A Court appointing arbitrator becomes functus-officio and loses jurisdiction to make any subsequent ancillary directions

Supreme Court was recently called upon to decide a challenge against order of High Court, which was passed subsequent to disposal of an application seeking appointment of arbitrator. Having appointed an arbitrator and thereby disposed of the Section 11 Application, the High Court proceeded to consider further application from a non-signatory to the arbitration agreement seeking among other directions, a permission to remain present in the arbitration proceedings. The High Court passed directions allowing the said non-signatory to remain present in the arbitral proceedings, among other ancillary directions. Amidst facts and circumstances of the case, the Supreme Court framed two issues for deliberations, i.e. (a) whether a non-signatory to arbitration agreement can be allowed to remain present in the arbitral proceedings, and (b) whether High Court retains the jurisdiction to pass any ancillary directions subsequent to disposal of Section 11 application; both of which were decided by Supreme Court in the negative.

The arbitral proceedings have arisen from a Family Settlement Deed, in respect of which the non-signatory members of the family raised concern about their personal properties may be dealt with in the arbitral proceedings behind their back, and on that count, the said non-signatory family members sought their continued presence in the arbitral proceedings as necessary for protection of their interest. In fact, during the course of hearing of Section 11 application leading to appointment of arbitrator, the Court had considered the plea of non-signatory members and held that the apprehension of their properties being dealt with in the arbitration proceedings is misplaced, and even assuming remotely that arbitral tribunal happens to deal with their property, the award will not be binding upon the non-signatory members. Their plea was thus rejected during the hearing for appointment of arbitrator.

Non-signatory to arbitration agreement has no right to remain present in the arbitral proceedings: Deliberating on this issue, Supreme Court adverted to Section 35 of the Arbitration and Conciliation Act, 1996 (“Act”), to hold that arbitral award shall be binding only upon the parties to the arbitration and persons claiming under them. In that regard, the definition of Part under Section 2(h) was considered as ‘party to an arbitration agreement’. In this backdrop, the Supreme Court held that since “arbitration proceedings” can happen only between parties to the arbitration agreement, and Section 35 of the Act does not make the arbitral award binding upon the non-signatories to arbitration agreement, there is no legal right conferred upon a non-signatory to arbitration agreement to remain present in the arbitration proceedings occurring between signatories to the arbitration agreement. At the most, it was only in the event that the arbitral award could have dealt with the properties belonging to the non-signatories that they could have agitated against such arbitral award that too under Section 36 of the Act. This observation was made by the Supreme Court conscious of the fact that the non-signatories were not claiming through any of the parties to the arbitration agreement. Pertinently, non-signatory to arbitration agreement, being stranger to the arbitration proceedings as well as they being not bound by the arbitral award, their presence in the arbitration proceedings is not countenanced by law.

Reinforcing this view, the Supreme Court also adverted to Section 42A of the Act, which enjoins upon the arbitral tribunal as well as parties to the arbitration agreement to maintain confidentiality of all arbitral proceedings. Accordingly, it was held that permitting a stranger to remain present in the arbitral proceedings would attract breach of Section 42A of the Act. Resultantly, the direction of the High Court permitting the non-signatories to remain present in the arbitral proceedings was held to be without jurisdiction and beyond the scope of the Act.

Court becomes functus officio, pursuant to appointment of arbitrator and loses jurisdiction to pass any subsequent ancillary direction: Supreme Court observed that on the date of passing order for appointment of arbitrator, the application under Section 11(6) of the Act stood disposed of, and no further proceedings were pending therein. Pertinently, no further applications could have been entertain by the Court in the said disposed off case of Section 11(6), as Court had become functus-officio upon grant of prayer made therein for appointment of arbitrator. As such, entertaining of subsequent fresh applications filed in the said disposed off Section 11(6) proceedings, was without jurisdiction. The Supreme Court went further observing that even if the High Court’s subsequent direction in question was well-intentioned, the same was without any statutory support.

Supreme Court proceeded further to examine the issue from the perspective of Section 5 of the Act, and in that regard referred to interpretation of Constitutional Bench Judgment laid down in Re Interplay between Arbitration Agreement and Indian Stamp Act to reiterate that while Section 5 in its positive facet vests jurisdiction upon judicial authorities over arbitral proceedings falling under Part I of the Act, the negative fact of Section 5 bars judicial intervention, in the matters bestowed upon the arbitral tribunal. The prescription of Constitutional Bench designating the Act as a self-contained complete code, was also taken note of by Supreme Court to observe that matters provided for in the Act are required to be carried forth in terms of the prescriptions made therein, and it is not permissible to do what it not prescribed therein.

Supreme Court, thereby found fault with the High Court in exercising a non-existent jurisdiction while entertaining Applications filed subsequent to disposal of Section 11(6) proceedings. Exercise of such power was held to be violative of Section 5 of the Act; and the directions made pursuant to such exercise of power was held to be violative of Section 42A of the Act. In fact, the attempt of non-signatories to file the subsequent applications and reopening the proceedings, was viewed by Supreme Court as amounting to abuse of the process of law.

The Judgment of Supreme Court stands firm on the touchstone of ‘party autonomy’ principle. The exclusivity of the arbitral proceedings only among the parties to the arbitration agreement, is one of the cornerstones of the principle of ‘party autonomy’. This ruling of Supreme Court very well carves out the distinction from those judicial dicta which prescribe inclusion of non-signatories into the arbitration proceedings by virtue of such non-signatory party claiming through or under a party to the arbitration agreement. Pertinently, this timely judicial prescription of Supreme Court, aptly clarifies the law; and acts to avoid any complexity or confusion over inclusion of non-signatory to arbitration agreement in the arbitration proceedings. This judgment reaffirms the law strengthening the arbitral tribunal in discharge of its functions, free from unnecessary judicial interventions.