Section 21 Notice Not a Precondition for Impleading Parties in Arbitration: Supreme Court Clarifies

Background and Core Issue

In Adavya Projects Pvt. Ltd. Vs Vishal Structurals Pvt. Ltd. & Ors. (Supreme Court of India), the Supreme Court examined a recurring procedural controversy under the Arbitration and Conciliation Act, 1996 (ACA):

  • Is service of a notice invoking arbitration under Section 21 on a person, and
  • Is inclusion of that person as a party in a Section 11 application for appointment of an arbitrator

a mandatory precondition for an arbitral tribunal to assume jurisdiction over that person?

The arbitral tribunal in this matter, while deciding a jurisdictional objection under Section 16, held that:

  • Since respondent nos. 2 and 3 had not been served with a Section 21 notice, and
  • Since they were not arrayed as parties in the Section 11 application,

they could not be treated as proper parties in the arbitration. The High Court, in appeal under Section 37, endorsed this reasoning.

The Supreme Court reversed both orders. It clarified the distinct purposes of Section 21 and Section 11, and reaffirmed that the true foundation of arbitral jurisdiction is the arbitration agreement and the doctrine of kompetenz-kompetenz under Section 16.

The Court formulated and answered four key propositions:

  1. A notice invoking arbitration under Section 21 is mandatory to determine commencement, limitation and the applicable arbitration law. However, non-service of such notice on a particular person does not, by itself, bar that person from being impleaded later in the arbitral proceedings.
  2. A Section 11 application is concerned primarily with the constitution of the arbitral tribunal based on a limited, prima facie scrutiny by the referral court. The tribunal’s jurisdiction and reference are not conclusively confined to the parties named or disputes articulated at the Section 11 stage.
  3. The jurisdiction of the arbitral tribunal over any person or entity flows from that person’s consent to the arbitration agreement. In a Section 16 inquiry, the decisive question is whether the person sought to be impleaded is a party to the arbitration agreement, applying principles including those governing non-signatories.
  4. On the facts, respondent nos. 2 and 3 were held to be bound by the arbitration clause in Clause 40 of the LLP Agreement, and thus amenable to the tribunal’s jurisdiction. The appeal was allowed and respondent nos. 2 and 3 were directed to be impleaded before the arbitral tribunal.

Factual Matrix

Contractual Structure

  • The appellant, Adavya Projects Pvt. Ltd., and respondent no. 1, Vishal Structurals Pvt. Ltd., entered into an LLP Agreement dated 01.06.2012 to form Vishal Capricorn Energy Services LLP (respondent no. 2).
  • The LLP Agreement envisaged that respondent no. 2 would undertake various projects in the oil and gas sector.
  • Only the appellant and respondent no. 1 were signatories to the LLP Agreement.

Key clauses:

  • Clause 8 named Mr. Kishore Krishnamoorthy (respondent no. 3) as Chief Executive Officer of the LLP, responsible for business administration and execution of contracts. Respondent no. 3 was also a director of respondent no. 1.
  • Clause 40 contained an arbitration agreement covering disputes:
    • between partners inter se,
    • between partners and the LLP, and
    • involving affiliates, assigns, successors, administrators, and persons claiming through them,
      with reference to arbitration under the Arbitration and Conciliation Act, 1996.

Subsequent Commercial Arrangements

  • By letter of award dated 31.12.2012, Oil India Ltd. granted a contract relating to augmentation of storage capacity at ITF, Tenughat, Assam to a consortium that included respondent no. 1.
  • Under an agreement dated 08.01.2013, the consortium sub-contracted the ITF project to respondent no. 1.
  • Thereafter, the appellant and respondent no. 1 executed a Supplementary Agreement and a Memorandum of Understanding, both dated 29.01.2013, for execution of the ITF project through respondent no. 2 (the LLP).
  • The appellant infused Rs. 1.1 crores as project funding.

Emergence of Disputes and Invocation of Arbitration

  • In 2018, disputes arose when the appellant sought documentation for audit and reconciliation of respondent no. 2’s accounts relating to the project.
  • The appellant issued demand notices to respondent no. 1 on 11.10.2019 and 20.12.2019, claiming Rs. 7.31 crores.
  • A notice invoking arbitration under Clause 40 of the LLP Agreement was then issued by the appellant on 17.11.2020.
    • This Section 21 notice was addressed solely to respondent no. 1, through its director, respondent no. 3.

Section 11 Proceedings and Appointment of Arbitrator

  • The appellant filed an application under Section 11 seeking appointment of an arbitrator, impleading only respondent no. 1.
  • By order dated 24.11.2021, the High Court appointed a sole arbitrator:
    • “to adjudicate the disputes that are stated to have arisen between the parties out of the LLP Agreement dated 01st June, 2012 read with Supplementary LLP Agreement and MoU both dated 29th January, 2013.”

Arbitral Proceedings and Section 16 Application

  1. Statement of Claim and Attempt to Implead Respondent Nos. 2 & 3

    • After entering upon reference, the appellant filed its statement of claim and impleaded respondent nos. 2 and 3 as parties, although the relief clause initially mentioned only respondent no. 1.
    • Respondent nos. 1–3 filed an application under Section 16, contesting the tribunal’s jurisdiction vis-à-vis respondent nos. 2 and 3 on grounds that:
      • they had not been served with a Section 21 notice;
      • they had not been joined in the Section 11 proceedings; and
      • Clause 40 of the LLP Agreement did not bind respondent no. 2 (the LLP) or respondent no. 3 in his individual capacity.

  2. Amendment of Claim under Section 23(3)

    • The appellant sought amendment under Section 23(3) to:
      • formalise a detailed memo of parties, and
      • expand the prayer clause to include claims against respondent nos. 2 and 3.
    • By order dated 01.08.2023, the arbitral tribunal allowed this amendment, treating it as ministerial and non-substantive.

  3. Tribunal’s Order under Section 16

    • By order dated 15.02.2024, the tribunal allowed the Section 16 application insofar as it related to respondent nos. 2 and 3, holding that proceedings against them were not maintainable.
    • Key reasoning:
      • No Section 21 notice had been served on respondent nos. 2 and 3;
      • They were not parties before the High Court under Section 11, and the High Court’s reference order did not mention them;
      • Hence, the tribunal could not exercise jurisdiction over them.
    • The tribunal also took the view that the principle of kompetenz-kompetenz and its power to add non-signatories would arise only where it had already held such parties to be necessary or proper for effective adjudication—something it expressly declined to find in this case.