2025 (4) TMI 1244 - SC - Indian Laws

Appointment of arbitrator - service of notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act 1996 on a person and joinder of such person in the application under Section 11 - prerequisites for an arbitral tribunal to exercise jurisdiction - source of jurisdiction of an arbitral tribunal over a person/entity - relevant inquiry that the arbitral tribunal must undertake when determining its own jurisdiction under Section 16 of the ACA. HELD THAT - Section 21 notice was undisputedly issued by the appellant under Clause 40 of the LLP Agreement on 17.11.2020; but the problem arises because this notice was issued only to respondent no. 1. However there is nothing in the wording of the provision or the scheme of the ACA to indicate that merely because such notice was not served on respondent nos. 2 and 3 they cannot be impleaded as parties to the arbitral proceedings. The relevant considerations for joining them as parties to the arbitration will be discussed at a later stage. It is important to note this Court s decision in State of Goa v. Praveen Enterprises 2011 (7) TMI 1313 - SUPREME COURT wherein it was held that the claims and disputes raised in the notice under Section 21 do not restrict and limit the claims that can be raised before the arbitral tribunal. The consequence of not raising a claim in the notice is only that the limitation period for such claim that is raised before the arbitral tribunal for the first time will be calculated differently vis-a-vis claims raised in the notice. However noninclusion of certain disputes in the Section 21 notice does not preclude a claimant from raising them during the arbitration as long as they are covered under the arbitration agreement. Further merely because a respondent did not issue a notice raising counter-claims he is not precluded from raising the same before the arbitral tribunal as long as such counter-claims fall within the scope of the arbitration agreement. Considering the purpose of a Section 11 application for constitution of an arbitral tribunal and the limited scope of examination into the existence of the arbitration agreement and prima facie finding on who are parties to it it follows that the court under Section 11 does not conclusively determine or rule on who can be made party to the arbitral proceedings. Therefore merely because respondent nos. 2 and 3 were not parties before the High Court under Section 11 and disputes against them were not referred to the arbitrator by order dated 24.11.2021 it does not mean that they cannot be impleaded at a later stage on this ground alone. The arbitral tribunal in this case did not delve into the issue of whether respondent nos. 2 and 3 are parties to the arbitration agreement and consequently whether they can be impleaded in the arbitral proceedings. It is also undisputed that these respondents are not signatories to the LLP Agreement that contains the arbitration agreement in Clause 40. In this light we are required to examine whether respondent nos. 2 and 3 are parties to the arbitration agreement. In view of the fact that respondent nos. 2 and 3 have through their conduct consented to perform contractual obligations under the LLP Agreement it is clear that they have also agreed to be bound by the arbitration agreement contained in Clause 40 therein. Since they are parties to the underlying contract and the arbitration agreement the arbitral tribunal has the power to implead them as parties to the arbitration proceedings while exercising its jurisdiction under Section 16 of the ACA and as per the kompetenz-kompetenz principle. Conclusion - i) Service of Section 21 notice and joinder in Section 11 application are not absolute prerequisites for impleading a party or for the arbitral tribunal to exercise jurisdiction. ii) The arbitral tribunal s jurisdiction is derived from consent under the arbitration agreement and the tribunal must determine party status under Section 16. iii) Respondent nos. 2 and 3 though non-signatories are parties to the arbitration agreement by virtue of their conduct and relationship and can be impleaded as parties to the arbitration proceedings. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(i) Whether service of a notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996 ("ACA") and joinder of a person/entity in an application under Section 11 for appointment of arbitrator are mandatory prerequisites for an arbitral tribunal to exercise jurisdiction over that person/entity.

(ii) What is the source of the arbitral tribunal's jurisdiction over a person/entity sought to be impleaded as a party to the arbitral proceedings, and consequently, what is the relevant inquiry the arbitral tribunal must undertake under Section 16 of the ACA when determining its jurisdiction.

(iii) Whether respondent nos. 2 and 3, who are non-signatories to the arbitration agreement but connected to the underlying contract, can be impleaded as parties to the arbitration proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue I: Whether service of Section 21 notice and joinder in Section 11 application are prerequisites for impleading a party in arbitration proceedings

Relevant legal framework and precedents: Section 21 of the ACA provides that arbitral proceedings commence on the date the respondent receives a request for arbitration. The purpose of the Section 21 notice is to fix the date of commencement of arbitration, which is crucial for limitation calculations under Section 43 of the ACA and for determining the applicable arbitration law. Section 11 governs appointment of arbitrators by the Court when the parties fail to appoint them as per the arbitration agreement.

Decisions such as Milkfood Ltd. v. GMC Ice Cream, State of Goa v. Praveen Enterprises, and BSNL v. Nortel Networks have expounded the functions of the Section 21 notice, including informing respondents of claims, enabling appointment of arbitrators, and triggering court jurisdiction under Section 11.

Court's interpretation and reasoning: The Court held that while a Section 21 notice is mandatory to commence arbitral proceedings and serves important functions, non-service of such notice on a person does not preclude that person's impleadment in arbitration. Similarly, the Section 11 application's purpose is limited to constituting the arbitral tribunal via a prima facie examination of the existence of an arbitration agreement and parties thereto. The Court emphasized that the Section 11 court's order appointing arbitrators does not conclusively define the arbitral tribunal's jurisdiction or terms of reference.

Key evidence and findings: In the present case, the Section 21 notice was issued only to respondent no. 1, and the Section 11 application joined only respondent no. 1. The arbitral tribunal and High Court held these as mandatory prerequisites to exercise jurisdiction over respondent nos. 2 and 3.

Application of law to facts: The Court rejected this reasoning, holding that the absence of notice or joinder in Section 11 application does not bar impleading such parties if they are bound by the arbitration agreement. The tribunal's jurisdiction depends on consent to arbitration, not procedural formalities of notice or joinder.

Treatment of competing arguments: The respondents argued that non-service of Section 21 notice and non-inclusion in Section 11 application preclude jurisdiction and violate natural justice. The Court distinguished these procedural requirements from the substantive question of jurisdiction, which rests on consent under the arbitration agreement.

Conclusion: Service of Section 21 notice and joinder in Section 11 application are necessary for certain procedural purposes but are not absolute prerequisites to implead parties or for the arbitral tribunal to exercise jurisdiction over them.

Issue II: Source of arbitral tribunal's jurisdiction over a person/entity and relevant inquiry under Section 16

Relevant legal framework and precedents: Section 7 of the ACA defines an arbitration agreement as a written agreement to submit disputes to arbitration. Section 16 embodies the kompetenz-kompetenz principle, allowing the arbitral tribunal to rule on its own jurisdiction, including questions of existence, validity, and scope of the arbitration agreement and who is a party thereto.

Key precedents include Cox and Kings Ltd. v. SAP India (2024), ONGC Ltd. v. Afcons Gunanusa JV, and Ajay Madhusudan Patel v. Jyotrindra S. Patel, which clarify that the tribunal's jurisdiction is derived from the parties' consent as expressed in the arbitration agreement, and the tribunal must decide jurisdictional issues based on evidence and legal principles.

Court's interpretation and reasoning: The Court emphasized that the arbitral tribunal's jurisdiction is contractual and arises from the arbitration agreement. The tribunal must determine, under Section 16, whether a person/entity is a party to the arbitration agreement. This inquiry involves interpreting the arbitration agreement and examining the conduct and relationship of the person/entity with the signatories.

The Court rejected the arbitral tribunal's and High Court's approach of denying jurisdiction solely because of absence of Section 21 notice or Section 11 joinder, holding that these procedural aspects do not displace the fundamental requirement of consent under the arbitration agreement.

Key evidence and findings: The arbitral tribunal had refused to exercise jurisdiction over respondent nos. 2 and 3 without examining whether they are parties to the arbitration agreement, focusing instead on procedural non-compliance.

Application of law to facts: The Court held that the arbitral tribunal should have conducted a substantive inquiry under Section 16 to determine if respondent nos. 2 and 3 are parties to the arbitration agreement, which would confer jurisdiction.

Treatment of competing arguments: The respondents contended that non-signatories cannot be bound and that jurisdiction cannot be extended without procedural compliance. The Court, relying on the kompetenz-kompetenz principle and precedents, held that the tribunal has the power to decide such issues based on consent and conduct.

Conclusion: The source of jurisdiction is the arbitration agreement and the parties' consent thereto. The arbitral tribunal's jurisdictional inquiry under Section 16 must focus on whether the person/entity is a party to the arbitration agreement, not merely on procedural formalities.

Issue III: Whether respondent nos. 2 and 3 are parties to the arbitration agreement and can be impleaded

Relevant legal framework and precedents: The Court applied the principles from Cox and Kings Ltd., which held that non-signatories can be parties to an arbitration agreement if their conduct and relationship with signatories demonstrate mutual intent to be bound. The factors to be considered holistically include mutual intent, relationship to signatories, commonality of subject-matter, composite nature of transactions, and performance of the contract (as per ONGC Ltd. v. Discovery Enterprises).

Court's interpretation and reasoning: Clause 40 of the LLP Agreement is broad and covers disputes between partners inter se, and between partners and the LLP or its administrators. Respondent no. 2 is the LLP itself, created under the LLP Agreement, and respondent no. 3 is the CEO designated under the LLP Agreement responsible for administration.

The Court reasoned that respondent no. 2, by performing contracts and business under the LLP Agreement, and respondent no. 3, by acting as CEO pursuant to the LLP Agreement, have consented to be bound by the arbitration clause. Their conduct and roles demonstrate their inclusion within the scope of the arbitration agreement despite not being signatories.

Key evidence and findings: The appellant infused funds and executed the ITF Project through respondent no. 2, and respondent no. 3 was a director of respondent no. 1 and CEO of respondent no. 2. The arbitration clause explicitly contemplates disputes involving the LLP and its partners and administrators.

Application of law to facts: Applying the holistic test, the Court found that respondent nos. 2 and 3 are parties to the arbitration agreement by conduct and relationship, and thus can be impleaded in the arbitration proceedings.

Treatment of competing arguments: The respondents argued that they are not parties because they did not sign the LLP Agreement and were not served with notices. The Court rejected this, emphasizing that written consent and conduct under Section 7 and the holistic test govern party status, not mere signature or procedural notice.

Conclusion: Respondent nos. 2 and 3 are parties to the arbitration agreement and can be impleaded as parties to the arbitral proceedings.

3. SIGNIFICANT HOLDINGS

The Court made the following crucial legal determinations, preserving key reasoning verbatim:

"First, while a notice invoking arbitration under Section 21 is mandatory and fulfils various purposes by fixing the date of commencement of arbitral proceedings, non-service of such notice on a person does not preclude his impleadment in the arbitral proceedings."

"Second, the purpose of an application under Section 11 is simply the constitution of the arbitral tribunal, which is pursuant to a limited and prima facie examination by the referral court. The order appointing the arbitrator does not limit the arbitral tribunal's terms of reference or scope of jurisdiction."

"Third, the arbitral tribunal's jurisdiction over a person/entity is derived from their consent to the arbitration agreement. Hence, the proper inquiry in an application under Section 16 is whether such person is a party to the arbitration agreement."

"Fourth, in the facts of the present case, an arbitration agreement exists between the appellant and respondent nos. 2 and 3, and hence they can be impleaded as parties to the arbitral proceedings."

Core principles established include:

• The arbitral tribunal's jurisdiction is contractual and based on consent as expressed in the arbitration agreement.
• Procedural requirements such as service of Section 21 notice and joinder in Section 11 application, while important, do not conclusively define or limit the tribunal's jurisdiction.
• The principle of kompetenz-kompetenz under Section 16 empowers the arbitral tribunal to decide its own jurisdiction, including party status.
• Non-signatories can be parties to arbitration agreements where their conduct and relationships demonstrate mutual intent to be bound, assessed holistically.

Final determinations on each issue were:

(i) Service of Section 21 notice and joinder in Section 11 application are not absolute prerequisites for impleading a party or for the arbitral tribunal to exercise jurisdiction.

(ii) The arbitral tribunal's jurisdiction is derived from consent under the arbitration agreement, and the tribunal must determine party status under Section 16.

(iii) Respondent nos. 2 and 3, though non-signatories, are parties to the arbitration agreement by virtue of their conduct and relationship, and can be impleaded as parties to the arbitration proceedings.

The Court accordingly allowed the appeal, set aside the impugned orders, directed impleadment of respondent nos. 2 and 3, and remanded the matter for continuation of arbitration proceedings.