Impleading Parties in Arbitration: Absence of Section 21 Notice and Non-Joinder in Section 11 Application Not a Bar

• Author(s): Sabah Iqbal Siddiqui
• Date: 06-May-2025
• Post in: Arbitration

The Supreme Court of India recently in ‘Adavya Projects Pvt. Ltd. vs M/s Vishal Structurals Pvt. Ltd. & Ors.’[1], ruled that an arbitral tribunal is not precluded from proceeding against a party merely because that party was not served a notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996 (“Act”) or was not impleaded in the Section 11 application under the Act seeking appointment of arbitral tribunal. The Court held that the existence of a valid arbitration agreement and the conduct of the parties are determinative factors when it comes to assessing the jurisdiction of the tribunal. Before delving further into the decision and reasoning of the Hon’ble Supreme Court, it is relevant to briefly note the factual matrix and the orders passed by the Arbitral Tribunal and the Hon'ble High Court, respectively on the issue.

Brief factual matrix

The Appellant and Respondent no. 1 had entered into an agreement to form a Limited Liability Partnership (LLP) (Respondent no. 2). The said agreement provided for dispute resolution through arbitration. Respondent no. 3 was appointed the CEO of the LLP / Respondent no.2 and was also a director of Respondent no. 1. Respondent no. 1 later received a subcontract for an oil storage project., which was executed through the LLP (Respondent no. 2). Sometime in 2018, disputes arose regarding auditing and reconciliation. Pursuant thereto, the Appellant issued a notice invoking arbitration under Section 21 of the Act to Respondent no. 1 and subsequently filed a Section 11 application under the Act before the Hon’ble High Court seeking appointment of arbitral tribunal, only impleading Respondent No.1 as a party. Consequently, the High Court appointed a sole arbitrator.

Upon the Arbitral Tribunal entering reference, the Appellant filed its statement of claim, impleading Respondent no. 2 and 3 also as a party however, the prayer clause was restricted to Respondent No.1 only. The Appellant thereafter filed an application seeking to amend the statement of claim, the same was allowed by the Arbitral Tribunal. Respondent nos. 2 and 3 filed an application under Section 16 of the Act challenging the jurisdiction of the Arbitral Tribunal inter alia on the ground that they were not bound by arbitration as they had not received notice invoking arbitration under Section 21 of the Act nor were made parties to the Section 11 proceedings seeking appointment of Arbitral Tribunal before the Hon’ble High Court.

Arbitral Tribunal’s decision on Section 16 Application

The Arbitral Tribunal allowed the Section 16 application holding that the arbitration proceedings against Respondent nos. 2 and 3 were not maintainable. The Tribunal reasoned that these respondents had neither been served a notice invoking arbitration under Section 21 nor referred to arbitration by the High Court in the Section 11 proceedings. Additionally, it found no basis to treat them as necessary or proper parties, thereby dismissing the appellant’s contention to implead non-signatories.

High Court’s decision in Section 37 (2)(a) appeal

The Appellant assailed the Arbitral Tribunal’s order by preferring an appeal under Section 37(2)(a) of the Act before the Hon’ble High Court. The Court dismissed the appeal echoing the Tribunal's reasoning, that since the Section 21 notice and Section 11 application did not raise claims against Respondent nos. 2 and 3 or include them as parties, the Appellant cannot be allowed to subsequently raise disputes against them in the statement of claim. The dismissal order prompted the appellant to challenge the same before the Hon’ble Supreme Court.

Special Leave Petition before the Supreme Court

The issues that fell for consideration before the Hon’ble Supreme Court was:

• Whether the service of a notice invoking arbitration under Section 21 under the Act and joinder of such party in a Section 11 application seeking appointment of an arbitrator under the Act are pre-requisites for an arbitrator to implead a person / entity in the arbitral proceedings?
• Further, when can an arbitral tribunal implead a person / entity in the arbitral proceedings?

The Court observed that the purpose and intent behind Section 21 of the Act is to primarily identify the date from when the limitation period for claims is to be calculated. Further, the date of invoking arbitration is required to determine applicability of law to the proceedings. Thirdly, the necessity of filing a Section 11 application for seeking appointment of an arbitrator arises only after a party has failed to act in terms of the appointment procedure laid down in the Agreement. Fourthly, the limitation period for filing a Section 11 application is calculated from the reference date on which the appointment procedure under the arbitration agreement fails.

Having noted the above, the Court analysed its decision in ‘State of Goa vs Praveen Enterprises’ (2012) 12 SCC 581, wherein it was held that the claims and disputes mentioned in the notice under Section 21 do not limit the claims that can be presented before the arbitral tribunal. The only consequence of not including a claim in the notice is that the limitation period for such a claim, when raised for the first time before the arbitral tribunal, will be calculated differently compared to claims mentioned in the notice. However, the omission of certain disputes in the Section 21 notice does not prevent a party from raising them during arbitration, provided they fall under the arbitration agreement. Adopting this rationale to the case at hand, the Court concluded that mere non-service of Section 21 notice on a party does not automatically preclude such a party from being impleaded in the arbitration proceedings.

The Court then examined the purpose and scope of inquiry under Section 11 to observe that Section 11 proceedings are limited in scope to the appointment of arbitrators and does not conclusively determine who can or cannot be made party to the arbitration. The court’s jurisdiction is limited to a prima facie examination into the existence of the arbitration agreement without conducting a mini trial. That beyond this, the court ought to leave it to the Arbitral Tribunal to adjudicate and decide upon the issues. This determination of who can be impleaded as a party in arbitral proceedings is fundamental to the Tribunal’s jurisdiction and therefore covered within Section 16 of the Act. The Court accordingly held that merely because a court did not refer a party to arbitration, it does not impede the jurisdiction of the Arbitral Tribunal from impleading such a party in the arbitration proceedings.

On the issue of who can be made a party to the arbitration proceedings, the Court examined the principles under the Act as well as International Commercial Arbitration to observe that an arbitration agreement is the foundational source of the Tribunal's jurisdiction. The Court further placed reliance upon the decision of the Constitution Bench in ‘Cox and Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1, wherein it was held that non-signatories can be considered parties to the arbitration agreement if the actions of both signatories and non-signatories show a mutual intention for the non-signatories to be bound by the agreement. Therefore, the Court held that Arbitral Tribunal must conduct an examination of the arbitration agreement in question and the conduct of the parties to determine who can be made a party to arbitral proceedings.

In the facts of the case, the Court found that Respondent Nos. 2 and 3 were parties to the arbitration agreement despite being non-signatories. The conduct of these respondents was in furtherance of the arbitration agreement therefore it held that they can be made parties to the arbitral proceedings. Accordingly, the appeal was allowed.