Arbitration is one of the alternate ways to resolve a dispute and is often a standard clause in any commercial agreements. Such arbitration clauses or the agreement is governed by the Arbitration and the Conciliation Act, 1996 (The Act). The Act prescribes for arbitration agreements to be in writing and signed by the parties. [i]An arbitration agreement cannot be inferred by implication[ii] and are non-binding on non-signatories/non-parties.
This article seeks to analyse the position of law in circumstances where such disputes may involve third parties such as non-signatories, nominees, or guarantors.
- Can a dispute in which some of the disputing parties are not parties to the arbitration agreement be referred for arbitration?
In Sukanya Holdings Pvt Ltd[iii] case, the issue of adding non-parties was specifically addressed by Hon’ble Supreme Court. In the instant case, a partnership firm executed a deed of conveyance subject to the rights of other party in favour of Westend Gymkhana (Buyer) in respect of the disposed flats. The Partners had a dispute and one of the partners sought for dissolution of the partnership firm and accounts, and challenged the execution of conveyance deed, prayed for interim relief against the other Partner and twenty-three purchasers or tenants of flats and sought to refer the matter to Arbitration under Section 8[iv] of the Arbitration Act. However, the arbitration clause was only present in the Partnership deed and not in the conveyance deed, therefore the reliefs were claimed against non-parties to Arbitration Agreement i.e. (tenants/purchasers).
The Hon’ble Supreme Court held that as per Section 8, Court can refer the matter to arbitration only if it is “a matter” agreed for arbitration between all the Parties to the dispute and not if it is “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement. There is no provision in Act for addition of such non-parties to the arbitration proceedings or split the cause or parties and refer the dispute to arbitrators. Hence, subject matter of dispute cannot be bifurcated or partly referred to arbitration, in such scenario disputes should be addressed and disposed of by the Courts.
- Can a nominee or beneficiary of a Party to an Arbitration Agreement be included in Arbitration Proceedings?
In Indowind Energy Limited Case[v], an asset purchase agreement was executed between the seller company and the buyer company on behalf of the nominee company. The arbitration clause in the said Agreement provided for matters in dispute to be referred to a sole arbitrator to be appointed by the mutual agreement of seller company and buyer company or the nominee. The clause further provided that, unless the agreement is approved by the board of directors of all the companies including the nominee, the clause would not be binding.
Buyer Company did not purchase the Assets of Seller Company. The Assets were sold by the Seller Company to the nominee of the Buyer Company as per the terms and conditions of the Asset Purchase Agreement. In the dispute with respect to said asset purchase transaction, the seller company filed section 9 [vi] petition under the Act claiming interim reliefs against nominee under the said arbitration clause. The petition was dismissed by the Madras High Court on the ground that since such agreement was signed by the Buyer Company and not its nominee, there was no arbitration agreement between the parties.
The Hon’ble Supreme Court in an appeal observed that mere description of a nominee in an agreement or the fact that an agreement was entered by a Person on behalf of nominee, will not include nominee as a party to arbitration agreement in the absence of a ratification, approval, adoption, or confirmation of the agreement. The Arbitration Agreement was not signed or executed by the nominee as a Party, as required under section 7[vii] and further, none of the documents or invoices of the said asset sales to nominee referred to the asset purchase agreement containing the arbitration clause, it was held there was no arbitration agreement between the parties.
- Can a Guarantor be included in arbitration proceeding in case of a lending transaction?
In the case of S. N. Prasad Case[viii], a loan agreement was executed between the lender and the borrower containing an arbitration clause. Guarantor has executed a Letter of Guarantee but not the Loan Agreement. Default in payment of loan led to the appointment of arbitrator and an award was passed against the borrower and guarantor to repay the debt along with interest.
The inclusion of guarantor in the arbitration proceedings was challenged. It was contended that, the guarantor had neither signed the loan agreement containing an arbitration clause nor any reference to such agreement was made in the letter of guarantee. It was contested that, since the claim against the borrower also includes the guarantor, the guarantor should be added to the arbitration proceedings.
However, the Hon’ble Supreme Court rejected the above contention and observed that, the letter of guarantee was prior to dates of loan agreement and the guarantor had no knowledge of such agreements being executed in the future. Further, the letter did not contain any provision for arbitration or any reference to a document containing an arbitration clause. Also, the guarantor had not signed the loan agreement, there was no arbitration agreement between lender and Guarantor, therefore, the guarantor could not be included or added as a party in the arbitration proceeding.
Therefore, an enforceable and binding arbitration agreement needs to strictly comply with requirements of the section 7 of the Act i.e. (i) it should be in writing; (ii)it should be between the parties to the dispute; and (iii) it should relate to or be applicable to the dispute.
[i] Section 7 of the Arbitration and the Conciliation Act, 1996,
[ii] MM Acqua Technologies Ltd v. Wig Brothers Builders Ltd 2001(3) RAJ 531 (Del).
[iii] Sukanya Holdings Pvt Ltd. v. Jayesh H. Pandya and another, AIR 2003 SC 2252.
[iv] Power of the Judicial authorities to refer matter to arbitration.
[v] Indowind Energy Limited v. Wescare (India) Ltd. & Ors (2010) 5 SCC 306.
[vi] Interim measures, etc., by Court.
[vii] Requisites of arbitration agreement.
[viii] S. N. Prasad v. Monnet Finance Ltd Civil Appeal no. 9224 OF 2010.
