Arbitration is increasingly becoming a favoured mode of dispute resolution in India as more and more parties choose to incorporate arbitration agreements and clauses into their Contracts. These Contracts, where the parties agree to arbitrate, are no longer limited to corporate transactions alone but now also govern family settlements, property disputes and so on. The flip side, however, is that there is increased confusion regarding the particulars of the agreement such as the seat of arbitration, parties, applicability and so forth, resulting in greater litigation. One interesting case is that of whether confirming parties to an arbitration agreement may be compelled to arbitrate.
Confirming parties are those who while not listed as parties within an agreement, sign it nevertheless i.e., confirm it. It is a form of tripartite arrangement where the confirming party may also be important to the contractual obligations or may be affected by the undertakings therein. Probably falling within the umbrella of the jurisprudence surrounding joinder of third-party to arbitration, there remains a dearth of case laws conclusively speaking of confirming parties in particular, even more so if the context is not related to disputes between companies per se.
The general rule has been that non-signatories to an arbitration agreement cannot be compelled to arbitrate as they are not privy to the Contract and did not consent to it. Courts, domestic and international, have for decades now laid down conclusive doctrines which in exceptional circumstances allow third parties who are not signatories to the Contract and/or arbitration agreement be compelled to arbitrate as well. However, the interesting distinguishing factor between a third party who is a non-signatory, and a confirming party is that the reservation surrounding the party not being privy to the Contract, does not apply in case of the latter. Confirming parties are not only aware of the terms of the Contract but may also sometimes be integral in carrying out the commitments undertaken therein or may be benefiting from them.
Courts, however, are usually not inclined to join confirming parties to arbitral proceedings in a cavalier manner. A factor of utmost importance is that the party must be either a necessary or properparty to the proceedings. A "necessary party" is one which must join the case else an effective decree cannot be passed, and the case would have to be dismissed. A "proper party" is one whose involvement will allow a complete, proper and appropriate adjudication of the issues in question.1
While Courts have often held that a confirming party is neither a proper or necessary party to the dispute, an over generalised observation must not be drawn in the interest of justice. The said determination would have to happen on a case-to-case basis, subject to the role, obligations and benefits drawn by the confirming party. In light of this fact, two doctrines developed by Courts internationally, in particular are relevant when speaking of conforming parties, even more so if these parties are not corporations. The doctrines are namely that of implied consent and third-party beneficiary.
Doctrine of Implied Consent
In the recent case of Ansal Properties Ltd and Anr v Dowager Maharanis Welfare Trust and Anr2 the Hon'ble Delhi High Court when deciding if a confirming party to a joinder agreement may be compelled to adhere to the arbitration agreement, highlighted that the general rule is that a non-signatory cannot be compelled to arbitrate and that there can be no assumption so as to the agreement to arbitrate. However, this rule is flexible by means of two theories which have evolved over time:
- The doctrine of implied consent, third party beneficiaries and other such transfer of contractual right mechanisms, which rely on discerning the intention of the parties;
- Doctrines of agent-principal relationship, alter ego, apparent authority, joint venture relations, succession and estoppel, all of which are concerned not with the intention but with the force of the applicable law.
The Hon'ble Court further went on to observe that even if a confirming party was not bound by the terms of the Contract in the sense that there was no liability affixed on it under the Contract, the fact that it signed the Contract containing the arbitration agreement means that there was an implied consent on its part to be bound by the arbitration clause. This stance of the Hon'ble Court is welcomed because it upholds the jurisprudential intent behind arbitration as an alternative source of dispute resolution. An arbitration agreement must be read in such a way that it best gives effect to the intention of the parties to opt out of litigation.
Doctrine of Third-Party Beneficiary
Another doctrine adopted internationally is that of "third party beneficiary" wherein if a third party, who may be a non-signatory per se, is extracting direct benefits flowing from the Contract, shall be estopped from avoiding arbitration when it has knowingly accepted the benefits arising directly from a contract containing the said arbitration agreement. The idea as elaborated upon in Avila Group Inc. v. Norma J. of California3 is that "to allow plaintiff to claim the benefit of a contract and simultaneously avoid its burdens would both disregard equity and contravene the purposes underlying enactment of the Arbitration Act."
The Hon'ble Delhi High Court in Shapoorji Pallonji and Co v Rattan India Pvt Ltd4 discussed this doctrine in detail and held that the non-signatory, India Bulls Pvt Ltd, being a direct beneficiary of the contract containing the arbitration agreement cannot avoid its obligation to arbitrate. The Hon'ble Court further cited Deloitte Noraudit v. Deloitte Haskins Sells5 wherein it was held that a non-signatory can be compelled to arbitrate under equitable estoppel principles since it had received a copy of the said contract, took no actions and offered no persuasive reason to the Court for the same, and knowingly accepted the benefits flowing directly from the contract. One may then argue, that confirming parties further solidify that the requirement of consent/ no-objection has been indisputably satisfied, and thus by virtue of extending this principle, they should be compelled to arbitrate.
Conclusion
If a confirming party, which is either proper or necessary to the arbitration proceedings, were held to not be bound by the agreement even if it has signed the same, it may have adverse consequences. The resulting determination of rights of the parties by means of the arbitral proceeding would be incomplete since the dispute resolution would lack finality, and the parties would again be compelled to litigate for fully adjudicating the issues and all questions posed therein through a Suit.
The confirming party may simultaneously initiate litigation proceedings for a dispute arising from the same cause(s) of action while arbitration proceedings are also going on between the other signatories. In all likelihood, the common consequence of any such scenario that may crop up is duplicity of proceedings, lengthy and complex litigation, incomplete adjudication and extremely costly dispute resolution. These consequences would essentially be against the very intention behind arbitration, possibly making the whole process itself obsolete.
Thus, it is pertinent and in the best interest of justice for the Courts to apply their judicial mind when deciding upon questions pertaining to relevant parties to an arbitration agreement. It must not allow the obligation to be side-stepped on account of technicalities. In order to give effect to the true purpose of arbitration, the Courts must endeavor to attach all such parties as are needed to correctly and completely determine the dispute in question, even more so if there is consent to the agreement evident on their part, as is the case for confirming parties. That being said, caution of course must also be exercised so as to not result in judicial over-reach where even those who are neither necessary, nor proper parties to the arbitration proceedings are being compelled to participate in them.
Footnotes
1. Vidur Impex and Traders (P) Ltd. v. Tosh Apartments (P) Ltd. (2012) 8 SCC 384
2. 2022 SCCOnline Del 3265
3. 426 F. Supp. 537 (S.D.N.Y. 1977)
4. 2021 SCCOnline Del 3688
5. 9 F.3d 1060 (2d Cir. 1993)]
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