Non-Signatories Can Be Impleaded Into Arbitration Proceeding Without Issuance Of Prior Notice Under Section 21 Of A&C Act, 1996

Summary:

[1]The Supreme Court ruled on whether non-signatory parties could be added to arbitration proceedings despite not receiving a formal notice under Section 21 of the Arbitration and Conciliation Act 1996 or not being included in the initial application to appoint an arbitrator under Section 11. The Court clarified that the key factor is whether these parties are bound by the arbitration agreement, even if they did not sign it. The Court emphasized that the absence of a Section 21 notice or exclusion from the Section 11 application does not automatically bar their inclusion if their conduct or role in the contract shows they are part of the arbitration agreement. The arbitral tribunal has authority under Section 16 to determine jurisdiction, including adding parties based on their involvement in the agreement.

Facts:

• Adavya Projects Pvt. Ltd. (appellant) and Vishal Structurals Pvt. Ltd. (respondent no. 1) formed a Limited Liability Partnership (LLP) named Vishal Capricorn Energy Services LLP (respondent no. 2). Respondent no. 3 was the CEO of the LLP and a director of Respondent No. 1.
• The LLP agreement (Clause 40) required disputes between partners or involving the LLP to be resolved through arbitration under the Arbitration and Conciliation Act, 1996.
• In 2018, the appellant sought to audit the LLP’s accounts for a project (ITF Project). When demands for payment (₹7.31 crores) went unresolved, the appellant sent an arbitration notice under Section 21 in 2020 only to respondent no. 1.
• The appellant approached the court (Section 11 application) to appoint an arbitrator, naming only respondent no. 1. The High Court appointed an arbitrator in 2021.
• Later, the appellant tried to include the LLP (respondent no. 2) and its CEO (respondent no. 3) in the arbitration. The respondents objected, arguing they were not part of the initial Notice or Application.
• The arbitral tribunal and High Court rejected adding respondents 2 and 3, stating they were not served the arbitration notice (Section 21) or named in the initial application (Section 11).

Issue:

1. 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?
2. Whether an arbitral tribunal has the authority to decide disputes involving a person or entity being added as a party to the arbitration proceedings? What is the important question that needs to be considered by the arbitral tribunal while determining its own jurisdiction under Section 16 of the Act?

Judgment:

1. Section 21 Notice Not a Bar for Impleading Parties

The Section 21 notice fixes the arbitration’s commencement date crucial for limitation and applicable law but does not restrict the tribunal’s jurisdiction over non-notified parties. Non-service on some parties does not preclude their inclusion if they are bound by the arbitration agreement. The Court relied on State of Goa v. Praveen Enterprises [2011] 10 S.C.R. 1026 that non-inclusion of claims in a Section 21 notice does not bar raising them later if covered by the arbitration agreement. The Court said that there is nothing in the wording of the provision, or in the scheme of the Act, to indicate that a party must not be impleaded merely because it was not served notice under Section 21.

2. Section 11 Application Limited to Tribunal Constitution

The court’s role under Section 11 is confined to prima facie verification of the arbitration agreement’s existence. Non-inclusion of parties in a Section 11 application does not bar their later joinder, as the tribunal retains authority to determine jurisdiction.

The court relied on Cox and Kings Ltd. v. SAP India [2023] 15 S.C.R. 621 that referral courts only make prima facie findings; final determination rests with the tribunal under Section 16.

3. Jurisdiction Based on Consent via Arbitration Agreement

The tribunal’s jurisdiction flows from consent under the arbitration agreement (Section 7, Arbitration and Conciliation Act, 1996). Non-signatories can be bound if their conduct and role in the transaction reflect implied consent.

4. Tribunal’s Kompetenz-Kompetenz Overrides Procedural Lapses

The arbitral tribunal erred by not examining whether Respondent Nos. 2 and 3 were parties to the arbitration agreement under Section 16. Their exclusion based on procedural lapses (no Section 21 notice/Section 11 joinder) was incorrect.

Analysis:

The Supreme Court ruled that serving a Section 21 notice or including a party in a Section 11 application is not mandatory for their inclusion in arbitration. The key factor is whether they consented to the arbitration agreement, even as non-signatories. The tribunal’s jurisdiction stems from the arbitration agreement, not procedural formalities. The court prioritized substantive consent over procedural gaps, allowing their impeadment and affirming the tribunal’s authority to decide jurisdiction under the kompetenz-kompetenz principle. This reinforces flexibility in arbitration while upholding party consent.

[1] BEFORE THE HON’BLE SUPREME COURT OF INDIA

 ADAVYA PROJECTS PVT. LTD. VERSUS M/S VISHAL STRUCTURALS PVT. LTD. & ORS.

CIVIL APPEAL NO. 5297 of 2025

Judgment Dated: 17th April 2025

https://api.sci.gov.in/supremecourt/2024/45960/45960_2024_11_1501_60992_Judgement_17-Apr-2025.pdf