Non-Signatory Cannot Be Compelled To Arbitrate Merely For Claiming Through Signatory: Bombay HIgh Court

The Bombay High Court has recently held that a non-signatory cannot be compelled to arbitrate merely because it is alleged to be claiming "through or under" a signatory to an arbitration agreement.

Emphasising that arbitration is founded on consent, the court observed, "Since consent forms the cornerstone of arbitration, a non-signatory cannot be forcibly made a 'party' to an arbitration agreement, as doing so would violate sacrosanct principles of privity of contract and party autonomy."

Justice Arun R. Pedneker delivered the judgment while partly allowing an application seeking appointment of an arbitrator in a family partnership dispute. The court referred the disputes between the original signatories to arbitration.

It, however, declined to refer Gayatri Sachin Shah and Sachin Trust, holding that they were not signatories to the 1985 partnership deed and did not fall within any recognised exception that could bind non-signatories to the arbitration agreement.

The court observed, "The person “claiming through or under” cannot be made a “party” to the arbitration agreement on its own terms, as it only stands in the shoes of original signatory party. The phrase “claiming through or under” has not been used either in Section 2(1)(h) or Section 7 of the Arbitration Act. This is so because those provisions are based on the concept of party autonomy and party independence, which requires the party to provide consent to submit their disputes to arbitration. On the contrary, a person claiming through or under a party to an arbitration agreement is merely standing in the shoes of original party to the extent that it is merely agitating the right of the original party to the arbitration agreement."

The dispute arose from a partnership deed executed on December 9, 1985, between Hemant D. Shah HUF and Kokila H. Shah on one side and Chittaranjan D. Shah HUF and Parul V. Shah on the other.

After an arbitral award passed in April 2016 was set aside by the High Court in October 2019, Hemant D. Shah HUF and Kokila H. Shah issued a fresh notice invoking arbitration in March 2024.

They later sought appointment of a sole arbitrator and also asked the court to refer Gayatri Sachin Shah and Sachin Trust to arbitration, arguing that they had become partners under partnership deeds executed in 2009 and were therefore claiming "through or under" the original partners.

Rejecting the contention, the court held that the 1985 and 2009 partnership deeds operated in "completely different orbits."It found nothing to indicate that Gayatri or Sachin Trust had agreed to be bound by the arbitration clause in the 1985 deed.

The court also held that concerns about enforceability of a future award or considerations of justice and equity could not override the consensual nature of arbitration.

The court also rejected the limitation objection. It held that fresh arbitral proceedings commence upon issuance of a fresh notice invoking arbitration.

The court observed, "In the instant case, it is not disputed that the notice received under Section 21 for the commencement of fresh arbitral proceedings is within the period of three years. The contention raised is that the application under Section 11 has to be filed within three years from the date of the earlier award being set aside cannot be accepted, as the fresh arbitral proceedings commence on the notice under Section 21."

Holding that both the fresh notice invoking arbitration and the application were within limitation, the court appointed former Bombay High Court judge Justice Sadhana Jadhav as the sole arbitrator to decide the dispute between the original signatories.

For Applicants (Hemant D. Shah HUF and Kokila H. Shah): Senior Advocate Nikhil Sakhardande with Advocates Amrut Joshi, Ashish Venugopal, Saurish Shetye, Ajay Panicker and Dhairya Sampat, instructed by Ajay Law Associates.

For Respondents (Chittaranjan D. Shah HUF and Parul V. Shah): Advocates Rohan Savant, Aman Saraf and Gobinda C. Mohanty.

For Respondents (Gayatri Sachin Shah and Sachin Trust): Senior Advocate Sharan Jagatiani with Advocates Shanay Shah, Tushar Gujjar, Hamza Lakhani and Gobinda C. Mohanty, instructed by Mohanty & Associates.