Non-Signatory Collaborator Whose Role Was Essential To Contract Can Invoke Arbitration: Supreme Court

The Supreme Court has held that a collaborator whose technical expertise was essential for a contractor to qualify for a project bid can invoke the arbitration clause in the principal contract.This would apply where the collaborator's role makes it effectively a party to the agreement.

“The meetings convened between the Employer, the Contractor and the Collaborator, after delay in execution of the contract, the tripartite agreement entered into between them and the further communications addressed to the collaborator to take up his responsibility as per the DJU makes the Collaborator a veritable party to the contract who is also entitled to invoke the arbitration clause as available in the contract between the Contractor and the Employer in which the DJU executed by the Collaborator and the Contractor, in favour of the Employer is an inextricable part.”, it held.

A Bench of Justices Sanjay Kumar and K. Vinod Chandran passed the ruling while allowing Elecon Engineering Company's plea for appointment of an arbitrator, holding that the project collaborator could invoke the arbitration clause in the principal contract between Bhartiya Rail Bijlee Company and the contractor, the employer.

The Court also set aside the Delhi High Court's refusal to refer the dispute to arbitration.

The Court appointed Justice (Retd.) Chakradhari Sharan Singh, former Chief Justice of the Orissa High Court, as sole arbitrator.

The dispute arose from the Coal Handling Plant Package for the Nabinagar Thermal Power Project. The bid conditions required bidders lacking the necessary technical experience to qualify through collaboration with an entity possessing the requisite expertise.

Elecon's technical credentials enabled the contractor to satisfy the eligibility criteria. A Deed of Joint Undertaking was executed jointly by Elecon and the contractor in favour of Bhartiya Rail Bijlee Company.

After the contractor went into liquidation in January 2020, Bhartiya Rail Bijlee Company repeatedly called upon Elecon to fulfill obligations under the joint undertaking. It also warned that failure would result in the balance work being executed at Elecon's risk and cost.

The Court also noted that a tripartite agreement provided for direct payments to Elecon for outstanding and future supplies.

“The communications issued pursuant to the default of the Contractor is a reaffirmation of the obligation of the Collaborator as per the contract executed, of which the DJU is an inextricable part. The tripartite agreement only asserted the responsibility of the Collaborator to fulfill the contract and was only a measure of ensuring payments to the Collaborator directly, in the wake of the inability of the Contractor and does not wipe out the earlier contract.”

Elecon invoked arbitration in 2022. However, the Delhi High Court rejected its plea on the ground that there was no privity of contract between Elecon and the employer.

Reversing that decision, the Supreme Court held that the contractual structure itself contemplated the collaborator's integral role. It said the arrangement imposed joint and several liability on both the contractor and collaborator for successful completion of the project.

“We are of the opinion that the contract by itself necessitated the execution of joint undertaking by the Contractor and the Collaborator who had the 'joint and several' liability for the due completion of the contract.”

The court held that all contentions remain open before the arbitrator. It directed the arbitrator to make the statutory disclosure regarding independence and impartiality within 15 days of receiving the judgment.