Act.

Judgment

The Court accepts the contention that section 37 of the Act does not provide that an appeal under said provision can be filed only by the parties to the arbitration agreement. Section 34 of the Act refers to the expression “party” which is absent in section 37 of the Act.

The fact that the expression “party” is absent in section 37 of the Act makes the legislative intent clear that the said expression “party” is deliberately not inserted so as to provide a remedy of an appeal to a third party who is affected by any interim measures granted by the arbitral tribunal or by the Court in the proceedings filed by and between the parties to the arbitration agreement.

There is a possibility of collusive proceedings and collusive order of interim measures being filed and obtained by the parties to the arbitration agreement which may affect the interest of third parties.

The Court further observed that the Division bench of the Bombay High Court in the case of Girish Mulchand Mehta and Durga Jaishankar Mehta vs. Mahesh S. Mehta and Harini Cooperative Housing Society Ltd. has dealt with an issue whether the appeal under section 37 of the Act could have been filed by the third party arising out of the order passed under section 9 of the Act.

The Division bench construed Rule 803E of the Bombay High Court (Original Side) Rules and has held that section 9 of the Act is distinct from section 17 of the Act, in as much as a petition under section 17 of the Act is moved before the arbitral tribunal for an order against a party to the proceedings, whereas section 9 of the Act vests remedy in a party to arbitration proceedings to seek interim measure of protection against a person who need not be either party to the arbitration agreement or to the arbitration proceedings. In the said proceedings under section 9 of the Act, a third party was also impleaded since the grant of the proposed relief may incidentally affect those third parties.

The Court entertained the appeal under section 37 of the Act filed by such third party who was affected by the order passed by the learned Single Judge under section 9 of the Act, though dismissed the said appeal on merit.

The High Court was of the view that the fact that powers of the Court under section 9 of the Act to grant interim measures and powers of the arbitral tribunal under section 17 of the Act are identical in view of the amendment to section 17 of the Act with effect from 23rd October 2015, therefore, even a third party who is directly or indirectly affected by interim measures granted by the arbitral tribunal will have a remedy of an appeal under section 37 of the Act. The principles of law laid down by the Division bench of the Court in Girish Mulchand Mehta’s case were extended to the present case.

By this landmark judgment the Court observed that, in view of an order obtained by the parties to the arbitration agreement under section 17 of the Act, directly affecting the independent rights of the Petitioner (a third party), such third parties cannot be made to suffer on the ground that the remedy of appeal under section 37 of the Act could not be availed of by such third parties, given that the said provision does not specifically bar appeals filed by the third parties.

Conclusion

An essential part of arbitration law in India includes determining whether a non-signatory party falls under the scope of an arbitration agreement. Before initiating arbitration proceedings in India, parties need to clearly review the provisions of the Arbitration and Conciliation Act 1996, which is the key law governing arbitration matters in India. Arbitration lawyers possess significant expertise in handling domestic arbitration matters and international commercial arbitration proceedings. Arbitration law firms in India routinely represent clients before a sole arbitrator or an arbitration turbinal so as to provide arbitration as an alternate dispute resolution mechanism for clients in India and outside India.

Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.

Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).

Regularly invited to speak at international & national platforms (conferences, TV channels, seminars, corporate trainings, government workshops) on technology, patents, business strategy, legal developments, leadership & management.

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