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Cheran Properties Limited v. Kasturi and Sons Limited and Ors: Can an Arbitral Award be Enforced Against a Non-Signatory to the Agreement?
With the advent of globalisation, business partnerships are being created every day between people from different countries and with this rise in commercial relationships disputes are bound to arise but when they do, jurisdiction becomes an issue because no court in either country has exclusive jurisdiction to decide the matter and adjudicate the dispute. Furthermore, courts are overburdened by the number of non-commercial and Constitution related matters and a new suit would take years to be heard and even longer to be resolved. This is what has led to the increasing popularity of Alternate Dispute Resolution (ADR) which allows parties to circumvent the traditional litigation process and appoint a neutral third party to facilitate discussion between them and help them arrive at an amicable solution to their dispute. Arbitration is one of the mechanisms of Alternate Dispute Resolution where the arbitrator, a neutral party, hears the arguments and issues put forth by the parties to a dispute, assesses the evidence and then makes a decision, known as an ‘arbitral award’, which is binding on parties and enforceable by the courts. Arbitration is one of the two only standardized and institutionalized mechanisms of ADR in India thanks to the Arbitration and Conciliation Act, 1996 which has allowed for the uniformity of the arbitration procedure, thus making it the most sought after method of Alternate Dispute Resolution.
Under the Arbitration and Conciliation Act, 1996, the parties to a dispute must have an arbitration clause in their contract or an arbitration agreement that refers all future disputes to arbitration. If, and only if, the arbitration clause or arbitration agreement is provided for with all the specifications and details of the arbitration process, the parties will be allowed to refer the dispute to arbitration and move forward with the arbitration process. The arbitration clause or agreement is an essential to the arbitration process because it reinforces both parties’ intent to refer disputes to arbitration. However, in certain cases, an arbitration agreement or clause may be binding on a third party who is a non-signatory to the agreement and in these situations there was no clarity on the binding nature of the agreement on the non-signatory until the case of Cheran Properties Limited v. Kasturi and Sons Limited and Ors[1].
The case came up because KC Palanisamy (KCP), KSL, SPIL and Hincorp Resorts Pvt. Ltd. entered into an arbitration agreement and once arbitration proceedings were concluded KCP was required to return title documents worth Rs. 3,58,11,000 to KSL but KCP refused on the grounds that it was not a signatory to the arbitration agreement and an appeal was filed in the Supreme Court. The three-judge Bench of the Supreme Court headed by the then Chief Justice Dipak Misra, dismissed the appeal and observed that in deciding whether a non-signatory to an arbitration agreement is bound by it the court must consider factors such as the nature of relationship that the non-signatory has with the parties, nature of transaction, and subject matter to assess the intent behind the business and the agreement itself[2]. The Bench also observed the application of the ‘Group of Companies’ Doctrine which aims to facilitate the fulfilment of mutually held intent between the parties to check whether parties to an arbitration agreement intend to bind both signatories and non-signatories[3]. The reason behind doing so was to assess whether there is an underlying intent to bind someone who is not officially a signatory to the agreement but has assumed the obligation to be bound by it[4]. The Court also went in to explain the requirement of having a written arbitration agreement which is the exclusion of jurisdiction of national courts over the matter and that in certain cases an arbitration award may bind some parties who are not signatories to the agreement. In order to provide a well-reasoned and legally backed argument, the Court also referred to Section 35 of the Arbitration and Conciliation Act, 1996 which states that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively” to interpret the phrase “claiming under” as including transfer of rights and interests such devolution and assignment, and the phrase “persons claiming under them” as a tool that widens the scope of applicability and binding nature of an arbitral award[5]. The Section recognises the extent of an arbitral award’s binding nature by providing for its application to any person whose capacity or position is derived from a party to the arbitration agreement or proceedings.
Therefore, the Supreme Court concluded that by merely being a non-signatory to the arbitration agreement one is not exempted from being bound by the arbitral award, but rather, that the essentials of the test laid out under Section 35 must be considered in assessing the issue; the test being whether the person against whom an arbitral award is sought to be enforced is someone who claims under a party to the agreement.
[1] Cheran Properties Limited v. Kasturi and Sons Limited and Ors, (2018), Civil Appeal No. 10026 of 2018.
[2] Cheran Properties Limited v. Kasturi and Sons Limited and Ors, (2018), Civil Appeal No. 10026 of 2018.
[3] Editor, Recent Cases on Arbitration Law in India, Vakilno1, (May 29, 2018, 9:11 PM), https://www.vakilno1.com/legal-news/recent-cases-arbitration-law-in-india.html.
[4] Editor, Cheran Properties Limited v. Kasturi and Sons Limited and Ors (April 24, 2018, Supreme Court), ELP, (Aug. 8, 2018, 6:17 PM), http://elplaw.in/wp-content/uploads/2018/08/180428-ELP-Arbitration-Update-Cheran-Properties-Limited-v.-Kasturi-and-Sons-Limited-and-Ors.pdf
[5] The Arbitration and Conciliation Act, 1996, No. 26 Acts of Parliament, 1996 (India).
- Alternate Dispute Resolution
- Arbitration
- Arbitration Agreement
