ARBITRATION | INVOLVEMENT IN PERFORMANCE OF UNDERLYING CONTRACT A FACTOR TO DECIDE IF NON-SIGNATORY BOUND BY AGREEMENT : SUPREME COURT 

SUMMARY:

⁵The Supreme Court of India ruled that a non-signatory to a primary settlement agreement can be bound by its arbitration clause under the “veritable party” doctrine if their obligations in an interlinked agreement are fundamental to the main contract’s completion. The Court set aside a Delhi High Court decision that had excluded one non-signatory based on a decoupling clause in his Share Purchase Agreement, noting that other identically situated parties with the exact same clause were already referred to arbitration. Consequently, the Court held that the non-signatory was a veritable party and referred the dispute to the ongoing arbitral proceedings.  

FACTS:

• Appellant No. 1 (KKH Finvest Pvt. Ltd.) intended to take over Appellant No. 2 (Sensorise Digital Services Pvt. Ltd.) and its sister concern through a Memorandum of Settlement (MoS) dated May 9, 2022.  
• Respondent No. 1, Ashiesh Shukla, did not sign the MoS.  
• However, Ashiesh Shukla was identified in Schedule 2 of the MoS as a consultant holding 1480 shares, which constituted a 0.05% shareholding.  
• The MoS stipulated that separate Share Purchase Agreements (SPAs) would be executed simultaneously with the individuals listed in the schedules.  
• In accordance with the MoS, Ashiesh Shukla signed an SPA on May 9, 2022, to transfer his shares for a proportionate portion of the ₹8 crore settlement amount.  
• The MoS included an arbitration agreement for resolving disputes through a mutually appointed sole arbitrator.  
• Following the emergence of disputes, the Delhi High Court referred several non-signatory management team members to arbitration.  
• The High Court declined to refer Ashiesh Shukla to arbitration, relying on Clause 16 of his SPA.  
• Clause 16 stated that the sale of his shares was independent, mutually exclusive, and not connected to the remaining clauses of the SPA and the MoS.  

ISSUES:

• Whether a non-signatory to a primary settlement agreement (MoS) qualifies as a “veritable party” and is bound by the arbitration agreement contained within it.  
• Whether the High Court erred in excluding Ashiesh Shukla from arbitration based on an exclusionary clause in his SPA, despite referring other identically situated parties to arbitration.  

JUDGMENT:

• The Supreme Court allowed the appeal and set aside the Delhi High Court’s judgment concerning Ashiesh Shukla.  
• The Court held that Ashiesh Shukla is a veritable party to the MoS and is therefore bound by its arbitration agreement.  
• The Court appointed Hon’ble Mr. Justice T.S. Thakur (Retired) as the sole Arbitrator to adjudicate the disputes between the appellants and Ashiesh Shukla.  
• The Court noted that the High Court overlooked a critical fact: the other management team members who were referred to arbitration had identical exclusion clauses in their respective SPAs.  
• The Court found that distinguishing between Ashiesh Shukla and the other identically situated individuals was factually unfounded and legally unsustainable.  
• Applying the principles laid down in Cox and Kings Limited v. SAP India Private Limited, the Court determined that Ashiesh Shukla’s performance under his SPA was fundamental to fulfilling the obligations outlined in the MoS.  
• The Court observed that without Shukla transferring his shares, the primary objective of the MoS would inevitably remain incomplete.  

ANALYSIS:

• The judgment reinforces the application of the “veritable party” doctrine in modern commercial transactions involving composite and interlinked agreements.  
• It clarifies that boilerplate exclusion or decoupling clauses in secondary agreements cannot defeat an arbitration clause if the transaction requires the non-signatory’s performance to achieve the contract’s primary goal.  
• The judgment reiterates that a non-signatory’s participation in the performance of the underlying contract is an important factor in determining whether it intended to be bound by the arbitration agreement, alongside other factors assessed holistically. 
• The ruling establishes a firm precedent on equal treatment, mandating that courts cannot artificially differentiate between non-signatories who execute agreements with mirror obligations.  

Last Updated on 25 September, 2026