'Unrelated Party To Contract Cannot Be Regarded As Veritable Party To Arbitration Agreement': Bombay High Court
The Bombay High Court has held that an unrelated third party to a contract cannot be treated as a “veritable party” to the arbitration agreement and hence cannot be compelled to participate in the arbitral proceedings. The Court reiterated that the doctrine enabling non-signatories to be treated as parties to an arbitration agreement applies only where there exists a close relationship, such as within a group of companies, or where there is an alter ego or composite transaction linking the entities.
Justice Somasekhar Sundaresan was hearing a petition under Section 11 of the Arbitration and Conciliation Act, 1996, filed seeking appointment of an arbitral tribunal in connection with disputes arising from a Development Agreement dated October 15, 2010, executed between the applicants and Pant Nagar Ganesh Krupa Co-operative Housing Society Limited. The applicants argued that Avvad Spaces LLP, a subsequent developer appointed after termination of the earlier Development Agreement, should also be treated as a veritable party to the arbitration.
The Court observed that Avvad Spaces LLP had entered into a separate agreement with the merged society long after the termination of the applicant's agreement. It noted that Avvad has no claim and purports to make no claim, whether under the Development Agreement or otherwise. It observed:
“Avvad is a subsequent grantee of development rights and has nothing to do with the Development Agreement to which Patel was a party, which came to be terminated in February 2019... The agreement that Avvad would have with the Merged Society is a different agreement, and that cannot become connected with Patel merely because at some time in the past, Patel had executed the Development Agreement.”
The Court held that to treat a non-signatory as a veritable party, there must exist a factual basis establishing close interlinkage such as common control, ownership, or a composite transaction, none of which were present in this case.
“If the non-signatory is not a related party, not a group company or enterprise, has no commonality of ownership, management or control, is not alter ego of a party, and is not undertaking a transaction that is contingent upon or subservient to or a contact not forming part of a wider, integral and composite transaction, it would not be possible to invoke principles of making such person a veritable party,” the Court observed.
Justice Sundaresan cautioned that accepting the petitioner's contention would lead to an absurd situation where every subsequent counterparty to future contracts could be dragged into earlier arbitrations without consent. Emphasising that consent, express or implied, is foundational to arbitration, the Court concluded that Avvad could not be considered a veritable party and hence could not be joined in the arbitration proceedings.
Case Title: M/s. Mukesh Patel & Ors. v. Pant Nagar Ganesh Krupa Co-operative Housing Society Ltd. & Ors. [Commercial Arbitration Application No. 389 of 2024]