Can third party defaulters be made part of Arbitration Proceedings?

Can third party defaulters be made part of Arbitration Proceedings?

6 minutes read

Author : MyLegalWork Staff

Posted on: 01st Mar, 2017

When two entities work together, they make a contract which will legally bind them into following the terms mentioned in it. This is done as a safeguard against fraudulent activities of either party. Sometimes, the contract also contains an arbitration clause which subjects the parties to contract to arbitration in case of a dispute. Sometimes, parties enter into arbitration agreements. An arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in course of their business.

What is arbitration?

Arbitration is an alternative form of dispute resolution where parties to an arbitration agreement mutually decide to approach an arbitrator instead of the courts to settle their dispute, as and when a dispute arises. An arbitrator is an unbiased third party who will listen to both sides of the dispute impartially and then grant an award based on merit of arguments to the parties. This award is analogous to court judgments and orders. The parties are bound by it.

When can Arbitration be used as a mode of redressal?

According to the Indian Arbitration and Conciliation Act 1996, arbitration as a dispute resolution mechanism can be applied only if the essentials of an arbitration agreement are complied with. These essentials are enumerated as follows:

  1. There should be an arbitration agreement. This agreement can exist either as a clause in a contract or as a separate agreement.
  2. If a contractual clause makes reference to another document containing an arbitration clause, then it will form an arbitration agreement if the intent of the parties is to make the arbitration clause a part of the contract.
  3. The arbitration agreement has to be in writing. This simply means that there has to be tangible proof of the agreement. It cannot be oral. The agreement can be deemed to be in writing in several ways:
  • Document signed by consenting parties;
  • An exchange of communication which can provide a record to the agreement; or
  • An exchange of communication where one party made a reference to the agreement and the other refused to deny it.

Simple reading shows that a document in writing on paper is not required, if an agreement is shown to exist through modes of communication between parties. Thus, intent of parties holds important meaning in arbitration dealings.

Can non-signatories be made to submit disputes to an arbitrator?

The issue of whether non-signatories are bound by arbitration proceedings is unsettled worldwide. Many concepts and doctrines have come up which have tried to regulate this glaring hole in company disputes, but all have failed to apply uniformly in all countries. Company and contractual disputes usually see non-signatories being attached as parties to disputes because many more parties are involved in the completion of a contract and liability is not always restricted to the opposite party.

Compelling non-signatories to be party to arbitration has been allowed through various legal theories in almost all jurisdictions of the world. Different jurisdictions lean towards different theories on the basis of the prevailing judicial notion. The most common theories followed to bring about non-signatories in an arbitration proceeding are the 'group of companies' doctrine and the 'piercing of the corporate veil' doctrine.

The 'group of companies' theory states that several companies forming a part of a larger corporate entity may be regarded as a single legal entity. However, consensus must be present between parties. If the third party non-signatory is a parent company, then it may come under arbitration proceedings if it was in a position to know and approve of the arbitration agreement between the parties. This doctrine will not apply only if a mere affiliation between the parties is present.

A corporation is generally said to have a separate legal existence from its subsidiaries. The 'piercing of the corporate veil' doctrine is usually used to look past the corporate shell and figure out who the actual decision maker of the company is. This doctrine is used when a single or a group of shareholders gain a large amount of shares which puts the decision making power in their hand. In such a case, the corporate veil may be lifted and these shareholders may be made liable as if they were the corporate entity itself. This principle has been used by Indian courts in judgments regarding taxation, company and contract laws. It follows that when non-signatories of a contract can be bound by the rights and liabilities under it, then non-signatories of the arbitration agreement can also be bound by the rights and liabilities under the arbitration clause. However, the arbitrators are deeply hesitant to use this doctrine because national policy calls for this rule to be an exception rather than a norm.

The Indian courts have adjudicated on the matter time and again. Though many judgments may show opposing views, a common thread runs through all. The courts, on reading of the Act, have held the rule that arbitration should be held only between parties to the arbitration agreement is not an absolute rule. Even a non-signatory may be attached as part of the arbitration proceedings depending on the facts and circumstances of each case with more weight given to the implied consent given by parties, relationship between all the parties, the content of relevant agreements, the intent of the parties and the conduct of the parties in this regard.


India, being a country upholding the common law system, holds a lot of weight over the judiciary's interpretation of the Arbitration and Conciliation Act. Till now, the judiciary has maintained its stand that non-signatories may be brought in the ambit of arbitration proceedings on a case-by-case basis. What is needed, not only in India but also worldwide, is a uniform method of figuring out where to draw the line on bringing non-signatories as parties to arbitration proceedings.

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