The Supreme Court has held that persons who have not signed an arbitration agreement may nevertheless be included in arbitration at the referral stage when the dispute directly and substantially affects their rights over the property concerned. 

The bench of  Justices J.B. Pardiwala and K. Vinod Chandran clarified that such inclusion rests on a prima facie assessment, with the arbitral tribunal retaining the authority to decide whether the non-signatories are ultimately bound by the agreement.

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The bench modified the High Court’s order to permit the inclusion of the third and fourth respondents in arbitration arising from a partnership dispute. Although they had not signed the 1985 partnership deed containing the arbitration clause, their claimed rights over the disputed property depended on the validity of a retirement deed challenged by the appellants.

The proceedings concerned Unit No. 2, measuring 3,500 square feet, on the ground floor of Manish Commercial Centre at Dr. Annie Besant Road, Worli, Mumbai.

The property originally belonged to M/s Prospective Traders, a partnership firm constituted through a deed dated April 2, 1977, between three family trusts. The firm acquired the property on October 3, 1977.

Under a reconstitution deed dated December 9, 1985, Hemant D. Shah HUF and Hemant D. Shah’s wife, along with Chittaranjan D. Shah HUF and C.D. Shah’s daughter-in-law, were inducted as partners. This deed contained the arbitration clause relevant to the dispute.

The partnership was subsequently reconstituted through a deed dated December 30, 1987, under which the original partners retired. The appellants disputed that document.

The central controversy, however, concerned a retirement deed dated July 3, 1995, under which the appellants were purportedly retired from the firm. They alleged that this document was forged and maintained that they had never ceased to be partners.

According to the subsequent sequence of transactions recorded in the judgment, the second respondent retired on July 1, 2005. The firm then stood dissolved and continued as a proprietorship, with its assets vested in the first respondent.

The third and fourth respondents were inducted as partners through a deed dated September 30, 2009, creating a new partnership. Following the first respondent’s retirement through a deed dated November 4, 2009, they continued as the partners.

The third and fourth respondents argued that they were unconnected with the December 9, 1985 partnership agreement containing the arbitration clause. The appellants, however, maintained that the original partnership continued and that the disputed property remained its asset because their alleged retirement was invalid.

While considering the application under Section 11 of the Arbitration and Conciliation Act, 1996, the High Court declined to join the third and fourth respondents.

It reasoned that they were not signatories to the arbitration agreement and did not fall within the recognised exceptions concerning persons claiming through or under a signatory or the group of companies doctrine.

The proceedings also involved limitation questions because an earlier arbitral award obtained at the appellants’ instance had been set aside under Section 34 of the Act. The Supreme Court did not revisit the limitation finding concerning the first and second respondents. It separately preserved the objections available to the third and fourth respondents.

The Supreme Court examined the principles laid down in Cox & Kings Limited v. SAP India Private Limited and Anotherand Hindustan Petroleum Corporation Limited v. BCL Secure Premises Private Limited.

Although it considered the group of companies doctrine and the principle of claiming through or under a signatory inapplicable to the present proceedings, the Court held that the broader principles governing non-signatories assisted in resolving the dispute.

The Bench explained that courts and tribunals cannot rigidly exclude every person who has not signed the agreement. The relationship with the signatories, conduct, and connection with the underlying transaction may require examination.

It also reiterated that the requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatories. A referral court may examine whether a non-signatory is, in substance, a genuine party to the agreement, while preserving the tribunal’s power to determine the issue on evidence.

Applying these principles, the Supreme Court found that the dispute was inseparably connected with ownership of the commercial property.

If the appellants’ retirement deed dated July 3, 1995 was found invalid, the parties would necessarily revert to the partnership constituted under the December 9, 1985 deed. That outcome could affect the rights claimed by the third and fourth respondents under the later partnership arrangements.

Their interests therefore depended on the validity of the very document being challenged in arbitration.

The Court consequently held that the third and fourth respondents were prima facie “veritable parties” to the dispute, despite not having signed the 1985 partnership deed.

The Supreme Court expressly clarified that its finding did not finally determine whether the third and fourth respondents were bound by the arbitration agreement.

Their limitation objections remained open. They could also raise the contention that the appellants were estopped from including them because they had not been joined in the earlier arbitration proceedings despite the appellants’ knowledge of the retirement deed.

The arbitral tribunal must independently consider these questions, along with the issue of whether the non-signatories are bound by the agreement. The Supreme Court’s prima facie assessment will not govern that adjudication.

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