Adavya Projects Pvt. Ltd. v. M/S Vishal Structurals Pvt. Ltd. & Ors.
Background
The appellant and respondent no. 1 formed a limited liability partnership (respondent no. 2) to execute oil-and-gas projects, with respondent no. 3 designated as the LLP's CEO under the partnership agreement, which contained an arbitration clause. A dispute arose over reconciliation of project accounts, and the appellant sent an arbitration notice and filed a court application for appointment of an arbitrator, but named only respondent no. 1, not the LLP or its CEO. After the arbitrator was appointed, the appellant tried to also bring in the LLP and its CEO as parties to the arbitration claim. The arbitral tribunal, and later the High Court, ruled this could not be done because those two had never been served the arbitration notice or named in the court application, so the appellant appealed to the Supreme Court.
Decision Breakdown
The Supreme Court held that a notice invoking arbitration and the list of parties named in the court application for appointing an arbitrator are not final limits on who can later be made a party to the arbitration. The court's role at the appointment stage is only a limited, preliminary screening, not a final decision on scope or parties. The real question, the Court held, is whether the person sought to be added actually consented to be bound by the arbitration agreement, applying the "Group of Companies" test from Cox and Kings v. SAP India, looking at mutual intent, the relationship between signatory and non-signatory, commonality of subject matter, and how the non-signatory actually performed the contract. Applying this, the Court found that the LLP was created by and operated entirely under the partnership agreement, and its CEO acted throughout under his contractual role defined in that agreement, so both had, through their conduct, effectively agreed to be bound by its arbitration clause even without signing it separately. The Court allowed the appeal, set aside the High Court's order, and directed that both be added as parties before the arbitral tribunal, with proceedings to continue from where they had been halted.
Lesson Learnt
Not sending a formal arbitration notice to someone, or leaving them out of the initial court application to appoint an arbitrator, does not permanently protect them from being added to the arbitration later. If their own conduct shows they operated under the same contract and consented to its terms, they can still be pulled into the arbitration as a party.