“Bombay High Court Rules: Arbitration Proceedings Cannot Be Commenced Against Third Parties Not Signatories to Arbitration Agreement”

 

The Bombay High Court has held that arbitration proceedings cannot be initiated against third parties who are not signatories to the arbitration agreement. The Court emphasised that the arbitration mechanism, as envisaged under the Arbitration and Conciliation Act, 1996, is founded on the mutual consent of the parties to the arbitration clause, and non-signatories cannot be cast into such proceedings merely by virtue of their non-contractual position.

In the case before the Court, the dispute arose between a developer and a housing society under a development agreement that contained an arbitration clause. A third party, who had neither executed the development agreement nor agreed separately to arbitration, was sought to be implicated in the arbitration initiated by the developer against the housing society and the third party. The third party contended that it had not entered into any agreement incorporating the arbitration clause, and therefore the tribunal lacked jurisdiction over it.

The High Court reviewed the fundamental requirements of an arbitration agreement under Section 7 of the Arbitration Act—that there must be a written agreement to arbitrate disputes, which is valid and refers the parties to arbitration. It found that the third party had not signed, accepted, or been bound by the arbitration agreement. Accordingly, the Court held that the third party could not be subjected to arbitration proceedings, because it had not given consent to arbitrate and was therefore not a “party” to the arbitration agreement.

The Court further held that allowing a non-signatory to be dragged into arbitration would undermine the consensual nature of arbitration and could lead to unfairness. It noted that the parties to an arbitration agreement choose to arbitrate to avoid litigation and benefit from finality and efficiency; these benefits cannot be extended to non-signatories who did not agree to arbitrate. Therefore, the arbitration clause cannot be invoked against someone who is not a signatory and has not agreed to be bound.

Importantly, the High Court clarified that this ruling does not mean that non-signatories can never be bound by an arbitration agreement—rather, their inclusion in arbitration must be justified by a recognized legal doctrine such as assignment, agency, group of companies, or estoppel with sufficient factual basis. Absent such a basis, the third party lacks locus to arbitrate and the arbitration proceedings against it must be set aside.

In conclusion, the Bombay High Court reaffirmed the principle that arbitration is founded on party autonomy and consent. It held that a party who has not executed the arbitration agreement cannot be drawn into arbitration proceedings simply by association or related contractual arrangement. The judgment reinforces the requirement that arbitration proceedings can only be initiated against parties who have given clear and unequivocal consent to the arbitration clause, thereby protecting the rights of those outside the contractual relationship.

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