Section 16’s Strategic Silence

** Saloni Rani

Introduction

The Arbitration & Conciliation Act, 1996 (hereinafter, the act) is the principal legislation for the governance of arbitration matters in the country. Section 16 of the act empowers the tribunal to rule on its jurisdiction, including objections related to validity of an arbitration agreement. However, the act remains silent on when such objections must be decided, especially when non-signatory is concerned. This silence has further deepened after the Supreme Court decision in Cox and Kings Ltd. v. SAP India Pvt. Ltd., where the Constitutional Bench affirmed that the non-signatory can be impleaded in the proceeding, but left the one critical question unanswered: when should an objection raised by non-signatory be decided, at the outset or the merit? This has led to an inconsistency in arbitral practice and prolonged proceedings in which a party has to necessarily participate without clarity whether they are legally bound by that arbitral agreement or not. This piece argues that non-signatory deletion or impleadment application should be decided as a preliminary issue. 

Through this article, the author attempts to analyse three aspects that arise from this legal lacuna. This piece firstly, identifies the procedural gap in deciding non-signatory objection or deletion application, secondly, examines how the statutory provisions can dilute the credibility of non-signatory parties and lastly, considers a proposed framework for India. 

The Stage Question: Analysing Existing Jurisprudence under Section 16

The core question is whether the tribunal is bound to decide the jurisdictional question at preliminary stage under Section 16. It can be traced to ruling of McDermott International Inc. v. Burn Standard Co. Ltd. where the court held that this question shall be decided at preliminary stage. In contrast, the court in Maharshi Dayanand University v. Anand Coop. L/C Society Ltd. ruled that there is no mandate to decide this. Recently, the court in Pankaj Arora v. AVV Hospitality LLP & Ors., held that the  “issues of jurisdiction are, ordinarily, to be addressed at the outset. That, however, is more a rule of prudence than one of inflexible procedure.”

Thereby, this type of orders are treated as an interlocutory order by the court which are amenable to challenge under Section 34 after the adjudication on final award rather than interim stage.

Rethinking Procedural Gaps 

Indian Arbitration has witnessed a doctrinal shift in the evolution of ‘non-signatory’ as a party bound by an arbitral agreement. This has first acknowledged in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc where the concept of ‘Group of Companies Doctrine’ gained prominence. This doctrine permits binding the non-signatory to an arbitral agreement provided it has mutual intention or direct involvement with parties. The court ruled that in an exceptional circumstance, non-signatory may be bound by an arbitral agreement even if they have not signed it in inter-connected contractual obligation. This principle further gained prominence in Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd. where the Supreme Court recognised this concept. This framework was subsequently considered in Cox v. King Ltd. v. SAP India Pvt. Ltd., a seven-judge Constitutional Bench which affirmed the tribunal’s competence to determine non-signatory impleadment or deletion application under Kompetenz-Kompetenz principle. This principle deals with the competency of the tribunal to adjudicate the matters. Although this has clarified the scope of non-signatory in arbitration, it failed to clarify the stage at which this application ought to be decided. However, if this scenario is viewed from the lens of procedural safeguards, a different situation emerges. Section 42A of the act mandates strict confidentiality in the proceeding thereby, limiting the participation by allowing only parties under Section 2(1)(h) and 35 to attend the same. A similar situation arose in Kamal Gupta v. L.R. Builders Pvt. Ltd., where the court held that non-signatory has no right to remain present during arbitration proceedings because it ultimately puts confidentiality at stake. These parties were termed ‘unknown to law’ and court equated their presence to violation of Section 42A of the act. Thus, it was clarified that only signatory parties under Section 2(1)(h) and 35 have the power to attend the proceedings. It establishes tension between the non-signatories who are treated as strangers on one hand and simultaneously on other side, compelled to attend the proceedings for years without resolving their legal status. These two positions are contradictory to each other and makes their coherent existence at stake.

Arguably, if a non-signatory is compelled to participate in the evidentiary proceedings e.g. lead evidence, observe the proceedings, engage in documentation without any clarity on jurisdictional right, their right to be heard (audi alteram partem) is nullified. This right presupposes that the party exercising right is aware about its legal status in the proceedings. Forceful participation without clarity inverts the application of the right. They will first bear procedural burden of compelled participation and later the clarity on their participation status. In short, they are forced to discharge their obligations in proceedings without knowing what exactly is their status. Therefore, tribunal’s failure to decide the stage of this objection makes it procedurally unsound. 

Furthermore, Section 16(5) of the act provides that “The arbitral tribunal shall  decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.’’

There is no specification of stage at which the plea shall be decided.  This is procedurally sound for signatory parties as they have executed and entered into an arbitration agreement with the consent, the only question remaining is the validity of that agreement. But, for non-signatory parties the situation is entirely different. The objection raised by them does not pertain to validity but rather to consent itself which need to be decided at the earliest. The consent is fundamental to the arbitration, if it is the jurisdictional fact itself it should arguably exist before the tribunal can exercise authority. Delhi High Court in SAIL v. Indian Council of Arbitration ruled that wording of Section 16(5) does not place any mandatory condition of deciding preliminary objections to jurisdiction. The author therefore, contends that the tribunal should exercise their discretionary power at preliminary stage itself especially where the arbitration clause’s existence depends on consent. 

Mechanisms of Section 16: Diluting Credibility 

Section 16(5) does not distinguish between jurisdictional challenges raised by signatory and non-signatory in arbitral proceedings. Consequently, this provision has proven inadequate in case of non-signatory parties. This has not merely challenged the procedure but also legitimacy of arbitration itself. This lacuna dilutes the credibility of arbitration as the parties can be compelled to participate in proceedings, thereby exposing the process to mandatory litigation. The solution does not lie in curtailing tribunal’s competence but in recalibrating the procedure. Comparative Jurisdiction can offer promising regards in this aspect. Indian Arbitration framework is modelled on UNCITRAL Model Law on International Commercial Arbitration. Article 16(3) of the model states the tribunal “may rule on a plea……. either as a preliminary question or in an award on the merits.” While this requirement is functionally similar to the Indian position, the difference arises in the raising objections against the ruling. Under model law, ruling is subjected to immediate judicial review within thirty days. This creates legitimate choice on non-participants whose jurisdiction is contested. In contrast, India provides no interim relief to the parties until and unless final award is challenged under Section 34. This absence of judicial scrutiny creates procedural trap for non-signatory party. 

In England, Section 31 of Arbitration Act, 1996 permit parties to directly approach the tribunal for deciding the preliminary question of jurisdiction. This principle has been enforced by Dallah Real Estate v. Pakistan where  the agreement was signed between Dallah and the Awami Hajj Trust where the Government of Pakistan did not find any reference. However, the arbitration tribunal concluded that it was ‘true party’ to agreement and thereby, bound by the arbitration clauses. When Dallah sought enforcement, the government contended the lack of consent. The Supreme Court henceforth, refused the enforcement. The court held that the question of consent shall not be decided as a factual matter to be deferred but as a condition precedent to exercising legitimate authority by the tribunal.

The significance of this lies in the reasoning that consent is treated as a condition precedent by the Court which this piece is arguing. This prevent the conflicting party to litigate the matter where the question of consent is pending, which saves time and efforts. India’s current framework however, is contradictory to this situation. 

Adopting such a framework will lead India to fulfil three objectives. Firstly, it will save the resources of non-signatory party. If the party is participating in the proceedings for two-three years and subsequently it is found non-obligatory to contractual obligation, it would serves no purpose. Secondly, it prevents confidentiality breaches. In same situation, it will breach the confidentiality of both the parties directly involved in arbitral proceedings. Thirdly, it prevents consensual foundation for enforcing arbitration. These three consequences are symptoms of India’s arbitration law which has extended the recognition of non-signatory without deciding the procedural infrastructure. 

Way Forward and Conclusion

The challenge today, is to balance the Kompetenz-Kompetenz principle with the procedural lacuna as highlighted above. Courts should therefore establish that the parties seeking to bind non-signatory in proceedings shall be decided at preliminary stage which can include providing the records and contracts for assessing the intertwined connection of the party with contractual obligations. The Supreme Court in Vidya Drolia v. Durga Trading Corporation stated that the courts may undertake prima facie examination to deal with circumstances where arbitration is manifestly non-existent. Extending this reasoning, tribunal shall decide the status of non-signatory party at preliminary stage to prevent the conflict of existence of consent. This can be exercised by first, examining whether the documentary evidences e.g. contracts or conduct prima facie points to involvement of non-signatories and second, whether there is ‘direct involvement’ as laid down in Cox judgement. If neither condition is fulfilled, non-signatory shall be excluded at preliminary stage itself. 

Secondly, section 16(5) was not designed keeping in mind the new concept of ‘non-signatory’. Thereby, a separate proviso may be added to adjudicate the status of non-signatory party at preliminary stage. This will help to raise the interest of non-signatory party. 

In conclusion, this piece deals with troubling situation of non-signatories in arbitral proceedings. Although these parties are given recognition by Judiciary, the time frame to decide their application of impleadment or deletion remains unclear. This leaves the tribunal with discretion which in turn, wastes time and efforts, breach confidentiality, and weaken the foundational base of consent. 

**The author is Saloni Rani, second year student at Rajiv Gandhi National University of law, Punjab. She has an interest in Business law, arbitration and Restructuring.

**Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.