Justice Narasimha’s Landmark Ruling in Adavya Projects v. Vishal Structurals: Redefining Arbitration Party Impleadment Rules

In the case of Adavya Projects Pvt. Ltd. v. M/s Vishal Structurals Pvt. Ltd. & Ors., the Supreme Court of India has issued a landmark ruling that addresses crucial problems about the circumstances under which parties may be admitted to arbitration proceedings. This case sheds light on the connection that exists between the procedural criteria that are outlined in the Arbitration and Conciliation Act of 1996 and the basic premise that arbitration is founded on agreement.

Details on the situation

A Limited Liability Partnership (LLP) arrangement between Adavya Projects (the appellant) and Vishal Structurals (the respondent no. 1), which resulted in the formation of Vishal Capricorn Energy Services LLP (the recipient of the second respondent), was the source of the dispute.

The position of Chief Executive Officer of the Limited Liability Partnership (LLP) was assigned to Mr. Kishore Krishnamoorthy, who was the third responder. An arbitration provision was included in the LLP Agreement, which covered disagreements between partners as well as disagreements between partners and the LLP or between partners and its administrators.

Adavya Projects sent a Section 21 notice invoking arbitration exclusively to Vishal Structurals and filed a Section 11 application identifying just this party when issues occurred over an oil and gas project.

Both of these actions were taken in response to the project controversy. After the arbitrator had been selected, Adavya Projects made an effort to include the limited liability partnership (LLP) and its chief executive officer (CEO) as parties to the arbitration proceedings.

The Decision Granted by the Arbitral Tribunal

The application for impleadment was denied by the arbitral tribunal on the grounds that the limited liability partnership (LLP) and its chief executive officer (CEO) were not served with the notice under Section 21 and were not parties to the application under Section 11.

Therefore, they were not eligible to be included in the arbitration proceedings. This ruling was affirmed by the High Court, which resulted in the current appeal being filed.

Observations of the Supreme Court Regarding Section 21 Notice

The Supreme Court of the United States investigated the function of a Section 21 notice, which is the document that signifies the beginning of the arbitration process.

As a requirement for Section 11 petitions, the Court recognized many critical duties of this notice, including the determination of limitation periods, the establishment of the relevant law, and the provision of information about that legislation.

On the other hand, the Court highlighted that although if a Section 21 notice is required, the fact that it was not served to some parties does not always bar such parties from being involved in arbitration proceedings.

The court made note of the fact that the notice mainly serves purposes connected to time and does not limit the jurisdiction of the arbitral tribunal over parties who have agreed to arbitration.

The application of Section 11 includes a limited scope of the court’s role.

There is a definite function that Section 11 petitions serve, and the Supreme Court has made it clear that this aim is to establish arbitral tribunals in the event that appointment processes are unsuccessful.

In proceedings involving Section 11, the duty of the Court is restricted to conducting a prima facie assessment to determine whether or not an arbitration agreement is in place.
Specifically, the Court decided that when it comes to the appointment of arbitrators under Section 11, courts do not definitively decide who may be parties to arbitration proceedings.

This is an important decision. Both the terms of reference and the extent of jurisdiction of the arbitral tribunal are not restricted in any way by the appointment order. The concept of kompetenz-kompetenz dictates that the arbitral tribunal is the one responsible for making this conclusion.

Where the Jurisdiction of the Arbitral Tribunal Comes From

It was confirmed by the Supreme Court that the authority of an arbitral tribunal is derived from the permission of the parties to submit problems to arbitration, which is reflected in the arbitration agreement.

The basis of arbitral jurisdiction is not procedural compliance with notice requirements but rather this consent, which is the cornerstone of the jurisdiction.

The United States Supreme Court stressed that arbitral tribunals have the authority to decide their own jurisdiction in accordance with Section 16 of the Act.

When it comes to determining jurisdictional concerns, the question that should be asked is whether or not a person is a party to the arbitration agreement. It is not the question of whether or not they were listed in the Section 11 application or whether or not they got a Section 21 notice.

Agreements to Arbitrate as well as Parties That Are Not Signatory

In the case of Cox and Kings Ltd. v. SAP India Pvt. Ltd., the Supreme Court gave an explanation of the circumstances in which non-signatories might be bound by arbitration agreements.

The Supreme Court relied on the judgment of the Constitution Bench. In order to pass the test, it is necessary to investigate if the actions of the parties show that they want non-signatories to be bound by the arbitration agreement from the beginning.

This test was applied to the current case, and the Court looked at the roles that the LLP and its CEO played in the situation. Due to the fact that the LLP was established in accordance with the LLP Agreement and carried out its operations in accordance with its provisions, as well as the fact that the CEO drew his position and obligations from the agreement, it was determined that both parties were bound by the arbitration clause via their actions.

The Application to the Current Situation

Despite the fact that they did not sign the arbitration agreement, the Supreme Court determined that the Limited Liability Partnership (LLP) and its Chief Executive Officer were parties to the arrangement.

Both the function and duties of the CEO were outlined in the LLP Agreement, which was the document that governed the operation of the limited liability partnership (LLP). Through their actions, they proved that they were willing to be bound by the arbitration provision.
A Final Decision from the Court

The appeal was granted by the Supreme Court, which declared the ruling of the High Court to be invalid. The court issued an order that the limited liability partnership (LLP) and its chief executive officer (CEO) be brought before the arbitral panel as parties, and the proceedings are to resume from the point when they were suspended.

As a result of the fact that the claim was submitted in 2022, the court urged that the arbitration be completed as quickly as possible.

With this ruling, it is made clear that the main focus of arbitration is on consent rather than strict adherence to procedural requirements.

Even though procedural requirements such as Section 21 notices serve important functions, they do not supersede the fundamental principle that parties who have consented to arbitration through their actions can be made parties to proceedings. This is true even if the parties were not initially served with notices or named in court applications.