SC: Non-Signatory Which Isn’t A Veritable Party Cannot Invoke Arbitration Clause

Summary

In this judgment, the Supreme Court has reiterated the fundamental principle that arbitration is a creature of consent and cannot be invoked by a non-signatory merely on the basis of commercial proximity or downstream contractual arrangements. The Court held that a sub-vendor or assignee, in the absence of privity of contract and prior written consent as required under the principal agreement, cannot invoke an arbitration clause contained in a contract to which it was never a party. Setting aside the order of the Bombay High Court which had appointed an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, the Supreme Court clarified that where no arbitration agreement exists even on a prima facie examination, the referral court is duty-bound to refuse reference rather than relegating the parties to arbitration under Section 16.

Facts

• Hindustan Petroleum Corporation Ltd. (“HPCL”) floated a tender for the design, supply, installation, testing, commissioning and post-commissioning support of a Tank Truck Locking System, which expressly prohibited sub-letting, sub-contracting or assignment of work without HPCL’s prior written consent.
• Pursuant to the tender, a purchase order was issued in August 2013 to AGC Networks Ltd. (later known as Black Box Ltd.). Without obtaining HPCL’s consent, AGC entered into a back-to-back agreement dated 15 January 2014 with BCL Secure Premises Pvt. Ltd. (“BCL”), under which BCL was to perform substantial portions of the work as a sub-vendor.
• Alleging non-performance, HPCL issued notices to AGC and ultimately denied further payments. BCL thereafter engaged in multiple rounds of litigation against AGC, including civil suits, MSME proceedings and insolvency proceedings, most of which were either withdrawn or dismissed.In October 2023, AGC and BCL entered into a settlement-cum-assignment agreement purporting to assign AGC’s receivables from HPCL to BCL.
• Relying on this assignment, BCL issued a notice invoking arbitration against HPCL and filed a petition under Section 11(4) before the Bombay High Court, which allowed the application and appointed an arbitrator, leaving the issue of arbitrability to be decided by the arbitral tribunal.

Issues

1. Whether a non-signatory sub-vendor / assignee can invoke an arbitration clause contained in a contract to which it was never a party.
2. Whether assignment of receivables, without the employer’s consent, creates arbitration rights against the employer.
3. Whether the High Court was justified in referring the dispute to arbitration despite the absence of privity of contract.
4. What is the scope of judicial scrutiny under Section 11 when a non-signatory seeks invocation of arbitration

Judgment

• Allowing the appeal, the Supreme Court held that no arbitration agreement existed between HPCL and BCL, even on a prima facie basis. The Court observed that HPCL and BCL operated on entirely separate contractual planes, with no direct contractual relationship between them.
• All agreements relied upon by BCL were inter se arrangements between BCL and AGC, to which HPCL was not a party. The Court further held that the tender conditions expressly prohibited sub-letting and assignment without HPCL’s written consent, which was admittedly never obtained, rendering the purported assignment ineffective against HPCL.
• Applying the principles laid down in Cox and Kings Ltd. v. SAP India Pvt. Ltd., the Court held that BCL failed to establish that it was a “veritable party” to the HPCL-AGC contract, as mere participation in performance, escrow arrangements, or email correspondence could not substitute contractual consent.
• The Court clarified that while arbitral tribunals are competent to decide jurisdictional issues under Section 16, referral courts under Section 11 are not reduced to mechanical conduits and must refuse reference where the absence of an arbitration agreement is evident at the threshold.

Analysis

This judgment provides important clarity on the limits of non-signatory participation in arbitration and reinforces the centrality of consent in arbitral jurisprudence. The Supreme Court carefully harmonised its earlier decisions in Cox and Kings, Interplay, Krish Spinning and ASF Buildtech, while cautioning against an over-liberal referral approach that would compel parties to arbitrate with entities with whom they never intended to contract.

The Court highlighted that assignment of receivables does not automatically carry with it the right to invoke arbitration, particularly where contractual terms prohibit assignment without consent. In doing so, the Court protected employers, including public sector undertakings, from being involuntarily subjected to arbitration proceedings initiated by downstream vendors or assignees lacking contractual privity.