Ankit Gupta, Sahil Sonkusale
In this piece, the authors navigate High Court jurisprudence on the ‘proximity with third party’ metric in consideration of which most High Courts over the country award interim measures against third parties; they reconcile the different approaches Court have taken in this regard, and offer an alternative in the Code of Civil Procedure to further the reach of arbitration in India.
In a recent case titled Avon Healthcare Private Limited v. Trade International & Ors., the Delhi High Court was seized of an appeal under Section 37 of the Indian Arbitration and Conciliation Act, 1996 (“the Act”). The appellant was aggrieved by the order of the Single Judge Bench whereby, its prayer for the issuance of interim measures against a third party was denied.
The Division Bench, hearing the appeal, expressed its doubts as to whether or not an interim measure can in-fact be issued against a non-signatory to the Arbitration Agreement or a party who has not participated in the arbitral proceedings (“third party”). While dismissing the appeal, the Court noted that interim measures under Section 9 of the Act against strangers to an arbitration agreement have vexed the Delhi High Court for a long time. The Court, after analyzing several judgments on said issue, concluded that its research did not yield any binding precedent on the said legal aspect.
High Courts, all over India, on very many occasions have expressed their concerns over the absence of any settled position of law regarding the issuance of interim measures against a third party. Though in very peculiar facts and circumstances, High Courts have passed interim measures against third parties, but under Indian law, such fact-centric decisions can never be followed as binding precedents. In such a vacuum and, importantly, in the absence of a ruling of the Supreme Court of India, it becomes imperative to analyze precedents from various High Courts and deduce objective parameters that may guide Courts in solving this legal question.
High Courts and Judicial Precedents
This issue came up before the Delhi High Court for the first time in CREF Finance Limited v. Puri Construction Ltd. & Ors.: despite it being a non-signatory to the arbitration agreement, the Court granted interim relief against Larsen and Toubro Limited (L&T). Having no judicial precedent on the point, the Court proceeded on the general principle that the court’s intervention is not only permissible but beneficial justice would be denied otherwise. More importantly, the Court granted the interim relief solely on the relation of L&T with that of the subject matter of the arbitration agreement, i.e. the Development Agreement. The Court after analyzing the relationship between L&T and Respondent, concluded that L&T was in-fact not a third party without notice and as such cannot be deemed to be ignorant about the rights of CREF.
A very similar yet unique situation next arose in 2006 in National Highway Authority of India (NHAI) v. China Coal Construction Group Corp.. The Petitioner made an application under Section 9 of the Act seeking an interim injunction, restraining the Respondent from interfering in the utilization by the Petitioner of the equipment, temporary works, and materials lying on the work site. The machinery belonged to the Respondent who had taken the same on a hire-purchase agreement with a third party (SREI). SREI sought intervention as it had a favourable order whereby, the Calcutta High Court had appointed receivers to take possession of the machinery employed by the Respondent. The Delhi High Court blindly relied upon the terms of the contract and granted the injunction as prayed. In the process, the Court directly infringed the rights of SREI i.e., a third party, without affording any opportunity of hearing whatsoever.
In a clear departure, the Delhi High Court in Smt. Kanta Vashist and Ors. v. Shri Ashwani Khurana, and in Mikuni Corporation v. UCAL Fuel Systems Ltd. refused to grant interim reliefs against a third party. The Court reasoned that the Act is applicable inter-se between the parties and therefore, Section 9 cannot be invoked by a party to seek an injunction against someone who was not a signatory to the arbitration agreement.
It was finally in Value Advisory Services v. ZTE Corporation that the Court hinted towards a liberal approach towards issuing interim measures against third parties. Though the Court refrained from giving any authoritative pronouncement, it made a pertinent observation: it held that laying down a general bar as to the exercise of powers under Section 9 of the Act against a third party would in-fact hamper the efficacy of the provision itself.
It was in Dorling Kindersely (India) Pvt. Ltd. v. Sanguine Technical (India) Pvt. Ltd. that the Delhi High Court interpreted Value Advisory (supra) and concluded that interim order under Section 9 of the Act can be issued against a third party only in very exceptional cases. Even here, the Court refrained from elaborating as to what would constitute an ‘exceptional case’. Ultimately in Gatx India Pvt. Ltd. v. Arshiya Rail Infrastructure Ltd., the Delhi High Court endeavoured to lay down the contours of Section 9 of the Act vis-à-vis a third party. The Court held that interim measures which incidentally affect a third party are ordinarily accepted. However, issuing the same against a stranger should be resorted to in extreme cases. The Court concluded that interim orders can be made against third parties only in exceptional circumstances which are such that the “denial thereof might frustrate the petitioner’s rights in arbitration; defeat the very object of arbitration between the parties thereto; render the arbitration proceedings infructuous; lead to gross injustice; and/or, leave the petitioner remediless, depending on facts of each case.” The judgment in Gatx India (supra) which seems to be the accepted view was recently affirmed in Blue Coast Infrastructure Development Pvt. Ltd. v. Blue Coast Hotels Ltd. and Anr.
Subsequently, in VLS Finance Ltd. v. BMS IT Institute Private Ltd. & Ors., the Court carved out another situation for the exercise of powers under Section 9 against a third party. It held that interim orders affecting third parties can be issued when such a party is claiming or deriving title through the party to the arbitration agreement.
It was in 2010 that a Division Bench of the Bombay High Court in Girish Mulchand Mehta v. Mahesh S. Mehta, took a liberal view and held that interim measure affecting a third party is not an impediment to its jurisdiction and it is empowered to do so for protection or preservation of the subject matter of the arbitration agreement. The Court proceeded to grant interim measure against a third party on the premise that the third party was deriving proprietary interests in the subject matter through one of the parties to the arbitration agreement. Similarly, a single bench of the same Court in Tapadiya Construction Ltd., Aurangabad v. Sanjay Suganchand Kasliwal and Anr. held that an order under section 9 of the Act can be made against a third party if prima facie case is made out that subject-matter of Arbitration or part of it is with the third party having no independent right in relation thereof. Also, if the property in the hands of a third party affects the subject-matter of arbitration, then also order can be made.
In M/s. L&T Finance Limited rep. by its Asst. Manager Mr. C. Balasubramanian v. C.T. Ramanathan Infrastructure Pvt. Ltd., the Madras High Court gave an open-ended finding that Courts can pass interim measures against third party in exceptional circumstances and “to protect the property from being transferred or becoming vested with third party illegally.”
The Division Bench of the Gujarat High Court in Nirma v. Lentjes Energy (India) Pvt. Ltd. relied on the UNCITRAL Model Law and without delving deep into the issue remarked that the Court can in a given case issue interim measures against the parties not involved in the arbitration.
The approach of the Kerala High Court is a bit ambivalent when it comes to the interpretation of Section 9 vis-à-vis a third party. The Kerala High Court in Shoney Sanil v. Coastal Foundations (P) Ltd. & Ors. at one hand held that the right of a third party can never be interfered with by the Courts while hearing a petition under Section 9 of the Act. However, on the other hand, concluded that interim measures can, however, be issued against a person claiming under a party to an arbitration agreement.
In all the cases where High Courts have issued interim measures against third parties, ‘proximity of the third party with the subject-matter/ party to arbitration agreement’ seemed to be the primary consideration. The Courts tried to reason that the third party was so inextricably linked with the subject-matter of the arbitral process that refusing interim measures would have frustrated the arbitral process. However, at the same time, the Courts adopted a hands-off approach while laying down concrete parameters for exercise of such powers under Section 9 of the Act.
In such a vacuum, the solution lies in the Code of Civil Procedure, 1908 (“the Code”). The exercise of powers under Section 9 of Act resonates powers of civil courts under Order XXXIX Rule 1 and 2 of the Code. The same is an equitable and discretionary relief, often exercised in prejudice to third parties, not being a party to the civil proceedings. Exercise of such equitable powers are guided by the sole consideration of preventing miscarriage of justice and to preserve the subject-matter of the proceedings. Similarly, interim measures under Section 9 of the Act are provided with the ultimate aim of protecting and preserving the subject-matter of the arbitral process. Therefore, in absence of any express bar, there exists no reason to not allow rigors of Order XXXIX Rule 1 and 2 from being transposed in Section 9 of the Act. Such a wide latitude would be in overall interest of the arbitral process in India and would in-fact prevent arbitration clauses from being rendered otiose.
Ankit Gupta is a graduate of National Law Institute University. He is currently practicing at the Delhi High Court. He is one of the youngest advocates to be empaneled by the Bar Council of Delhi.
Sahil Sonkusale is a penultimate year student at National Law Institute University, Bhopal.
Categories: Legislation and Government Policy