Introduction:

In the landmark case of Adavya Projects Pvt. Ltd. vs. M/s Vishal Structurals Pvt. Ltd. & Ors., the Supreme Court addressed a pivotal issue concerning the jurisdiction of arbitral tribunals over parties who were neither served with a notice under Section 21 of the Arbitration and Conciliation Act, 1996 (ACA) nor made parties in a Section 11 application for the appointment of an arbitrator. The Court’s decision has significant implications for arbitration proceedings in India, particularly regarding the inclusion of parties in arbitral proceedings.

Background:

The appellant, Adavya Projects Pvt. Ltd., agreed with respondent No.1, M/s Vishal Structurals Pvt. Ltd., to form a Limited Liability Partnership (LLP). Respondent No.3, a director of Respondent No.1, was designated as the CEO of the LLP (Respondent No.2). Disputes arose concerning the execution of a project through the LLP, leading the appellant to invoke the arbitration clause in the LLP agreement. A notice under Section 21 of the ACA was issued solely to respondent No.1, and a Section 11 application for the appointment of an arbitrator also included only respondent No.1.

After the arbitrator was appointed, the appellant filed a statement of claims, now including respondent Nos.2 and 3. These respondents challenged the tribunal’s jurisdiction under Section 16 of the ACA, arguing that they were not bound by the arbitration proceedings as they had neither received the Section 21 notice nor were they parties to the Section 11 application. The arbitral tribunal upheld this objection, and the High Court affirmed the tribunal’s decision. The appellant then approached the Supreme Court.

Appellant’s Arguments:

The appellant contended that respondents Nos. 2 and 3 were integral to the LLP agreement and had actively participated in its execution. Their involvement and conduct demonstrated their consent to the arbitration agreement, making them subject to the arbitral proceedings. The appellant argued that the absence of a Section 21 notice or inclusion in the Section 11 application should not preclude the tribunal’s jurisdiction over these parties.

Respondents’ Arguments:

Respondent Nos. 2 and 3 maintained that they were not signatories to the arbitration agreement and had not received the mandatory Section 21 notice. They emphasised that they were not parties to the Section 11 application and, therefore, could not be subjected to the arbitral proceedings. They argued that the tribunal lacked jurisdiction over them due to these procedural omissions.

Supreme Court’s Judgment:

The Supreme Court, comprising Justices P.S. Narasimha and Manoj Misra, delivered a comprehensive judgment addressing the issues at hand. The Court acknowledged that while a notice under Section 21 of the ACA is mandatory to commence arbitration proceedings, the non-service of such a notice to certain parties does not automatically strip the arbitral tribunal of its jurisdiction over them. The Court emphasised that the critical factor is whether the party in question is a party to the arbitration agreement.

The Court clarified that the purpose of a Section 11 application is the constitution of the arbitral tribunal, and the referral court’s decision does not conclusively determine the parties to the arbitration. The arbitral tribunal retains the authority to decide on its jurisdiction under Section 16 of the ACA, including the inclusion of additional parties who are found to be part of the arbitration agreement.

In this case, the Court found that respondent Nos. 2 and 3, through their conduct and involvement in the LLP, had effectively consented to the arbitration agreement. Their roles and actions indicated that they were parties to the agreement, even if not formal signatories. Consequently, the arbitral tribunal possessed the jurisdiction to include them in the proceedings.

The Supreme Court set aside the High Court’s decision and directed that respondents Nos.2 and 3 be impleaded as parties before the arbitral tribunal. This judgment reinforces the principle that the substance of parties’ involvement and consent takes precedence over procedural formalities in determining jurisdiction in arbitration.

Conclusion:

The Supreme Court’s decision in this case underscores the importance of examining the substantive involvement and consent of parties in arbitration agreements. While procedural requirements like the service of a Section 21 notice and inclusion in a Section 11 application are essential, they are not the sole determinants of an arbitral tribunal’s jurisdiction. The Court’s emphasis on the parties’ conduct and the essence of their participation in the agreement provides clarity and flexibility in arbitration proceedings.