2025 (8) TMI 862 - SC - Indian Laws

Court loses jurisdiction after sole arbitrator appointment under Section 11(6) of Arbitration Act; no non-signatory intervention allowed

KAMAL GUPTA & ANR. Versus M/s L.R. BUILDERS PVT. LTD & ANR. ETC.

The SC held that once a sole arbitrator is appointed under Section 11(6) of the Arbitration and Conciliation Act, 1996, the Court loses jurisdiction to ... Permission to a non-signatory to an agreement leading to arbitration proceedings to remain present in such arbitration proceedings - appointment of an arbitrator under Section 11 (6) of the Arbitration and Conciliation Act, 1996 - whether it is permissible for the Court in such disposed of proceedings to issue any further ancillary directions concerning the arbitration proceedings that have commenced pursuant to appointment of the arbitrator? - HELD THAT:- It can be seen from the record that the application under Section 11(6) of the Act came to be filed on 22.08.2022. The appointment of a sole arbitrator was sought in terms of Clause 16 of the MoU/FSD dated 09.07.2019. Admittedly, RG and the other intervenors were not parties to the aforesaid MoU/FSD and hence they were not parties to the application filed under Section 11(6) of the Act. RG and the other intervenors therefore on 13.07.2023 filed I.A. No.13282 of 2024 with a prayer seeking permission to intervene in the proceedings filed under Section 11(6) of the Act. It may be stated that when the application filed under Section 11(6) of the Act came to be decided on 22.03.2024 and Arbitration Petition No.1010 of 2022 came to be disposed of, there was no question of entertaining any prayer for permission to intervene in the arbitration proceedings. The sole arbitrator having been appointed by virtue of the power conferred by Section 11(6) of the Act on 22.03.2024, the Court did not have any further jurisdiction to entertain a fresh application with a prayer for permission to remain present in the arbitration proceedings. In our view, Interim Application No.37567 of 2024 preferred by the respondents in the disposed proceedings was not liable to be entertained since the Court had become functus officio on the conclusion of the proceedings filed under Section 11(6) of the Act to consider such prayer. This aspect goes to the root of the matter and it is evident that the learned Judge committed an error in entertaining the Interim Application with a prayer for intervention much after disposal of the main proceedings in which the sole arbitrator was appointed. It can be gathered from the order dated 07.08.2024 that RG and other non-signatories were aggrieved by the action of the signatories in dealing with one of the properties that was the subject matter of the undertaking given by them. Assuming the apprehension of RG and other non-signatories to be bonafide, we do not find that it can justify the direction to permit a non-signatory to remain present in the arbitration proceedings. It must be stated that the learned Judge was cognizant of the fact that the Act does not envisage an observer in arbitral proceedings as can be seen from the observations in paragraph 19 of the order dated 07.08.2024. Despite that, such permission has been granted. The direction, even if well-intentioned, does not have any statutory support. The applications filed by RG and other non-signatory companies in the disposed of proceedings were misconceived. The attempt on their behalf to re-open the proceedings amounted to an abuse of the process of law. The applications deserved outright rejection. The learned Judge erred in entertaining the same on merits. The order dated 12.11.2024 passed on the various interim applications is set aside. The parties to the present proceedings are free to work out their rights in accordance with the order dated 22.03.2024 - Appeal allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether a non-signatory to an arbitration agreement can be permitted to remain present in arbitration proceedings arising from that agreement. 2. Whether, after the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the Act) and disposal of the Section 11(6) proceedings, the Court retains jurisdiction to issue further ancillary directions concerning the arbitration proceedings. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Permissibility of Non-Signatory Presence in Arbitration Proceedings Relevant Legal Framework and Precedents: - Section 2(h) of the Act defines a 'party' as a party to an arbitration agreement. - Section 35 of the Act provides that an arbitral award binds only the parties to the arbitration and persons claiming under them. - Section 42A of the Act mandates confidentiality of arbitral proceedings, binding arbitrators, arbitral institutions, and parties. - Judicial precedents emphasize minimal judicial intervention and adherence to the self-contained code of the Act. Court's Interpretation and Reasoning: - The arbitration agreement (MoU/FSD) was signed only by certain family members; the non-signatory intervenors, including RG, were not parties to the agreement. - The Court noted that the arbitral award would not be binding on non-signatories, as per Section 35. - The Act does not confer any right on non-parties to remain present or participate in arbitration proceedings between signatories. - Permitting non-signatories to be present in arbitration proceedings would contravene the confidentiality obligations under Section 42A. - The presence of non-signatories would amount to allowing strangers to the arbitration, which is unsupported by law. Key Evidence and Findings: - The non-signatories sought intervention and presence in arbitration despite not being parties to the arbitration agreement. - Earlier applications for intervention by non-signatories were dismissed on the ground of their non-party status. - The Court observed that the non-signatories' apprehensions about the arbitration affecting their properties were misplaced, as the award would not bind them. Application of Law to Facts: - Since the arbitration agreement binds only signatories, non-signatories have no legal basis to intervene or be present in arbitration proceedings. - The confidentiality provisions reinforce exclusion of non-parties from arbitration proceedings. Treatment of Competing Arguments: - The non-signatories argued breach of undertakings by signatories justified their presence; the Court found no statutory or legal basis for this in the Act. - The respondents contended that the non-signatories' presence was impermissible and beyond the scope of the Act, which the Court agreed with. Conclusions: - Permission granted to non-signatories to remain present in arbitration proceedings was without jurisdiction and beyond the scope of the Act. - Non-signatories cannot be permitted to participate or observe arbitration proceedings to which they are not parties. Issue 2: Jurisdiction of Court to Issue Ancillary Directions after Appointment of Arbitrator under Section 11(6) Relevant Legal Framework and Precedents: - Section 11(6) of the Act empowers the Court to appoint an arbitrator and dispose of such proceedings. - Section 5 of the Act restricts judicial intervention in arbitral proceedings to only those matters expressly provided in Part I of the Act. - The Act is a self-contained code governing arbitration, limiting the scope of other statutes and judicial powers. - The doctrine of functus officio applies once the Court disposes of the Section 11(6) proceedings by appointing an arbitrator. - Judicial precedents emphasize minimal judicial interference post-arbitrator appointment. Court's Interpretation and Reasoning: - The Court held that after disposal of the Section 11(6) petition by appointment of the sole arbitrator, it became functus officio and lacked jurisdiction to entertain further applications related to the arbitration. - The subsequent applications filed by non-signatories seeking intervention and ancillary directions were filed in disposed proceedings and were not maintainable. - The Court rejected invocation of Section 151 of the Code of Civil Procedure to circumvent the statutory scheme under the Act. - The impugned directions issued after disposal of the Section 11(6) proceedings were beyond the Court's jurisdiction and contrary to the legislative intent of minimal judicial intervention. Key Evidence and Findings: - The Section 11(6) petition and related Section 9 petition were disposed of on 22.03.2024 with appointment of the sole arbitrator and direction to treat the Section 9 petition as under Section 17. - No further proceedings were pending before the Court in respect of Section 11(6) after disposal. - Applications filed by non-signatories in August and November 2024 were entertained despite the Court being functus officio. Application of Law to Facts: - The Court's jurisdiction under Section 11(6) ceased upon appointment of the arbitrator and disposal of the petition. - The Act does not provide for re-opening or ancillary directions by the Court in disposed Section 11(6) proceedings. - Allowing such interventions post-disposal undermines the self-contained nature of the Act and the autonomy of arbitration. Treatment of Competing Arguments: - Non-signatories argued breach of undertakings and invoked Section 151 of the Code to justify intervention; the Court found no statutory basis for such invocation post-disposal. - Respondents argued that the Court had no jurisdiction to entertain such applications after disposal and that the applications were an abuse of process; the Court agreed. Conclusions: - The Court has no jurisdiction to entertain applications for intervention or ancillary directions after disposal of Section 11(6) proceedings by appointment of an arbitrator. - The Court became functus officio on disposal of the Section 11(6) petition and cannot issue further directions concerning the arbitration proceedings. Additional Observations: - The confidentiality provisions under Section 42A reinforce the exclusion of non-parties from arbitration proceedings and preclude their presence as observers or intervenors. - The remedy available to non-signatories disputing an arbitral award is under Section 36 of the Act, relating to enforcement, not participation in arbitration. - The Court emphasized the legislative intent to minimize judicial interference in arbitration, consistent with international best practices and the UNCITRAL Model Law. - The applications filed by non-signatories after disposal of Section 11(6) proceedings were held to be misconceived and amounted to abuse of process. - The Court set aside the impugned order permitting intervention and presence of non-signatories and restored the position as per the original order appointing the sole arbitrator.