Whether Arbitral Award can be Binding on Non- Signatory to the Agreement?
(Cheran Properties Ltd. V. Kasturi and Sons Ltd.)
The arbitration agreement is often referred to as the ‘foundation stone’ of arbitration as it is a method of dispute resolution based on mutual party consent to arbitrate future or current disputes. Section 7 of Arbitration and Conciliation Act, 1996 defines arbitration agreement as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen ore may arise between them in respect of a defined legal relationship, whether contractual or not.” This agreement can be in the form of an arbitration clause in a contract or in a form of a separate agreement and it must be in writing. The parties who sign the arbitration agreement are bound by the arbitral award under Section 34 of the Act.
According to the general rule, the parties who enter into the arbitration agreement are bound to first submit the dispute in arbitration and then accept the award given by the arbitral tribunal. Some of the essentials of the arbitration agreement is intention of the parties to enter into such agreement or the parties should have agreed to refer dispute to arbitration. Hence, it is parties who decide whether they want to submit the dispute to arbitration or not and without the consent of either party the arbitral tribunal cannot decide the dispute and the award of invalid arbitration agreement cannot bind the parties.
Nevertheless, other than the general rule, the question of enforcement of arbitral award or arbitration agreement arose in cases where non signatory involves in the disputes. Thus, the issue, whether an arbitral award is binding on a third party who is not a signatory to the arbitration agreement, was finally decided by the apex in Cheran Properties Ltd. V. Kasturi and Sons Ltd. On 24th April, 2018 to make the execution of arbitral awards and arbitration agreement easy and expedient.
Putting emphasis on Section 35 of the Act, which states that an arbitral award is “binding on the parties and persons claiming under them”. The Top Court that the expression “person claiming under them” is a doctrine recognized by the legislature, that besides the parties who are already binding by the award, an arbitration award binds every parson whose capacity is derived from and is same as the parties to the proceedings. The expression was widened and interpreted enough to include those who claim under the award, irrespective that whether such person was party to the arbitration agreement or not.
The Supreme Court placed heavy reliance on the case, Chloro Conttrols, to the expound the principles and categories of relationship which qualify a non- signatory to be a person claiming under a party. Such relationships were classified into three categories by the apex, these are:
- The first category included relationships entailing third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights in the dispute. The legal basis to connect these relationships is implied consent on behalf of the third party and good faith in entering into the dispute.
- The second category involves agent and principal, apparent authority, piercing of veil, joint venture relations, succession and estoppel; the legal basis being force of the appropriate and applicable laws according to the facts of the case.
- The third category involves group of companies. The legal basis behind the doctrine is to connect an arbitration agreement entered by a company within a group of companies with its non-signatory affiliates is mutual and implied intention i.e. if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties then the non- signatory can be bound by the agreement or award.
Hence, even if the general rule, that is, parties must enter into a valid agreement to bind themselves by the arbitral award, is not fulfilled an arbitral award can be binding on non- signatory to the arbitration agreement.