2025 (12) TMI 704 - SC - Indian Laws

Appeal Allowed: No Prima Facie Basis to Bind Non-Signatory Under Arbitration Clause, Section 11(4) Petition Set Aside

SC allowed the appeal and set aside the order referring the parties to arbitration under Section 11(4). Relying on the principles governing joinder of ... Reference of parties to arbitration by allowing the Section 11(4) petition filed by the respondent - legal relationship between the appellant and the respondent or not - no privity of contract - HELD THAT:- The scope of jurisdiction of the referral court hearing a Section 11-Petition when faced with an issue of joinder of a non-signatory to the arbitration agreement has been lucidly set out by the five-judge Bench of this Court in Cox and Kings Limited vs. Sap India Private Limited and Another [2023 (12) TMI 427 - SUPREME COURT (LB)]. Though said in the context of considering the Group of Companies doctrine, the said judgment has a great bearing for the present case. This Court, speaking through Chief Justice D.Y. Chandrachud, held that 'The Tribunal can delve into the factual, circumstantial, and legal aspects of the matter to decide whether its jurisdiction extends to the non-signatory party. In the process, the Tribunal should comply with the requirements of principles of natural justice such as giving opportunity to the non-signatory to raise objections with regard to the jurisdiction of the Arbitral Tribunal. This interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of determination of true parties to an arbitration agreement to be decided by the Arbitral Tribunal under Section 16.' The referral court should be prima facie satisfied that there exists an arbitration agreement and as to whether the non-signatory is a veritable party. It further holds that even if the referral court prima facie arrives at the satisfaction that the non-signatory is a veritable party, the Arbitral Tribunal is not denuded of its jurisdiction to decide whether the non-signatory is indeed a party to the arbitration agreement on the basis of factual evidence and application of legal doctrine. The Court further reinforces this proposition by holding that as to whether the non-signatory is bound would be for the Arbitral Tribunal to decide. On the facts of this case, it is clear that the appellant and the respondent have been operating on separate orbits. It has not been established even prima facie that there was any intention to bind BCL to the contract between HPCL and AGC. Applying the consensual theory or the non-consensual theory, the respondent has not established its case to show even prima facie the existence of an arbitration agreement between HPCL and the respondent - the respondent fails the prima facie test of being a veritable party to the arbitration agreement between HPCL and AGC. As to what is the legal status otherwise of clause 2.2 of the Settlement Agreement dated 31.10.2023 is not for us to comment in the present proceeding. The impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, on the facts, an arbitration agreement existed between the appellant and the respondent so as to justify reference under Section 11(4) of the Arbitration and Conciliation Act, 1996, particularly when the respondent was a non-signatory to the principal contract. 1.2 Whether the respondent could invoke the arbitration clause in the tender/purchase order as a 'veritable party' or as a person 'claiming through or under' the original contractor, notwithstanding (a) express contractual prohibition on subletting/assignment without written consent, and (b) the nature of the Settlement-cum-Assignment Agreement between the contractor and the respondent. 1.3 What is the scope of examination by the referral court under Section 11 when a non-signatory seeks reference to arbitration, and whether the High Court correctly applied that standard. 1.4 Whether it was necessary to consider the objection that the claims were ex facie time-barred. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Existence of arbitration agreement between the appellant and respondent; status of respondent as non-signatory / assignee / person claiming through or under contractor Legal framework 2.1 The Court examined the scope of Section 11(6-A) of the Arbitration and Conciliation Act, 1996, and the doctrine relating to non-signatories and 'veritable parties', with reference to the following decisions as discussed in the judgment: (a) Cox & Kings Ltd. v. SAP (India) (Group of Companies / veritable party doctrine and joinder of non-signatories); (b) In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 & the Stamp Act, 1899 (scope of 'examination' by referral court under Section 11(6-A)); (c) SBI General Insurance Co. Ltd. v. Krish Spinning (limited 'prima facie' scrutiny of existence of arbitration agreement); (d) Ajay Madhusudan Patel v. Jyotrindra S. Patel (factors to determine whether non-signatory is a veritable party); (e) ASF Buildtech (P) Ltd. v. Shapoorji Pallonji & Co. (P) Ltd. (Section 11 approach to non-signatories and competence-competence); (f) Cox & Kings (2) (reinforcing tribunal's role under Section 16); (g) Cox & Kings analysis on 'claiming through or under' and the limits of mere legal/commercial connection; (h) Khardah Company Ltd. v. Raymon & Co. (distinction between assignment of rights and assignment of obligations; requirement of consent and novation). 2.2 The tender/contract between the appellant and the original contractor contained clauses expressly prohibiting subletting, subcontracting or assignment without prior written consent of the owner, and an arbitration clause applicable to disputes between the contracting parties. Interpretation and reasoning 2.3 The Court held that the referral court, under Section 11, must 'examine' the existence of an arbitration agreement, which includes a prima facie inspection and scrutiny of dealings between the parties, but does not extend to a detailed, contested inquiry reserved for the arbitral tribunal under Section 16. 2.4 When a non-signatory is involved, Cox & Kings requires the referral court to: (a) prima facie determine the existence of an arbitration agreement; and (b) prima facie assess whether the non-signatory is a 'veritable party' to that agreement; while leaving a fuller, evidence-based determination to the arbitral tribunal where such prima facie linkage exists. 2.5 The Court clarified that this scheme does not compel the referral court to send every non-signatory claim to arbitration. If, even prima facie, the non-signatory is not a veritable party and there is no semblance of an intention to bind it or to create a legal relationship with the original contracting party, reference to arbitration is impermissible. Otherwise the referral court would be reduced to a 'monotonous automation' and 'absolute strangers' could compel arbitration. 2.6 Applying these principles, the Court examined the relationship between the appellant, the contractor (AGC/Black Box), and the respondent (BCL): (a) The appellant's contract, including the arbitration clause, was exclusively with AGC; the respondent did not sign or participate in that contract. (b) The separate agreement of 15.01.2014, under which AGC engaged the respondent on a back-to-back basis, was only between AGC and the respondent; the appellant was not a party. (c) Clause 4 of the 15.01.2014 agreement explicitly prohibited the respondent's Project Manager from communicating or coordinating directly with the appellant without AGC's prior written approval, indicating an intent to keep the respondent at arm's length from the appellant. (d) The subsequent Settlement-cum-Assignment Agreement dated 31.10.2023 was again only between AGC and the respondent, recording that receivables accruing to AGC from litigation/proceedings against the appellant would, as between them, be assigned to the respondent. 2.7 The Court held that neither the back-to-back arrangement nor the internal assignment of receivables between AGC and the respondent created an arbitration agreement between the appellant and the respondent, nor did they make the respondent a veritable party to the appellant-AGC contract. The assignment agreement only regulated rights inter se AGC and the respondent. 2.8 The Court emphasised that the tender/contract expressly barred subletting, subcontracting or assignment without prior written consent of the appellant. The respondent did not show any consent by the appellant to any assignment of the contract or its arbitration clause in favour of the respondent. In such a scenario, there was no novation or consensual assumption of obligations by the respondent vis-à-vis the appellant. 2.9 On the plea that the respondent was a person 'claiming through or under' AGC and therefore entitled to invoke the arbitration clause, the Court applied Cox & Kings' analysis: (a) Typical scenarios of 'claiming through or under' are assignment, subrogation and novation; (b) Such persons assert rights in a derivative capacity as successors to the signatory's interest; (c) They do not have an independent right to stand as parties to the arbitration agreement; and (d) Mere legal or commercial connection is insufficient. The Court found that, even on this test, the respondent had not established any valid consented assignment or novation binding the appellant, and therefore could not rely on the arbitration clause as a person 'claiming through or under' AGC. 2.10 The Court rejected the reliance on group emails, escrow arrangements, and other indirect dealings as inadequate to demonstrate, even prima facie, any mutual intent between the appellant and the respondent to create a legal relationship or to treat the respondent as a veritable party to the appellant-AGC contract. 2.11 The Court distinguished authorities relied on by the respondent: (a) ASF Buildtech was held consistent with Cox & Kings and other precedents; it does not require referral where, on simple facts, the non-signatory plainly fails the prima facie test of being a veritable party. (b) Pravin Electricals was inapplicable as it involved a direct dispute between the employer and tendering party over the very existence of their agreement. (c) Cox & Kings (2) turned on complex facts warranting reference to the tribunal, unlike the present case where the non-existence of an arbitration agreement between the appellant and respondent was straightforward. Conclusions 2.12 The Court concluded that: (a) There is no privity of contract between the appellant and the respondent; (b) The respondent has not, even prima facie, established that it was a veritable party to the contract between the appellant and AGC; (c) The Settlement-cum-Assignment Agreement between AGC and the respondent does not create or evidence any arbitration agreement between the appellant and the respondent, nor any consented assignment of the arbitration clause; (d) The respondent cannot validly invoke the arbitration clause as a person 'claiming through or under' AGC in the absence of a consented assignment/novation or other legally recognized basis; and (e) Accordingly, no arbitration agreement exists between the appellant and the respondent for the purposes of Section 11. 2.13 On this basis, the High Court's order allowing the Section 11(4) application and referring the parties to arbitration was held to be unsustainable and was set aside. The Section 11 application stood dismissed, with liberty to the respondent to pursue any other remedies available in law. Issue 3 - Scope of the referral court's jurisdiction under Section 11 where a non-signatory applies Legal framework 3.1 The Court reiterated, with reference to Interplay, SBI General Insurance, and Cox & Kings, that: (a) Section 11(6-A) confines the referral court to an 'examination of the existence of an arbitration agreement'; (b) 'Examination' entails inspection/scrutiny but not a laborious or contested inquiry; (c) The arbitral tribunal 'rules' on its jurisdiction, including existence and validity of the arbitration agreement, under Section 16; and (d) The prima facie determination of existence by the referral court does not bind the arbitral tribunal or the enforcing court. 3.2 When a non-signatory seeks joinder or invokes an arbitration agreement, Cox & Kings and ASF Buildtech, as analysed, require that: (a) The referral court must prima facie determine whether an arbitration agreement exists and whether the non-signatory appears to be a veritable party; but (b) Where such prima facie linkage is established and the issue is factually or legally complex, the referral court should generally leave the detailed determination to the arbitral tribunal under Section 16, thereby giving effect to the competence-competence principle. Interpretation and reasoning 3.3 The Court clarified that ASF Buildtech does not dilute the requirement of a prima facie determination by the referral court. It only stresses that, where a non-signatory's status as a veritable party is not clearly excludable at the referral stage, the court should err on the side of leaving the determination to the tribunal. 3.4 The Court held that this approach does not extend to cases where the referral court, after the limited but real scrutiny mandated by Section 11(6-A), finds no prima facie basis to treat the non-signatory as a veritable party or to hold that an arbitration agreement exists between the applicant and the respondent. In such cases, reference to arbitration is impermissible. Conclusions 3.5 The Court held that the High Court misapplied the Section 11 standard by: (a) Proceeding on the footing that the mere existence of an arbitration agreement in the tender and the respondent's claim of assignment sufficed to refer the matter to arbitration; (b) Treating the question of arbitrability and the respondent's status as a veritable party as matters to be entirely left to the arbitral tribunal, without first undertaking the mandated prima facie scrutiny of existence of an arbitration agreement between the appellant and the respondent. 3.6 Properly applying the Section 11 framework, the referral court should have refused reference because, on the admitted documents, there was no prima facie arbitration agreement binding the appellant and the respondent. Issue 4 - Necessity to examine limitation objection Interpretation and reasoning 4.1 The appellant had raised a contention that the respondent's claims were ex facie time-barred. 4.2 The Court held that, in light of its finding that no arbitration agreement existed between the appellant and the respondent, the question of limitation did not arise for consideration at this stage. Conclusions 4.3 Having held that there was no arbitrable dispute under any arbitration agreement between the parties, the Court found it unnecessary to adjudicate upon the issue of limitation.