Non-signatories to arbitration agreement referred to arbitration

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• In the case of Chloro Controls (I) P. Ltd. (Appellant) v. Severn Trent Water Purification Inc. & Ors. (Respondent), the Hon’ble Supreme Court has held that ‘the expression ‘person claiming through or under’ as provided under section 451 of the Arbitration and Conciliation Act, 1996 (“Act”) would mean and take within its ambit multiple and multi-party agreements and hence even non-signatory parties to some of the agreements can pray and be referred to arbitration.

• The court observed that language of section 45 is worded in favour of making a reference to arbitration provided the court is satisfied that a valid, enforceable and operative arbitration agreement exists. It was held that the expression ‘person claiming through or under’ provided under Section 45 of the Act indicates that the section does not refer to parties to the agreement but persons in general and if it is established that a person is claiming through or under the signatory to the arbitration agreement then the matter could be referred to arbitration. The court however made a cautionary remark that such reference could be done though only in exceptional cases where the facts principally justify a reference.

• Following were certain important factors which the court provided would have to be considered while dealing with such an issue: Direct relationship to the party signatory to the arbitration agreement; Direct commonality of the subject matter; Agreement between parties being a composite transaction; Transaction should be of composite nature where performance of principal agreement may not be feasible without the aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute; and Whether a composite reference of such parties would serve the ends of justice.

• Previously, the law as laid down in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya2, was said to hold the field, whereby if a dispute involved non-signatories or included subject matter which was not strictly within the arbitration agreement, the matter could not be referred to arbitration.

• However, the present judgment has clearly distinguished between the Sukanya case, which now applies only to domestic arbitrations and where an application under section 8 of the Act is made.