Supreme Court clarifies adding non-signatories to arbitration despite missing notice

It matters to citizens and businesses because it determines whether a party can be held liable in arbitration if they were not specifically named in the initial notice or court application, relying instead on their connection to the underlying agreement.

Who it concerns: The judgment concerns Adavya Projects Pvt. Ltd. (Appellant), M/s Vishal Structurals Pvt. Ltd. (Respondent No. 1), Vishal Capricorn Energy Services LLP (Respondent No. 2), and Mr. Kishore Krishnamoorthy (Respondent No. 3). It establishes legal principles applicable to parties involved in arbitration under the Arbitration and Conciliation Act, 1996.

What the document says

• The Supreme Court allowed the appeal, overturning the High Court and Arbitral Tribunal decisions.
• The Court held that non-service of a Section 21 notice invoking arbitration on a person does not preclude their impleadment (addition as a party) in the arbitral proceedings.
• The Court clarified that the purpose of a Section 11 application is solely the constitution of the arbitral tribunal and does not limit the tribunal's scope of jurisdiction or terms of reference.
• The Court ruled that the source of an arbitral tribunal's jurisdiction over a person is their consent to the arbitration agreement, not the procedural steps of notice or appointment.
• The proper inquiry under Section 16 of the Act is whether the person is a party to the arbitration agreement.
• The Court found that an arbitration agreement exists between the Appellant and Respondents No. 2 and 3, allowing them to be impleaded in the proceedings.

Also in the document

• The dispute originated from a 2012 Limited Liability Partnership (LLP) Agreement and subsequent agreements for an oil and gas project (ITF Project) in Assam.
• The Appellant had infused Rs. 1.1 crores into the project and later demanded Rs. 7.31 crores for account reconciliation.
• The initial Section 21 notice was issued only to Respondent No. 1, and the Section 11 application for appointing an arbitrator also named only Respondent No. 1.
• Respondent No. 3 was the Chief Executive Officer of the LLP and a director of Respondent No. 1, but was not a signatory to the LLP Agreement.
• The Arbitral Tribunal and High Court had previously held that Respondents No. 2 and 3 could not be parties to the arbitration because they were not served with the initial notice or included in the appointment application.