In a significant ruling on the scope of judicial scrutiny under the Arbitration and Conciliation Act, 1996, the Supreme Court has held that a referral court under Section 11 is empowered to examine whether a non-signatory can be treated as a “veritable party” to an arbitration agreement. This judgment clarifies that courts are not mere conduits for referring matters to arbitration but can determine preliminary issues regarding the existence of an arbitration agreement.
The decision was delivered by a Bench comprising Justice JB Pardiwala and Justice KV Visvanathan in Hindustan Petroleum Corporation Ltd v. BCL Secure Premises Pvt Ltd, where the Court set aside a Bombay High Court order appointing an arbitrator despite the absence of any direct arbitration agreement between the parties.
Key Takeaways
- Referral court can examine whether a non-signatory is a proper party to the arbitration.
- A prima facie test must be satisfied before referring a non-signatory to arbitration.
- If the Court finds prima facie that a party is not bound by the arbitration agreement, the matter cannot be referred to the arbitral tribunal.
- Court reaffirms the principles laid down in Cox & Kings Ltd v. SAP India Pvt Ltd (Constitution Bench).
- Bombay High Court order appointing an arbitrator is set aside; no arbitration agreement existed between HPCL and BCL.
Referral Court’s Jurisdiction: Supreme Court Clarifies the Test
The Supreme Court emphasised that the referral court is not powerless to examine whether a non-signatory has any basis to be treated as a party to the arbitration agreement. The Court observed:
“The referral court under Section 11 is not deprived of its jurisdiction from examining whether the non-signatory is in the real sense a party to the arbitration agreement. The answer would depend on the facts and circumstances of each case.”
This reinforces the doctrine that judicial intervention at the referral stage is limited yet meaningful—focused exclusively on determining whether an arbitration agreement exists and whether the party seeking arbitration is bound by it.
Cox & Kings Judgment Reaffirmed
Relying on the Constitution Bench decision in Cox and Kings Limited v SAP India Private Limited, the Court clarified:
- The referral court must be prima facie satisfied that an arbitration agreement exists.
- It must also determine whether the non-signatory is a veritable party to that agreement.
- Even if the referral court holds that a non-signatory is prima facie bound, the arbitral tribunal retains jurisdiction to decide the issue in depth.
However, the Court drew a clear line:
🔹 If the referral court finds prima facie that the party is not a proper party, then the matter cannot be referred to arbitration.
The Court warned against a mechanical, automated approach that would allow complete strangers to arbitration agreements to invoke Section 11.
“To hold otherwise would reduce the referral court to a monotonous automation and lead to disastrous consequences, where absolute strangers walk in and seek referral to arbitration.”
Factual Background: Why the Court Rejected BCL’s Claim
The dispute arose from a contract awarded by Hindustan Petroleum Corporation Ltd (HPCL) for a Tank Truck Locking System. HPCL awarded the contract to AGC Networks Ltd. Crucially, the tender contained a clause prohibiting:
- Subletting
- Transfer
- Assignment of the contract work
without prior written consent from HPCL.
Despite this, AGC allegedly handed over the work to BCL Secure Premises Pvt Ltd. In 2018, BCL demanded 94% of the contract value from HPCL, which denied liability due to lack of privity.
Subsequently:
- BCL initiated suits and MSME arbitration against AGC.
- In 2023, BCL and AGC reached a settlement where receivables from HPCL, if recovered, would be transferred to BCL.
- Based on this settlement, BCL invoked HPCL’s arbitration clause and claimed nearly ₹3 crore.
When HPCL rejected BCL’s invocation, BCL approached the Bombay High Court under Section 11. The High Court appointed an arbitrator, observing that the arbitral tribunal should first decide arbitrability.
Supreme Court’s Findings: No Arbitration Agreement, No Veritable Party
The Supreme Court disagreed with the High Court’s approach and held that:
- BCL was never a party to the HPCL–AGC contract.
- There was no arbitration agreement between HPCL and BCL.
- Assignment without prior consent violated the tender contract.
- No material showed any intention to create legal relations between HPCL and BCL.
The Court held:
“Nothing even prima facie has been shown to establish that there was any semblance of intent to effect legal relationship between the respondent and HPCL or to indicate that the respondent was a veritable party.”
It further noted that HPCL and BCL operated on “separate orbits”, and no evidence justified binding HPCL to an arbitration initiated by BCL.
Thus, the Bombay High Court’s appointment of an arbitrator was legally unsustainable.
Implications of the Ruling
This judgment strengthens the legal framework governing non-signatory involvement in arbitration. Key implications include:
1. Stricter Prima Facie Scrutiny
Courts must examine whether a non-signatory has:
- Direct involvement,
- Clear legal relationship, or
- Factual basis to be bound.
2. Protection Against Arbitrary Invocations
Referral courts will prevent strangers or unauthorized entities from dragging parties into arbitration.
3. Balanced Judicial Approach
While the arbitral tribunal retains authority for a deeper inquiry, courts cannot abdicate their initial role under Section 11.
4. Commercial Certainty and Contractual Discipline
Companies cannot bypass contractual restrictions—like non-assignment clauses—to create artificial arbitration claims.
Representation
For Appellant (HPCL):
- Solicitor General Tushar Mehta
- Advocates: Sanjay Kapur, Surya Prakash, Shubhra Kapur, Mansi Kapur, Abhishek Tiwari
For Respondent (BCL Secure Premises):
- Senior Advocate Nalin Kohli
- Advocates: Chirag Madan, Ravleen Sabharwal, G. Sai Krishna Kumar, Rahul Agarwal, Ronit Bose, and others
Conclusion
The Supreme Court’s ruling serves as an important precedent reaffirming the limited yet essential scrutiny that courts must undertake under Section 11 of the Arbitration Act. By holding that a non-signatory must be shown—at least prima facie—to be a “veritable party,” the Court strengthens contractual integrity and ensures that arbitration remains consensual, as mandated by law.
In setting aside the Bombay High Court order, the Court also restored commercial certainty and upheld the principle that arbitration cannot be imposed where no agreement exists.
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