Arbitration | Involvement In Performance Of Underlying Contract A Factor To Decide If Non-Signatory Bound By Agreement : Supreme Court

The Supreme Court on Wednesday (August 5) held that the involvement of a non-signatory in the performance of the contract would be a factor to consider if they would be bound by the arbitration agreement.“…the participation of a non-signatory in the performance of the underlying contract is the most important factor to be considered as the conduct of the non-signatory parties is an indicator of the intention of those parties to be bound by the arbitration agreement.”, observed a bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva, while setting aside that part of the Delhi High Court's decision which had excluded the Respondent No.1 from the ambit of the arbitration proceedings merely because he was non-signatory to the contract, thereby ignoring his involvement in performing the underlying contract. The dispute arose out of a Memorandum of Settlement (MoS) under which the Appellant company agreed to acquire another company and its sister concern for a settlement consideration of ₹8 crore. The MoS required promoters, management personnel and certain shareholders to transfer their shareholdings and comply with obligations relating to confidentiality, non-compete restrictions and intellectual property rights. Respondent No.1, who held 1,480 shares in the company, was listed among the employee-shareholders whose participation was necessary for completing the acquisition. Although he did not sign the MoS, he executed a separate Share Purchase Agreement (SPA) on the same day, agreeing to transfer his shares in exchange for a proportionate share of the settlement amount. Subsequently, disputes arose between the parties and arbitration was invoked. While the Delhi High Court referred several parties to arbitration, it excluded Respondent No.1, relying on a clause in his SPA stating that the share transfer was independent of and unconnected with the MoS. Aggrieved by the High Court's decision, the buyer company moved to the Supreme Court. Allowing the appeal, the judgment authored by Justice Sanjay Kumar observed that the High Court erred in creating a distinction between the Respondent No.1 and other shareholders. “The difference drawn by the learned Judge between these identically situated persons was not founded on fact and is entirely unsustainable in the light of the similar agreements executed by all of them.”, the Court observed, pointing out that like other shareholders who were party to the arbitration proceedings, the Respondent No.1 also expressly acknowledged the existence of the MoS, the settlement between the promoters and buyer, and the acquisition of shares under the broader settlement arrangement. “…it is clear that the performance of his obligations by Ashiesh Shukla under his Share Purchase Agreement was fundamental to the completion of the obligations spelt out in the MoS. Being a shareholder in his own right, unless Ashiesh Shukla also transferred his shares, the MoS would inevitably remain incomplete.”, the Court said. The Court relied on the Constitution Bench ruling in Cox and Kings Limited v. SAP India Private Limited 2023 LiveLaw (SC) 1042, which recognized that non-signatories may be bound by arbitration agreements if their conduct and relationship with the transaction indicate an intention to be bound. The Court also relied on ONGC Ltd. v. Discovery Enterprises Pvt. Ltd. 2022 LiveLaw (SC) 416, which recognized that non-signatories may be referred to arbitration where agreements form part of a composite transaction and the disputes are closely interlinked. “…the involvement of a non-signatory in the performance of the underlying contract in a manner that suggests that it intended to be bound by the contract containing the arbitration agreement is an important aspect. Other factors, such as the composite nature of the transaction and commonality of subject matter, were also held to suggest that claims against a non-signatory are interlinked with the issues under arbitration.”, the Court observed. Applying these principles, the Court found that Respondent No. 1's role was indispensable to the completion of the acquisition. Unless he transferred his shares, the settlement contemplated under the MoS could not be fully implemented. Cause Title: KKH Finvest Pvt. Ltd. and another versus Ashiesh Shukla and othersCitation : 2026 LiveLaw (SC) 769Click here to download judgmentAppearance: For Petitioner(s) Mr. Dhruv Mehta, Sr. Adv. Ms. Ranjana Roy Gawai, Adv. Ms. Vasudha Sen, Adv. Ms. K. Hema, Adv. Mr. Anubhav Ray, Adv. Ms. Divya Roy, AOR For Respondent(s) Ms. Manjeet Kirpal, AOR Ms. Sanam Tripathi, Adv. Mr. Dheeresh K Dwivedi, Adv. Ms. Anjali Kaushik, Adv. Mr. Kailash Prashad Pandey, AOR

Arbitration | Involvement In Performance Of Underlying Contract A Factor To Decide If Non-Signatory Bound By Agreement : Supreme Court

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Arbitration | Involvement In Performance Of Underlying Contract A Factor To Decide If Non-Signatory Bound By Agreement : Supreme Court

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