Arbitral tribunal can proceed against party though not served with Section 21 notice or named in Section 11 application as consent is key to jurisdiction : Supreme Court
Kiran Raj
The Supreme Court of India Division Bench of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra held that non-service of a notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996, and non-joinder in a Section 11 application, are not prerequisites for an arbitral tribunal to exercise jurisdiction over a person or entity. The Court allowed the appeal challenging the High Court’s affirmation of the arbitral tribunal’s rejection of proceedings against certain respondents and directed that those respondents be impleaded in the arbitration.
The dispute arises out of a business relationship formed through an agreement dated 01.06.2012 between the appellant and respondent no. 1 for the formation of a Limited Liability Partnership (LLP) named Vishal Capricorn Energy Services LLP, which is respondent no. 2 in the present case. The agreement established the LLP to undertake various oil and gas sector projects. Under Clause 8 of the LLP Agreement, respondent no. 3 was designated as the Chief Executive Officer, responsible for business administration and execution of contracts. Respondent no. 3 also holds the position of director in respondent no. 1 company.
The LLP Agreement contained an arbitration clause under Clause 40, stipulating that disputes between the partners or between the partners and the LLP, including their affiliates or administrators, would be subject to arbitration under the Arbitration and Conciliation Act, 1996.
Subsequently, Oil India Ltd. awarded a contract on 31.12.2012 for the augmentation of storage capacity at ITF, Tenughat, Assam to a consortium that included respondent no. 1. This project was subcontracted to respondent no. 1 through an agreement dated 08.01.2013. The execution of the project was further facilitated through a Supplementary LLP Agreement and a Memorandum of Understanding (MoU), both dated 29.01.2013, between the appellant and respondent no. 1. As part of this arrangement, respondent no. 2, the LLP, was tasked with executing the ITF Project. The appellant contributed Rs. 1.1 crores towards the execution of this project.
Disputes emerged in 2018 when the appellant requested access to respondent no. 2’s accounts related to the ITF Project for auditing purposes. The appellant issued demand notices to respondent no. 1 dated 11.10.2019 and 20.12.2019, seeking payment of Rs. 7.31 crores arising from account reconciliation under the LLP Agreement.
On 17.11.2020, the appellant issued a notice invoking arbitration under Clause 40 of the LLP Agreement. This notice was served only on respondent no. 1, through its director, respondent no. 3. The appellant then filed an application under Section 11 of the ACA for appointment of an arbitrator, impleading only respondent no. 1. By order dated 24.11.2021, the High Court appointed a sole arbitrator to adjudicate disputes arising from the LLP Agreement, Supplementary Agreement, and MoU.
Following the arbitrator’s appointment, the appellant filed its statement of claim and impleaded respondent nos. 2 and 3. However, at the time of filing, the prayer clause was limited to respondent no. 1. Respondents 1 to 3 subsequently filed an application under Section 16 of the ACA, challenging the tribunal’s jurisdiction, particularly objecting to the maintainability of proceedings against respondent nos. 2 and 3. They contended that they were not served a Section 21 notice and were not parties to the Section 11 application. It was also argued that respondent no. 2, being a creation of the LLP Agreement, and respondent no. 3, not being a signatory in his personal capacity, were not bound by the arbitration clause in Clause 40.
Meanwhile, the appellant filed an application under Section 23(3) of the ACA to amend its statement of claim, seeking to include respondent nos. 2 and 3 in the prayer clause and formally update the memo of parties. The tribunal allowed this amendment by an order dated 01.08.2023, terming it ministerial and clarifying that it did not alter the substantive claims in the original filing.
By its order dated 15.02.2024, the arbitral tribunal allowed the objections raised under Section 16 and held that proceedings could not be maintained against respondent nos. 2 and 3 due to non-service of Section 21 notice and their non-joinder in the Section 11 application. The tribunal ruled that it lacked jurisdiction over the said respondents in the absence of a finding that their presence was necessary for the adjudication of disputes.
The appellant challenged this ruling under Section 37(2)(a) of the ACA. However, the High Court, by its order dated 08.07.2024, upheld the tribunal’s view and dismissed the appeal. It reiterated that since the Section 21 notice and Section 11 application did not include respondent nos. 2 and 3, they could not be later impleaded in the arbitral proceedings.
Subsequently, the appellant appealed to the Supreme Court.
The Supreme Court examined the issue of whether service of notice invoking arbitration under Section 21 and joinder in a Section 11 application are essential prerequisites for the arbitral tribunal to assume jurisdiction over a person. The Court stated that “non-service of such notice on a person does not preclude his impleadment in the arbitral proceedings.” It also held that “the order appointing the arbitrator does not limit the arbitral tribunal’s terms of reference or scope of jurisdiction.”
On the purpose of the Section 21 notice, the Court recorded: “A notice invoking arbitration under Section 21 is mandatory and fulfils various purposes by fixing the date of commencement of arbitral proceedings.” However, it clarified that “there is nothing in the wording of the provision or the scheme of the ACA to indicate that merely because such notice was not served on respondent nos. 2 and 3, they cannot be impleaded as parties to the arbitral proceedings.”
The Court discussed the rationale adopted in State of Goa v. Praveen Enterprises, stating: “non-inclusion of certain disputes in the Section 21 notice does not preclude a claimant from raising them during the arbitration, as long as they are covered under the arbitration agreement.” The Court drew a similar inference in the present case: “non-service of the notice under Section 21 and the absence of disputes being raised against respondent nos. 2 and 3… do not automatically bar their impleadment.”
Turning to the Section 11 application, the Court clarified the limits of judicial examination under this provision. It noted: “the purpose of an application under Section 11 is simply the constitution of the arbitral tribunal… The court only undertakes a limited and prima facie examination into the existence of the arbitration agreement and its parties.”
Citing the Constitution Bench decision in Cox and Kings Ltd. v. SAP India (P) Ltd., the Court observed: “the referral court should leave it for the Arbitral Tribunal to decide whether the non-signatory party is indeed a party to the arbitration agreement on the basis of the factual evidence and application of legal doctrine.”
Addressing the tribunal’s failure to determine whether respondent nos. 2 and 3 were parties to the arbitration agreement, the Court remarked: “the arbitral tribunal’s approach clearly shows that it did not exercise its jurisdiction in accordance with the principle of kompetenz-kompetenz.” It added: “the arbitral tribunal should have inquired into whether respondent nos. 2 and 3 are parties to the arbitration agreement to determine whether they could have been impleaded.”
The Court also recorded its disagreement with the High Court’s reliance on Alupro Building Systems Pvt Ltd. v. Ozone Overseas Pvt Ltd., stating: “we do not agree with the conclusion that non-service of such notice on a party nullifies the arbitral tribunal’s jurisdiction over him.”
Reaffirming the principle that arbitral jurisdiction stems from consent, the Court stated: “Once a person consents to refer disputes to arbitration, and enters into an arbitration agreement under Section 7, he is bound by the same.” It further held: “the arbitral tribunal’s jurisdiction must be determined against the touchstone of the arbitration agreement.”
On the factual question of whether respondent nos. 2 and 3 were parties to the arbitration agreement, the Court held: “respondent no. 2 is carrying out its business… based on the terms of the LLP Agreement… [and] is therefore bound by the arbitration clause contained therein.”
Regarding respondent no. 3, the Court observed: “he is the CEO of the LLP and is responsible for its administration and looking after its business… he is acting under this contract… he is also bound by the arbitration clause… not in his individual capacity but as the CEO of the LLP.”
Applying the Group of Companies doctrine, the Court stated: “respondent nos. 2 and 3 have, through their conduct, consented to perform contractual obligations under the LLP Agreement… it is clear that they have also agreed to be bound by the arbitration agreement contained in Clause 40 therein.”
In its summary, the Court recorded: “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.”
The Court concluded that “in the facts of the present appeal, respondent nos. 2 and 3 are parties to the arbitration agreement in Clause 40 of the LLP Agreement despite being non-signatories.” It directed the arbitral tribunal to “continue the proceedings from the stage of arbitral tribunal’s order dated 15.02.2024.”
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The Supreme Court allowed the appeal and set aside the judgment and order dated 08 July 2024 passed by the High Court of Delhi in Arb. A. (Comm.) 24/2024.
The Court directed that respondent nos. 2 and 3 be impleaded as parties before the arbitral tribunal. It ordered that the arbitral proceedings continue from the stage at which the tribunal had passed its order dated 15 February 2024.
The Court requested the arbitral tribunal to complete the hearings and pass its award as expeditiously as possible, noting that the claim was filed in 2022.
The Court made no order as to costs. All pending applications, if any, were disposed of.
Advocates Representing the Parties
For the Appellant(s): Mr. Gaurav Agrawal, Senior Advocate; Mr. Debmalya Banerjee, Ms. Simran Brar, Mr. Rohan Sharma, Mr. Kartik Bhatnagar, Ms. Kiran Devrani, Ms. Apurva, Mr. Nitish Dham, and Ms. Liza Vohra, Advocates; M/s. Karanjawala & Co., Advocate-on-Record
For the Respondent(s): Mr. Susheej Joseph Cyriac, Mr. Nirnimesh Dube, Mr. Ankur S. Kulkarni, Mr. Varun Kanwal, and Mr. Tarun, Advocates; M/s. Lex Regis Law Offices, Advocate-on-Record
Case Title: Adavya Projects Pvt. Ltd. v. M/s Vishal Structurals Pvt. Ltd. & Ors.
Neutral Citation: 2025 INSC 507
Case Number: Civil Appeal No. 5297 of 2025 arising out of SLP (C) No. 25746 of 2024
Bench: Justice Pamidighantam Sri Narasimha, Justice Manoj Misra
[Read/Download order]
