Factors That Signify Intention Of Non-Signatory To Be Bound By An Arbitration Agreement: Supreme Court Explains

The Supreme Court has explained the factors that signify the intention of the non-signatory to be bound by the Arbitration Agreement.

The Court said that the mutual intent of the parties, relationship of a non-signatory with a signatory, commonality of the subject matter, composite nature of the transactions and performance of the contract are factors that signify the intention of the non-signatory to be bound by the arbitration agreement.

The Court was dealing with an arbitration petition filed under Section 11(6) read with Section 11(9) of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking appointment of a Sole Arbitrator to adjudicate the disputes in terms of clauses of the Family Arrangement Agreement (FAA) read with the Amendment Agreement.

The three-Judge Bench comprising CJI D.Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra observed, "The fact that a non signatory did not put pen to paper may be an indicator of its intention to not assume any rights, responsibilities or obligations under the arbitration agreement. However, the courts and tribunals should not adopt a conservative approach to exclude all persons or entities who intended to be bound by the underlying contract containing the arbitration agreement through their conduct and their relationship with the signatory parties. The mutual intent of the parties, relationship of a non-signatory with a signatory, commonality of the subject matter, composite nature of the transactions and performance of the contract are all factors that signify the intention of the non-signatory to be bound by the arbitration agreement."

The Bench said that in order to infer consent of the non-signatory party, their involvement in the negotiation or performance of the contract must be positive, direct, and substantial and not be merely incidental.

Senior Advocate Darius Khambata appeared for the petitioners while Senior Advocate Huzefa Ahmadi and AOR Anushree Prashit Kapadia appeared for the respondents.

Factual Background -

The parties involved in the petition were AMP Group (petitioners) and JRS Group (respondents). Ashit Patel representing the AMP Group and Jyotrindra S. Patel of the JRS Group were co-brothers and married in the same family. The two groups were jointly engaged in various businesses and co-owned several entities. Subsequently, the SRG Group had joined hands with the AMP Group and JRS Group in two entities i.e. Millenium and Deegee. SRG Group held 40% equity shares in Millenium. As per the petitioners’ case, between 2013 and 2019, various disputes arose between the AMP Group on one side and JRS and SRG Groups on the other which led to the filing of several proceedings before various forums including the National Company Law Tribunal (NCLT). The same were pending before the respective forums. The parties thought it fit to resolve all the issues between them once and for all with the understanding that the AMP Group would completely takeover various entities and that the JRS and SRG Groups would co-own other entities.

Thereafter, FAA was entered between the two and the same imposed several obligations in pursuance of the settlement contemplated therein. Since mediation between the parties yielded no result, the JRS Group sent an Arbitration Notice to the AMP Group invoking Clauses 7.2 and 7.3 respectively contained in the FAA read with the Amendment to the FAA. The JRS Group, in the said notice, alleged that while the JRS Group had fulfilled its obligations under the FAA, the AMP Group had failed to discharge and take appropriate steps in compliance of its obligations. Upon failure to reach an agreement on the appointment of the Sole Arbitrator within 30 days, the AMP Group has filed the arbitration petition before the Apex Court.

The Supreme Court in the above context of the case, noted, “It is evident that the intention of the parties to be bound by an arbitration agreement can be gauged from the circumstances that surround the participation of the non-signatory party in the negotiation, performance, and termination of the underlying contract containing such an agreement. Further, when the conduct of the non-signatory is in harmony with the conduct of the others, it might lead the other party or parties to legitimately believe that the non-signatory was a veritable party to the contract containing the arbitration agreement.”

The Court added that the conduct of the non-signatory party along with the other attending circumstances may lead the referral court to draw a legitimate inference that it is a veritable party to the arbitration agreement.

“In short, while the AMP Group is supposed to exit from Millenium and acquire shares in Deegee, the JRS and SRG Groups are supposed to exit from Deegee and, the SRG Group would acquire shares in Millenium. It is also provided that agreements are to be executed with or by the SRG Group to record and finalize the understanding with respect to the exit of AMP Group from Millenium and the exit of JRS and SRG Groups from Deegee. Recognising the interdependent nature of the transactions contemplated with respect to Millenium and Deegee, clause 2.1.4(a) also states that the exit of Millenium and Deegee should be endeavoured to be undertaken simultaneously on the same day”, it said.

Furthermore, the Court observed that though prima facie, the SRG Group may be connected to the FAA and forms part of the settlement contemplated therein, however, this aspect should be looked into more closely by the Arbitral Tribunal. It emphasised that an important factor to be considered by the Courts and Tribunals is the participation of the non-signatory in the performance of the underlying contract.

“Moreover, on the question whether the non-signatory party i.e., the SRG Group intended or consented to be bound by the arbitration agreement or the underlying contract containing the arbitration agreement through their acts or conduct, elaborate submissions have been made on behalf of all three groups, by placing reliance on the terms of the agreement, several email exchanges etc.”, it remarked.

The Court enunciated that the fact that the underlying contract is called the “Family Arrangement Agreement” by itself may not preclude the impleadment of the SRG Group in arbitration.

Accordingly, the Apex Court allowed the petition and appointed Former Chief Justice of Rajasthan High Court Akil Kureshi to act as the Sole Arbitrator.

Cause Title- Ajay Madhusudan Patel & Ors. v. Jyotrindra S. Patel & Ors. (Neutral Citation: 2024 INSC 710)

Appearance:

Petitioners: Senior Advocate Darius Khambata, AOR Shamik Shirishbhai Sanjanwala, Advocates Keyur Gandhi, Kunal Vyas, Anmol Gandhi, Prabhakar Yadav, Shubhangi Agarwal, and Abhishek Jamalpur.

Respondents: Senior Advocate Huzefa Ahmadi, AOR Anushree Prashit Kapadia, Advocates Anuj K. Trivedi, Ekta Kundu, Ruby Singh Ahuja, Aakriti Vohra, Simran Jeet, Vasu Singh, and Rohan Sharma.

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