Can a non-signatory be bound by an arbitration agreement?
Ordinarily, arbitration takes place between the persons who are signatory parties to the arbitration agreement, as well as the underlying substantive commercial contract.
The general principle is that one or more parties are not signatories of the arbitration agreement, the dispute cannot be referred to arbitration.Each company is a separate and distinct legal entity, and the mere fact that the companies may have common shareholders or directors would not make the two companies a single entity. For a company to be bound by an arbitration agreement, it should be a signatory and party to the said agreement.If there is a dispute between a party to an arbitration agreement with other parties to the arbitration agreement, as also no parties, the reference may be made only with respect to the signatories to the arbitration agreement.
A non-signatory has however been held to be bound by an arbitration agreement by invoking various doctrines such as the principal-agent relationship, piercing the corporate veil, joint-venture agreement, succession, implied consent, third-party beneficiaries, guarantors, assignments, and another concept of contractual rights.
The ‘group of companies’ doctrine has been applied where an arbitration agreement is entered into by a company being and constituent of a group of corporate entities, to bind a non-signatory affiliatein certain circumstances. For instance, it is invoked in the case where there is a composite transaction, and a clear intention of the parties to bind both the signatory and the non-signatory parties.
The first judgment in which the group of companies doctrine was invoked to bind non-signatory affiliates in arbitration in Chloro Controls (I) P. Ltd V. Severn Trent purification. This case pertains to international commercial arbitration, where multiple agreements were signed between different parties, only some of which contained an arbitration clause. The issue was whether arbitration could be invoked by a party that is not a signatory but was acting through or under a signatory to the arbitration agreement. A three bench of the court held:
“normally, arbitration takes place between the persons who have, from the outside, being parties to both the arbitration agreement as well as the substantive contract underlining that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute sense to law/the agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy on this lies on the party to show that, in fact, and in law, it is claiming ‘through’ or ‘under’ the signatory party as contemplated under section 45 of the 1996 act:
- The claimant was in reality always a party to the contract, although not named in it.
- The claimant has succeeded by operation of law to the rights of the named party.
- The claimant has become a party to the contract in substitution of the named party by virtue of a statutory or consensual novation.
- The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence.”
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.