Supreme Court of India: Arbitrator’s Power to Implead a Third Party to Arbitration & Relevance of Arbitration Notice in such Impleament
In Adavya Projects Pvt. Ltd. vs M/S Vishal Structurals Pvt. Ltd. & Ors. 2025 INSC 507, the Supreme Court was called upon to decide whether the service of notice invoking arbitration under Section 21 of the Indian Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) on a person and joinder of such person in the application under Section 11 for appointment of arbitrator are prerequisites for an arbitral tribunal to exercise jurisdiction over him, and further, when can an arbitral tribunal implead a person to the arbitration proceedings.
Factual Matrix
In the facts of the case, Adavya Projects Pvt Ltd. (‘Adavya’) and Vishal Structurals Pvt. Ltd. (‘Vishal’) formed an LLP by an agreement (‘LLP Agreement’). Only Adavya and Vishal were signatories to this LLP Agreement. One of the clauses of the LLP Agreement, designated a person from Vishal as the CEO of LLP (‘Vishal’s Director / CEO of LLP’). The LLP Agreement contained an arbitration clause which reads as under:-
“40. Disputes or differences, if any, that may arise between partners inter se and/ or between the partner(s) and LLP hereto or their affiliates, assigns, successors, attorneys, administrators and all those claiming through it touching these presents or the construction thereof or any clause or thing herein contained or otherwise or in any way relating to or concerning these presents or the rights, duties or liabilities of any of the partners hereto in connection therewith the matters in such dispute or difference shall be referred to the arbitration in accordance with and subject to the provisions of Arbitration and Conciliation Act, 1996 or to any statutory modification or reenactment thereof for the time being in force. The venue of the Arbitration shall be decided by the Arbitrator so appointed by mutual consent of both partners.”
Vishal secured a contract (‘Contract’) through a consortium and later this contract was sub-contracted by the consortium to Vishal only. To execute this Contract, Adavya and Vishal entered into a Supplementary Agreement and MoU for execution of works under the Contract.
Disputes arose between the parties in respect of reconciliation of accounts in relation with execution of Contract. Resultantly, Adavya issued arbitration notice under the LLP Agreement to Vishal through its Director / CEO of LLP. Hearing nothing from Vishal, Adavya filed an application under Section 11 of the Arbitration Act in the court seeking appointment of arbitrator impleading only Vishal in these proceedings. The Court appointed arbitrator to decide disputes between the parties arising out of LLP Agreement, Supplementary Agreement and MoU.
In SoC, Adavya also impleaded LLP and Vishal’s Director / CEO of LLP but prayers were restricted only to Vishal. Vishal, the LLP and Vishal’s Director / CEO of LLP challenged the jurisdiction of the arbitrator by filing an application under Section 16 of the Arbitration Act inter alia contending that Arbitral Tribunal does not have jurisdiction qua LLP and Vishal’s Director / CEO of LLP. It was also contended that the arbitration clause in the LLP Agreement does not bind LLP which is itself a creature of LLP Agreement and Vishal’s Director / CEO of LLP.
Adavya sought amendment of its SoC wherein it had sought to implead the LLP and Vishal’s Director / CEO of LLP. This was allowed by the Arbitral Tribunal. In section 16 application, the arbitral tribunal held that it does not have jurisdiction qua the LLP and Vishal’s Director / CEO of LLP. This was reasoned on the fact that LLP and Vishal’s Director / CEO of LLP were not served with the arbitration notice and they were not referred to arbitration by the Section 11 court.
Adavya appealed against this order to the High Court under 37(2)(a) of the Arbitration Act which was dismissed and the High Court echoed the reasoning provided by the Arbitral Tribunal. This decision of the High Court was appealed before the Supreme Court in the present proceedings.
Parties Contentions
Adavya submitted that as per the principle of kompetenz-kompetenz, the Arbitral Tribunal has jurisdiction to implead parties including signatories and non-signatories even after reference to arbitration if the disputes involving them arise from the same agreement.
It further contended that LLP and Vishal’s Director / CEO of LLP are bound by the arbitration clause in the LLP Agreement as it specifically refers to disputes between the partners and the LLP and the partners and the administrator. Further, even Section 23(4) of the Limited Liability Partnership Act, 2008 provides for arbitration between the LLP and its partners. Furthermore, given the intertwined roles of the LLP and Vishal’s Director / CEO of LLP, a separate notice of arbitration was not required for them as they are presumed to be in constructive notice through Vishal.
Per contra, LLP and Vishal’s Director / CEO of LLP submitted that the real issue before the court is whether a person/entity that has not been served with a notice under Section 21, and has not been referred to arbitration by the court under Section 11 of the Arbitration Act, can be made a party to the arbitral proceedings.
As per them, the position of law that non-signatories can be impleaded in the arbitration if their conduct shows that they are veritable parties to the arbitration agreement as propounded by the Supreme Court in Cox and Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1is not applicable in the facts of the case. Further, they cannot be bound by the arbitration clause under the LLP Agreement since they were not party to the said agreement and the proceedings against them are against the principles of natural justice as they were not served with the arbitration notice.
Issues
The following issues were placed before the Supreme Court:-
- Whether service of a Section 21 notice and joinder in a Section 11 application are prerequisites to implead a person/entity as a party to the arbitral proceedings?
- What is the source of jurisdiction of an arbitral tribunal over a person/entity who is sought to be impleaded as a party to the arbitral proceedings? As a corollary, what is the relevant inquiry that the arbitral tribunal must undertake when determining its own jurisdiction under Section 16 of the Arbitration Act?
Observations
While deciding the above issues, the Supreme Court observed as under:-
- Non-service of notice invoking arbitration under Section 21 on a person does not preclude his impleadment in the arbitral proceedings.
- The purpose of an application under Section 11 is simply the constitution of the arbitral tribunal, which is pursuant to a limited and prima facie examination by the referral court. The order appointing the arbitrator does not limit the arbitral tribunal’s terms of reference or scope of jurisdiction.
- Arbitrator’s jurisdiction over a person/entity is derived from their consent to the arbitration agreement. Hence, the proper inquiry in an application under Section 16 is whether such person is a party to the arbitration agreement.
Findings of the Supreme Court
Applying the position of law on the facts of the case, the Supreme Court held as under:-
- Arbitration clause in the LLP Agreement is expansive in its wording and covers disputes arising between the partners inter se each other, and between the partners on the one hand and the LLP and its administrator on the other hand, when such disputes pertain to the LLP Agreement or its construction, or relate to the rights, duties, and liabilities of the partners.
- The arbitration clause covers the present disputes arising out of reconciliation of accounts in relation to the contract, as this directly affects the rights and liabilities of the Adavya and Vishal, who are the partners.
- Further, the arbitration agreement itself includes within its scope disputes that may arise between the partners and the LLP, and the partners and the administrators of the LLP, i.e., Vishal’s Director / CEO of LLP as he is the CEO of the LLP and responsible for its administration under Clause 8 of the LLP Agreement.
- The LLP and Vishal’s Director / CEO of LLP have consented to being bound by such arbitration agreement. LLP is carrying out its business and entering into contracts and dealings with third parties, such as undertaking contract based on the terms of the LLP Agreement. Hence, by way of its conduct, LLP has undertaken to be bound by the LLP Agreement and it is therefore bound by the arbitration clause contained therein.
- Similarly, Vishal’s Director who is the CEO of the LLP and is responsible for its administration and looking after its business derives his position and duties from Clause 8 of the LLP Agreement. His obligations as the CEO of the LLP are therefore derived under the LLP Agreement, and he is acting under this contract. Therefore, it can be said that Vishal’s Director / CEO of LLP is also bound by the arbitration clause contained in the LLP Agreement, not in his individual capacity but as the CEO of the LLP.
- Since the LLP and Vishal’s Director / CEO of LLP are parties to the underlying contract and the arbitration agreement, the arbitral tribunal has the power to implead them as parties to the arbitration proceedings while exercising its jurisdiction under Section 16 of the Arbitration Act and as per the kompetenz-kompetenz principle.
Accordingly, the Supreme Court set aside the decision of the High Court and impleaded the LLP and Vishal’s Director / CEO of LLP to the arbitration proceedings.