Non-Signatory Is Party To Contract Containing Arbitration Clause If Its Actions Align With Those Of Signatories: Delhi HC
The Delhi High Court held that a non-signatory is party to the contract containing arbitration clause if its actions align with those of signatories.
The Court held thus in an arbitration petition filed under Section 11(5) of the Arbitration and Conciliation Act, 1996 (A&C Act), seeking appointment of Justice T.S. Thakur, Former Chief Justice of India (CJI) as the Sole Arbitrator to adjudicate the disputes between the parties.
A Single Bench of Justice Jasmeet Singh observed, “The intention of the parties to be bound by an arbitration agreement is to be gathered from the circumstances surrounding the involvement of a non-signatory party in the negotiation, performance, and termination of the underlying contract containing the agreement. If the non-signatory's actions align with those of the signatories, it could reasonably lead the signatories to believe that the non-signatory was a veritable party to the contract containing the arbitration clause. To infer the non-signatory's consent, its participation/involvement in the negotiation or performance of the contract must be positive, direct, and substantial, rather than merely incidental. The burden of proof to establish the same lies on the party seeking to implead the non-signatories to the arbitration proceedings, in this case, the petitioners.”
Senior Advocate Akhil Sibal appeared on behalf of the petitioners while Advocate Shivek Trehan appeared on behalf of the respondents.
Brief Facts -
The petitioners were the companies and a Share Subscription and Shareholder’s Agreement (SSHA) was executed between them. Since there were disputes between the parties in terms of SSHA, a petition was filed under Section 9 of A&C Act which was subsequently withdrawn on account of parties trying for an amicable settlement. However, no settlement could arrive between the petitioners. The petitioner no.1 registered an FIR under Sections 406, 409, 420, 467, 468, 471, 477-A, and 120-B of the Indian Penal Code (IPC). The respondents filed anticipatory bail applications before the Sessions Court but the same were dismissed. In order to put a closure to the subsisting disputes, the parties entered into a Memorandum of Settlement (MoS) along with individual Share Purchase Agreements (SPAs).
It was asserted that the respondents failed to fulfil their obligations under the MoS and materially breached several terms and conditions of the agreement. On account of multiple breaches on behalf of the respondents, the petitioners issued notice to the proforma parties. After rounds of failed negotiations, the proforma parties initiated a petition under Section 9 of A&C Act. Vide order, the Court allowed the Section 11 petition filed by petitioner no.1 and appointed Justice T.S. Thakur, Former CJI as the sole arbitrator. Henceforth, respondent nos. 2 to 9 filed applications under Section 16 of A&C Act, seeking termination of the arbitral proceedings qua them on the ground that they were non-signatories to the MoS.
The High Court in view of the above facts, noted, “… the petitioners have made out a prima facie case for impleadment of respondent Nos. 2 to 5 as veritable parties for adjudication of disputes between the parties under the MoS and hence they are referred to arbitration. It is reiterated that the views given hereinabove are only prima facie views. The issues, being complex in nature, need more detailed examination which can only be done by the arbitral tribunal who is most suited to delve into the factual, legal and circumstantial aspects of the matter.”
The Court directed that, since Justice T.S. Thakur, Former CJI is already appointed as the arbitrator for adjudication of disputes between the petitioners and the proforma parties under the MoS, he is appointed as the arbitrator in this case.
The Court further said that the finding of the referral court which takes a bird’s eye view and does not go into minute details is only for the purpose of referring the parties to arbitration and that the respondents will be at liberty to agitate this issue before the arbitrator, who shall take an independent view based on the pleadings and arguments of the parties.
“… invoking arbitration against respondent No. 6 on the basis of the MoS would be legally unsustainable, as Clause 16 unambiguously disconnects any/all issues between the SPA and the MoS. Hence, given the fact that a) there is no arbitration agreement between respondent No. 6 and the petitioners in the SPA; and b) by way of the severance clause, the parties have ousted the possibility of arbitration, and applying the principle of party autonomy, being a cardinal rule of arbitration, I am of the view that no case can be made out against respondent No. 6 to be referred to arbitration. If this Court was to refer respondent No. 6 to arbitration, Clause 16 would become redundant and meaningless, and would lose its purpose”, it added.
The Court observed that the respondent nos. 7 to 9 cannot be referred to arbitration as there are no SPAs executed between them and the petitioners. It also said that in the absence of any binding contractual relationship, such as an SPA or their inclusion in the MoS, there is no basis to subject respondent nos. 7 to 9 to arbitration proceedings.
“Respondent Nos. 7 to 9 have no discernible link with the MoS, which was primarily focused on facilitating the transition and transfer of control of petitioner No. 2 to petitioner No. 1. Their exclusion from the framework of the MoS is evident from the absence of any binding obligations or duties assigned to them within the agreement”, it held.
The Court, therefore, concluded that there is no prima facie case made out holding respondent nos. 7 o 9 as veritable parties to the disputes and thus, they are not referred to arbitration.
Accordingly, the High Court disposed of the petition and issued necessary directions.
Cause Title- KKH Finvest Private Limited & Anr. v. Jonas Haggard & Ors. (Neutral Citation: 2024:DHC:8116)
Appearance:
Petitioners: Senior Advocate Akhil Sibal, Advocates Ranjana Roi, Vasudha Sen, K Hema, and Debosree Mukherjee.
Respondents: Advocates Shivek Trehan, Ishaan Kumar, Pranay Mohan Govil, Riya Nair, Rajeshwari H, Tahir A.J., Sugandh Shahi, Tarang Gupta, and Kartikeya Sharma.
