Adavya Projects Pvt. Ltd. vs M/s Vishal Structurals Pvt. Ltd. & Ors.

Held: The source of the arbitral tribunal’s jurisdiction is derived from the consent of the parties to refer disputes to arbitration – Such consent must be gathered from the arbitration agreement – Once a person consents to refer disputes to arbitration, and enters into an arbitration agreement u/s.7, he is bound by the same – The implication of being a party to the arbitration agreement is that such person has contractually undertaken to resolve any disputes referenced in the arbitration agreement through the agreed upon method of dispute resolution, i.e., arbitration – It is under this contractual obligation that a person can be impleaded as a party to the arbitral proceedings, even if he was not served with a s.21 notice and not referred to arbitration by the court u/s.11 – The relevant consideration to determine whether a person can be made a party before the arbitral tribunal is if such a person is a party to the arbitration agreement – The arbitral tribunal must determine this jurisdictional issue in an application u/s.16 by examining whether a non-signatory is a party to the arbitration agreement as per s.7 of the ACA. [Paras 22, 23, 40(III)]

Arbitration and Conciliation Act, 1996 – s.16 – Appellant and the respondent no.1-Company entered into an agreement to form LLP-respondent no.2 – Respondent no.3 was designated as CEO of the LLP – Respondent nos.2 and 3 were not signatories to the LLP Agreement that contained the arbitration agreement in Clause 40 – Whether respondent nos. 2 and 3 are parties to the arbitration agreement and whether the arbitral tribunal can implead them as parties to the arbitration proceedings exercising jurisdiction u/s.16:

Held: Clause 40 of the LLP Agreement is expansive in its wording – The arbitration agreement covers the present disputes arising out of reconciliation of accounts in relation to the ITF Project, as this directly affects the rights and liabilities of the partners, the appellant and respondent no.1– Arbitration agreement itself includes within its scope disputes that may arise between the partners and the LLPrespondent no. 2, and the partners and the administrators of the LLP-respondent no. 3 as he is the CEO of the LLP and responsible for its administration under the LLP Agreement – Furthermore, Respondent no.2 was created under the LLP Agreement and the scope of its activities and the management of its business are set out in the LLP Agreement – It is pursuant to the objectives, purpose, and terms of the LLP Agreement that respondent no.2 undertook the ITF Project, for which a Supplementary LLP Agreement and an MoU were also signed by the partners – Respondent no. 2 was carrying out its business and entering into contracts and dealings with third parties, such as undertaking the ITF Project, based on the terms of the LLP Agreement – Thus, by way of its conduct, respondent no. 2 has undertaken to be bound by the LLP Agreement and it is therefore bound by the arbitration clause contained therein – Respondent no. 3, who is the CEO of the LLP and is responsible for its administration and looking after its business derives his position and duties from Clause 8 of the LLP Agreement – Therefore, respondent no.3 is also bound by the arbitration clause contained in the LLP Agreement, not in his individual capacity but as the CEO of the LLP – Respondent nos.2 and 3, through their conduct, have consented to perform contractual obligations under the LLP Agreement, hence they have also agreed to be bound by the arbitration agreement contained in Clause 40 therein – Since they are parties to the underlying contract and the arbitration agreement, the arbitral tribunal has the power to implead them as parties to the arbitration proceedings while exercising its jurisdiction u/s.16 and as per the kompetenzkompetenz principle i.e., the arbitral tribunal can determine its own jurisdiction. [Paras 37-39]

Arbitration and Conciliation Act, 1996 – s.16 – Doctrine of kompetenz-kompetenz – Discussed. [Paras 24-26] Arbitration and Conciliation Act, 1996 – ss.21, 11, 16 – Appellant and the respondent no.1 entered into a contract to form LLPrespondent no. 2 – Respondent no.3 was designated as CEO of LLP – Disputes arose – Appellant issued notice u/s.21 for invocation of arbitration to respondent no.1 only – Further, in s.11 application also only the respondent no.1 was impleaded as a party – However, in statement of claims, the appellant impleaded the respondent no.2 and 3 – Application u/s.16 filed by respondent nos.1-3 raising objection that the arbitration was not maintainable against respondent nos.2 and 3 as they were neither sent the notice invoking arbitration u/s.21 nor were parties in the s.11 application for appointment of arbitrator – Arbitral Tribunal allowed the application u/s.16 – High Court dismissed the appeal thereagainst – Correctness: Held: While allowing the s.16 application, the arbitral tribunal proceeded only on the basis that respondent nos. 2 and 3 were not served with the s.21 notice and were not parties in the s.11 application – It did not go into whether these respondents were parties to the arbitration agreement, and whether its jurisdiction extends to them – Arbitral tribunal did not exercise its jurisdiction in accordance with the principle of kompetenz-kompetenz and rather held that such issue does not at all arise at the present stage – Even the High Court, while exercising appellate jurisdiction u/s.37 proceeded on a similar basis – This was an incorrect approach – Rather, the arbitral tribunal should have inquired into whether respondent nos. 2 and 3 are parties to the arbitration agreement to determine whether they could have been impleaded in the statement of claim – Not being served with a s.21 notice and not being made a party in the s.11 application are not sufficient grounds to hold that a person cannot be made party to arbitral proceedings – Impugned judgment set aside – Respondent nos. 2 and 3 be impleaded as parties before the arbitral tribunal, and the proceedings must be continued from the stage of arbitral tribunal’s order dated 15.02.2024. [Paras 21, 27, 28, 41] Arbitration and Conciliation Act, 1996 – s.21 – Notice under – Purpose and Object – Discussed. [Paras 10.1-10.3, 30.2]