The Supreme Court recently observed that not being served with the notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act, and not being made a party in the Section 11 application (for appointment of arbitrator), are not sufficient grounds to hold that a person cannot be made party to arbitral proceedings. 

"A notice invoking arbitration under Section 21 of the ACA is mandatory...and it is a prerequisite to filing an application under Section 11. However, merely because such a notice was not issued to certain persons who are parties to the arbitration agreement does not denude the arbitral tribunal of its jurisdiction to implead them as parties during the arbitral proceedings.

...merely because a court does not refer a certain party to arbitration in its order does not denude the jurisdiction of the arbitral tribunal from impleading them during the arbitral proceedings as the referral court's view does not finally determine this issue. The relevant consideration to determine whether a person can be made a party before the arbitral tribunal is if such a person is a party to the arbitration agreement", said a bench of Justices PS Narasimha and Manoj Misra.

Factual Background

The appellant entered into an agreement with respondent No.1 to form a Limited Liability Partnership (LLP). Under the agreement, which was signed only by the appellant and respondent No.1, respondent No.3 (who was the Director of respondent No.1) was to be the CEO of the LLP (respondent No.2). Subsequently, the appellant and respondent No.1 decided to execute a project through respondent No.2-LLP. Later, disputes arose between the parties in that regard.

The appellant invoked the arbitration clause under the LLP Agreement and issued notice to respondent No.1. It also filed an application under Section 11 of the Act for appointment of arbitrator, impleading only respondent No.1. After the arbitrator entered appearance, the appellant filed a statement of claims impleading respondent Nos.2 and 3 as well. However, respondent Nos.1-3 filed an application under Section 16 of the Act, raising objections to the arbitral tribunal's jurisdiction. One of these was that the arbitration was not binding on respondent Nos.2 and 3 as they were neither issued the Section 21 notice nor made party to the Section 11 application.

The arbitral tribunal, while determining its jurisdiction under Section 16, took the view that service of Section 21 notice and being made party to the Section 11 application were mandatory requirements for a person/entity to be made party to the arbitral proceedings. The High Court upheld the findings in exercise of its appellate jurisdiction under Section 37 of the Act. Aggrieved, the appellant approached the Supreme Court.

Issues

The Court examined the following issues:

(1) Whether service of a Section 21 notice and joinder in a Section 11 application are prerequisites to implead a person/entity as a party to the arbitral proceedings?

(2) What is the source of jurisdiction of an arbitral tribunal over a person/entity who is sought to be impleaded as a party to the arbitral proceedings? What is the relevant inquiry that the arbitral tribunal must undertake when determining its own jurisdiction under Section 16 of the Act?

Observations

With regard to service of Section 21 notice, the Court observed that the notice is mandatory and fulfils various purposes by fixing the date of commencement of arbitral proceedings. However, non-service of the notice on a person does not preclude his impleadment in the arbitral proceedings.

In this context, the Court referred to State of Goa v. Praveen Enterprises, where it was held that the claims and disputes raised in Section 21 notice do not limit the claims that can be raised before the arbitral tribunal. Rather, the limited consequence of raising a claim before the arbitral tribunal for the first time is that the limitation period for such claim shall be calculated differently vis-a-vis claims raised in the notice.

Extending the same logic to non-service of notice under Section 21 to a party, the Court said that there is nothing in the wording of the provision, or in the scheme of the Act, to indicate that a party must not be impleaded merely because it was not served notice under Section 21.

On the aspect of impleadment in a Section 11 application, it was noted that the purpose of the application is "constitution" of the arbitral tribunal, which takes place pursuant to a limited and prima facie examination by the referral court. As such, the order appointing the arbitrator does not limit the arbitral tribunal's terms of reference or scope of jurisdiction.

Referring to the decision in Cox and Kings Ltd. v. SAP India (P) Ltd., the Court observed,

"while deciding such an application under Section 11(6), the High Court or this Court, as the case may be, undertakes a limited examination as per Section 11(6A)...the determination of whether certain persons are parties to the arbitration agreement, and consequently, whether they can be made party to the arbitration proceedings, is left to the arbitral tribunal. While the Section 11 court can return a prima facie finding on this issue, the same does not bind the arbitral tribunal, which must decide the issue based on evidence and the applicable legal principles. The determination of this issue goes to the very root of the arbitral tribunal's jurisdiction, and hence, is covered under Section 16 of the ACA."

Arbitral tribunal's jurisdiction over a person/entity, it further opined, is derived from their consent to the arbitration agreement. Hence, the proper inquiry in an application under Section 16, which embodies the doctrine of kompetenz-kompetenz (that the arbitral tribunal can determine its own jurisdiction), is whether such person is a party to the arbitration agreement.

"The implication of being a party to the arbitration agreement is that such person has contractually undertaken to resolve any disputes referenced in the arbitration agreement through the agreed upon method of dispute resolution, i.e., arbitration. It is under this contractual obligation that a person can be impleaded as a party to the arbitral proceedings, even if he was not served with a Section 21 notice and not referred to arbitration by the court under Section 11."

Conclusion

The Court concluded that an arbitration agreement existed between the appellant and respondent Nos. 2 and 3, despite their being non-signatories. Their conduct was in accordance with and in pursuance of the terms of the LLP Agreement, and hence, they could be made parties to the arbitral proceedings, it said.

Accordingly, the Court set aside the High Court decision and directed impleadment of respondent Nos.2 and 3 before the arbitral tribunal.

Appearance: Senior Advocate Gaurav Agrawal (for appellant); Advocate Varun Kanwal (for respondents)

Case Title: ADAVYA PROJECTS PVT. LTD. VERSUS M/S VISHAL STRUCTURALS PVT. LTD. & ORS., CIVIL APPEAL NO. 5297 OF 2025

Citation : 2025 LiveLaw (SC) 439

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