The Brewing Controversy: Arbitral Tribunal cannot implead Non-Signatories

The Delhi High Court in its latest decision of M/s Arupri Logistics Private Ltd. v. Vilas Gupta and Ors. and Taurus India Limited v. Vilas Gupta and Ors. (“Arupri Logistics”), has ruled that an Arbitral Tribunal does not have the inherent power to implead non-signatory third parties in ad-hoc arbitration proceedings.

The decision comes at a time when the Supreme Court of India (“Supreme Court”) has referred the question of the applicability of the Group of Companies doctrine to a Constitutional Bench for adjudication, potentially reigniting the debate around issues of consent and party autonomy, the scope of the Tribunal’s procedural powers, and judicial interference in arbitrations.

The joint appeals arose out of an order passed by the Arbitral Tribunal allowing the impleadment of M/s Arupri Logistics Private Ltd. (“ALPL”) and Taurus India Ltd. (“TIL”) (collectively referred to as the “appellants”), who were non-signatories to the arbitration agreement. The respondents were engaged in a family business conducted through an agency of companies including TIL. The respondents were embroiled in a long-standing and litigious business dispute including allegations of oppression and mismanagement in TIL.

With an intention to resolve the issues, the respondents entered into a Memorandum of Family Settlement (“MFS”), to bifurcate the mandates, businesses, and properties of the family business, among themselves. In addition to the execution of the MFS, TIL entered a separate conveyance deed for selling an industrial plot to ALPL, despite the same being the subject matter of the MFS.

Consequently, the respondents invoked arbitration, seeking inter alia the cancellation of the conveyance deed and winding up and distribution of assets of TIL. The Arbitral Tribunal, relying upon Chloro India Pvt. Ltd. v. Severn Trent Water Purification Inc. and Ors. (“Chloro India”), impleaded both the appellants as necessary parties in the arbitration proceedings, on the basis that since they had a vital interest in the matter, non-exclusion would cause prejudice and not serve the ends of justice.

In the present appeal, the Delhi High Court (“Court”) dealt with the following issues:

1. Inherent powers of Arbitral Tribunal to implead a non-signatory third party.

2. Powers conferred upon the Arbitral Tribunal under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) to implead a non-signatory third party:

• Whether the power to implead is concomitant of Section 17 of the Arbitration Act?

• Whether the Arbitral Tribunal has the jurisdiction to rule upon its own power to implead under Section 16 of the Arbitration Act?

3. Application of Group of Companies and the alter ego doctrines to implead third parties by Arbitral Tribunal.

§  Nature and Scope of Arbitral Tribunal’s Powers

The Court attempted at delineating the Arbitral Tribunal’s powers and held the same cannot be considered on par with an adjudicatory institution. The Court held that an Arbitral Tribunal is the creation of an express contract between the parties and derives its powers within the contours of contractual terms and the applicable law i.e., the Arbitration Act. The Arbitral Tribunal only possesses statutory powers and could not assume inherent powers which are vested only with courts.

§  Impleadment: Does it qualify as an interim measure under Section 17 of the Arbitration Act?

At the outset, the Court delved into the provisions of Section 17(1)(ii)(e) of the Arbitration Act, which empowers the Arbitral Tribunal to pass interim measures of protection. Post the amendments to the Arbitration Act in 2016, the power of the Arbitral Tribunal to pass interim measures was enhanced and made on par with that of a court under Section 9 of the Arbitration Act. However, such enhancement could not be construed to encompass impleadment on two counts, as highlighted in the Madras High Court ruling of V.G. Santhosam and Ors. v. Shanthi Gnanasekaran and Ors, in which it was held:

a) Impleadment is not an interlocutory or interim remedy as once impleaded, the party becomes bound by the terms of the award.

b) The powers must be applied within the scope of the Arbitration Act and cannot be utilised to invoke inherent powers of a civil court under Order I Rule 10 of the Code of Civil Procedure, 1908 (“CPC”).

Interestingly, the respondents, relying upon Supreme Court’s decision in SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited (“SREI”), argued that the Arbitral Tribunal’s jurisdiction to exercise the powers of a civil court was virtually unfettered [Section 19 of the Arbitration Act]. The Supreme Court observed that by no means an Arbitral Tribunal is prohibited from applying those rules and even traveling well beyond them, as long as it complies with the principles of natural justice. The Court noted that the interpretation of Section in the SREI case merely facilitates that Arbitral Tribunal could seek guidance and regulate its own procedure by perusing the underlying principles of the CPC. However, it did not confer additional powers upon the Arbitral Tribunal.

§  Kompetenz-Kompetenz: Power of Impleadment can it be derived under Section 16 of the Arbitration Act

Under the Arbitration Act, an Arbitral Tribunal comes into existence either by force of Section 8 (court-referral to arbitration) or Section 9 (interim measures by court) or Section 11 (appointment of arbitrators). The question of the applicability of the principle of komptenz-kompetenz arises only after the reference is made. The Court held that impleadment would be tantamount to a fundamental and impermissible alteration of the original reference vide which an Arbitral Tribunal was created in the first place. The Madras High Court had concluded analogously in Abhibus Services India Pvt. Limited and Ors. v. Pallavan Transport Consultancies Services Ltd, observing that “In substance, the exercise of power of impleadment of non-signatory/ third party by the Tribunal would amount to vary the terms of the reference itself…Such overreach is antithetical to the concept and traditional edifice of arbitral Tribunal as envisaged in the scheme of the Act.”

§  Group of Companies and Application of Alter-Ego Principles

The question of whether the Group of Companies doctrine and principle of alter ego could be resorted to by an Arbitral Tribunal to implead a party was previously answered in the negative by the Delhi High Court in Sudhir Gopi v. Indira Gandhi National Open University and Anr (“Sudhir Gopi”). The doctrine is applied exceptionally by courts in instances as outlined in the more widely discussed case of Chloro Controls and Cheran Properties Limited v. Kasturi and Sons Limited. These include inter alia where (i) the non-signatory shares a direct relationship with the party signatory; (ii) the subject matter shares a direct commonality with that of the arbitration; (iii) the agreement between the non-party and party constitutes a composite transaction; and (iv) the ends of justice so dictate a joinder of non-signatories. The applicability of the doctrine hinges on the interpretation of the phrase “claiming through or under” used to refer to a ‘party’ in Sections 8 and 45 of the Arbitration Act, to cover in its sweep, parties which derive their rights by claiming through or on behalf of some other party to an arbitration agreement, such as successors-of-interest and alter egos. Both Sections 8 and 45 deal with powers conferred on a “judicial authority”.

Recently, the consistency of the doctrine with the cardinal value of party autonomy and consent has been questioned by the Supreme Court in Cox & Kings Ltd. v. SAP India (P) Ltd. (“Cox & Kings”). The controversy has been referred to a larger bench of the Supreme Court, with all eyes set to settle the principle and provide much needed clarity on the application of this doctrine.

However, in the present case, while the Court did take a discursive detour to trace the jurisprudence of the doctrine, it ultimately focused only on the aspect of whether the principle, even if exceptional and controversial, can be applied by an Arbitral Tribunal or by judicial authorities alone. In conclusion, the Court held that the Arbitral Tribunal cannot expropriate the power of a civil court to implead non-signatory third parties, and the impugned order of the Arbitral Tribunal was set aside. Additionally, it was clarified that the respondents were not precluded from taking further steps for impleadment before the courts.

An Arbitral Tribunal is empowered to implead non-signatories in institutional arbitrations. The 2021 UNCITRAL Arbitration Rules, 2021 ICC Arbitration Rules, and 2016 SIAC Rules all have express provisions to this effect, as acknowledged by the Court in the present case. Under these rules, the power to implead or to permit intervention by a third party is either governed by a specific provision allowing for and detailing the procedure for impleadment, or contingent upon the approval of the additional party or parties to the proceedings.

The sore spot has been the impleadment of non-signatories in ad hoc arbitrations governed as per Part I of the Arbitration Act and not governed by institutional rules. The Court in Arupri Logistics does not demystify the air around the same. Instead, it makes it foggier, defeating the larger goal of developing an arbitration regime in India. Courts across the country have taken varying and prima facie contradictory stands on this issue. Most notably, the Gujarat High Court in IMC Ltd. v. Board of Trustees of Deendayal Port Trust, came to a contrary conclusion that there is nothing in law that prohibits the Arbitral Tribunal from applying the doctrine of alter ego to implead third parties. It disagreed with Sudhir Gopi in express terms and held that the Arbitral Tribunal has the right to take up all matters which a court can undertake except those subject matters as enlisted in A. Ayyasamy v. A. Paramasivam, such as fraud or criminal allegations etc.

Further, the Court last year in Vistrat Real Estates Pvt. Ltd. v. Asian Hotels North Ltd. held that the Arbitral Tribunal could decide on its own jurisdiction and competence to implead a third party, which was completely antithetical to the current decision. The power of the Arbitral Tribunal to implead non-signatories by way of consolidation of two separate arbitration proceedings happening under two different arbitration agreements but in relation to connected contracts has been specifically recognized on two notable occasions: first, by the Supreme Court in P.R. Shah, Shares & Stock Broker (P) Ltd. v. M/s B.H.H. Securities (P) Ltd. and Ors. (“PR Shah”) and second, by the Delhi High Court again in Sterna India Oil and Gas Private Ltd. v. Nandini Impex Pvt. Ltd. (“Sterna”). However, it may be argued that consolidation in PR Shah and Sterna was permitted and later upheld as they were institutional arbitrations and consequently, the proceedings as well as, the procedure for impleadment were governed by specific provisions in the BSE bye-laws and 2018 DIAC Arbitration Rules.

Since the judgement squarely affects ad hoc domestic arbitrations governed as per Part I of the Arbitration Act, statutory clarity is necessary. The Expert Committee which is currently formulating recommendations in the form of statutory means to minimise the recourse to judicial authority must provide the necessary clarity on this issue. Given the evolving landscape of resolving complex disputes through arbitration, the time is ripe from a practical and efficiency perspective to vest an Arbitral Tribunal with powers to implead non-signatories. Of course, it is not to say that such power should be unbridled. Its exercise could be well regulated by the Arbitration Act, by placing the onus on the claimant to prove the need for a joinder in the relevant circumstances, placing an obligation on the Arbitral Tribunal to serve a notice to the party proposed to be joined etc. The Swiss legislation, also referred to by the Court in Arupri Logistics, is a befitting example of such a statutory scheme, which has been tried and tested.

A reasonable balance must be struck between the competing values of party autonomy and consent and, outcome-oriented efficiency of arbitration, vesting the Arbitral Tribunal with the controlled power to implead non-signatories is one of the means to achieve it.

Payel Chatterjee is a Partner, Shuchita Choudhry is a Senior Associate and Bharatt Goel is an Associate at Trilegal.