Citation Codes: 2025 INSC 507; 2025 SCC OnLine SC 806
Date of Judgment: 17 April 2025
Court: Supreme Court of India
Coram: Justice Pamidighantam Sri Narasimha and Justice Manoj Misra
Factual Background
Adavya Projects Pvt Ltd (“Appellant”) and Vishal Structural Pvt. Ltd. (“Respondent 1”), only signatories to the agreement formed a Limited Liability Partnership (“Respondent 2”) with Respondent 3 as the CEO, designated under Clause 8 of the LLP Agreement. Clause 40 of the LLP Agreement provided for dispute resolution through Arbitration. Respondent 1 was awarded a contract. For the execution of this contract through Respondent 2, Appellant and Respondent 1 entered into a Supplementary Agreement and a Memorandum of Understanding (“MoU”). The Appellant infused funds for its execution and subsequently sought documents to audit account of Respondent 2 and issued demand notices to Respondent 1 for payment towards reconciliation of accounts of the LLP.
In light of the disputes above, the Appellant then issued a notice invoking arbitration under LLP Agreement to Respondent 1 through Respondent 3; and subsequently, filed a Section 11 application seeking appointment of arbitrator, with Respondent 1 as the only party. The court appointed an arbitrator to resolve the disputes arising out of the LLP Agreement read with the Supplementary Agreement and the MoU.
The Appellant filed its Statement of Claim, impleading Respondent 2 and 3 as parties to the arbitration, although prayer in Statement of Claim remained restricted to Respondent 1. Respondent 1-3 then filed an application under Section 16 of the Arbitration & Conciliation Act, 1996 (“A&C Act”), raising the objection that arbitration is not maintainable against Respondent 2 and 3, given that they were not parties to the notice invoking arbitration as well as the application for appointment of arbitrator. It was also argued that Clause 40 of the LLP Agreement (Arbitration Clause), is not binding on Respondent 2 since it is itself a creature of the said agreement, and Respondent 3 since he was not a party to the agreement in an individual capacity. The arbitral tribunal allowed the application and held that since the Section 21 notice was not served on Respondent nos. 2 and 3 and the court did not refer them in the Section 11 proceedings, the arbitral proceedings against them are not maintainable.
The Appellant filed an appeal against the tribunal’s order which was dismissed by the High Court, and it was held that since Respondent nos. 2 and 3 were non-parties and were not the subject of any disputes in the initial notice and application, the appellant cannot be allowed to raise disputes against them in the statement of claim.
The Appellant then preferred the present appeal.
Extract of Arbitration Clause
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………………………
Issues
Whether service of a notice under Section 21 of A&C Act and joinder in a Section 11 application are essential for impleading a person or an entity as a party to the arbitral proceedings?
When can the arbitral tribunal exercise its jurisdiction under Section 16 of A&C Act to implead a person or an entity as a party to the arbitral proceedings?
Appellant’s Position
On Jurisdiction of Arbitral Tribunal to implead
The Appellant relied on the principle of ‘kompetenz-kompetenz’ which allows arbitral tribunals to determine their own jurisdiction, laid down under Section 16 of the A&C Act. It was argued that the arbitral tribunal has the power to implead both signatories and non-signatories even after reference to arbitration, if the disputes involving them arise from the same agreement and since Respondent nos. 2 and 3 were intentionally and consensually involved in the performance of the LLP Agreement, Supplementary agreement, the MoU as well as the ITF Project, it is essential to implead them for complete adjudication.
On Arbitration clause
It was submitted that Respondent nos. 2 and 3 are bound by the arbitration clause i.e. Clause 40 of the LLP Agreement, since it specifically covers disputes or differences arising between both, the partners and the LLP (Respondent no. 2) and the partners and the administrators (Respondent no. 3)
On Constructive Notice
It was further argued that Respondent nos. 2 and 3 had constructive notice through respondent no. 1 since their roles are interlinked, and thus absence of a separate notice under Section 21 is no bar to implead them in the statement of claim.
Respondents’ Position
The Respondents argued that Respondent nos. 2 and 3 were not necessary parties to the disputes in the instant case and relied upon the findings of the arbitral tribunal and the High Court for this purpose. It was further argued that Respondent nos. 2 and 3 were not bound by the arbitration clause under Clause 40 since they were non-parties to the same. Lastly, it was submitted that since Respondent nos. 2 and 3 were neither referred in Section 11 proceedings, nor served any notice under Section 21, proceedings against them would violate natural justice principles.
Decision and Reasoning
The Apex Court allowed the appeal and directed respondent nos. 2 and 3 to be impleaded as parties to the proceedings. The court decided the issues as follows:
Issue 1
Notice under Section 21: The Court highlighted that notice invoking arbitration under Section 21 is mandatory and serves many purposes including determination of limitation for claims and Section 11 application, determination the applicable law and a perquisite for Section 11 application. However, neither Section 21 nor the A&C Act, prohibit impleadement of a person to whom notice is not served.
The Court citing State of Goa vs Praveen Enterprises, which holds that claims or disputes not raised in Section 21 notice can be raised directly before the Arbitral Tribunal, extended to allow impleadement of the parties, against whom disputes were not raised in the notice.
Application under Section 11: The court held that a mere fact that the High Court does not refer a party to arbitration in its order of appointment of an arbitrator under Section 11, does not denude the tribunal of its jurisdiction to implead persons or entities during the proceedings.
The court relied on its decision in SBI General Insurance Co. Ltd. v. Krish Spinning, 2024 INSC 532 and observed that, as per the scheme of the A&C Act and the wording of Section 11, the court at such a stage only undertakes ‘necessary measures’ i.e. a prima facie examination of the existence of an arbitration agreement ‘for securing the appointment of the tribunal’ and the same does not pertain to final determination of a dispute or a finding on whether certain persons are parties to the arbitration agreement as per the reasoning in Cox and Kings Ltd. v. SAP India (P) Ltd., 2023 INSC 1051.
Furthermore, the decision in State of Goa vs Praveen Enterprises was relied upon to hold that the tribunal is not bound to restrict itself to the terms referred by the court under Section 11 proceedings and thus, non-parties can be impleaded by the Arbitral Tribunal at a later stage .
Issue 2
The court held that in order to determine the tribunal’s jurisdiction under section 16 of the A&C Act, the fact relating to non-signatories being parties of the arbitration agreement must be examined. The jurisdiction of the tribunal is derived from the consent of the parties, as per the decision in Cox and Kings Ltd. v. SAP India (P) Ltd., expressed through an agreement, to refer their disputes to arbitration as per Section 7 of the A&C Act and thus once a person consents to the same, they become bound to be impleaded as a party in exercise of the tribunal’s jurisdiction.
On facts of the case
The Court highlighted that in deciding the maintainability of arbitral proceedings against Respondent 2 and 3, the tribunal and the High Court, only proceeded on the basis that Respondent nos. 2 and 3 were not parties to the Section 11 application and that notice was not served to them under Section 21. However, in light of the above reasoning, the appropriate inquiry should have been “Whether Respondent nos. 2 and 3 are parties to the arbitration agreement?”
The Court then interpreted Clause 40 of the LLP Agreement expansively to determine whether Respondent nos. 2 and 3 were parties to the arbitration agreement. It was observed that since Respondent 2 was created under the LLP Agreement, its activities and management are defined by the agreement and fall within its objectives and terms. Therefore, Respondent 2, through its conduct, is bound by the LLP Agreement, including Clause 40 i.e. the arbitration clause. Similarly, Respondent 3 derives his position and duties from Clause 8 of the LLP Agreement and his obligations stem from the same, making him bound by Clause 40, in his capacity as the CEO.
Conclusion
The ruling of the Supreme Court in Adavya Projects Pvt Ltd v M/s Vishal Structural Pvt Ltd answers pertinent questions of law regarding the nature of the notice invoking arbitration under Section 21, with respect to the tribunal’s jurisdiction to implead non-signatory parties to the proceedings. The court while affirming the mandatory nature of a Section 21 notice for commencement of arbitration, unequivocally held that the absence of such notice to potential parties does not take away the jurisdiction of the arbitral tribunal under Section 16 of the A&C Act to implead them during the proceedings, provided they are party to the arbitration agreement. Further, the court reasoned that the scope of judicial intervention under Section 11 applications is limited and does not preclude the tribunal from subsequently impleading parties if not referred during the appointment of an arbitrator. The court held that consent under Section 7 of the A&C Act remains the foundation of the tribunal’s jurisdiction and it possesses the authority to implead non-signatories who are party to the arbitration agreement into the proceedings. This decision thus provides significant clarity on the scope of the jurisdiction of arbitral tribunals to implead parties under section 16 of the A& C Act.
Author(s)
Vaishnavi Bali
Student at Symbiosis Law School Pune