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Whether A Party To A Dispute Before An Arbitrator Can Claim Money For And On Behalf Of A Third Party On The Ground That The Third Party Worked On The Project?

The Law Commission had recommended amending the definition of Party¯ under Section 2 (1) (h) of the Arbitration and Conciliation Act, 1996 to include person claiming through or under such party¯. However, this recommendation was not accepted.

However, by 2015 amendment, Section 8 of the Arbitration and Conciliation Act (Act) was amended, which reads as follows:


Section 8 (1):

A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists¯.

The 2015 amendment to Section 8 of the Act gives enough leeway to include third party claims in the overall claims of the petitioner (party to the Arbitration Agreement) and makes it clear that persons claiming through or under the party to arbitration agreement can claim the benefit of such agreement.

In Chloro Controls(I) P.Ltd vs Severn Trent Water Purification[1], the Supreme Court held that though the scope of an arbitration agreement is limited to the parties who entered into it and those claiming under or through them.....

In Ameet Lalchand Shah vs Rishabh Enterprises[2], the Supreme Court revisited the principles expounded in Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Others and held that:
  • Principally four amendments to Section 8(1) of the Act have been introduced by the 2015 Amendments - one being that the relevant "party" that is entitled to apply seeking reference to arbitration has been clarified/amplified to include persons claiming "through or under" such a party to the arbitration agreement;
     
  • The Parties to the agreements namely Rishabh and Juwi India:
    1. Equipment and Material Supply Agreement; and
    2. Engineering, Installation and Commissioning Contract and the parties to Sale and Purchase Agreement between Rishabh and Astonfield are one and the same as that of the parties in the main agreement namely Equipment Lease Agreement. All the four agreements are inter-connected. This is a case where several parties are involved in a single commercial project executed through several agreements/contracts. In such a case, all the parties can be covered by the arbitration clause in the main agreement.
Thus, from a conjoint reading of Section 8 and the above judgements, it can be inferred that a party to an arbitration can claim amounts for and on behalf of a third party, who may or may not be an affiliate or a group company.

Also, the intention of legislature in not accepting the Law Commission recommendation of including person claiming through or under such party¯ in the Party¯ definition under Section 2(1)(h) of the Act could be that the legislature did not intend to give the third parties an opportunity to arbitrate their individual claims separately. That would have resulted into multiple claims arising out of the same transaction relating to a project/principal agreement being filed and thereby increasing the judicial burden.

Therefore, a party to a dispute before an Arbitrator can claim money for and on behalf of a third party on the ground that the third party worked on the project

Doctrine of Privity of Contract

In accordance with the common law principle of doctrine of privity of contract, a contract cannot confer rights or impose obligations upon any person who is not a party to the contract. As such, the third parties to an Arbitration Agreement, who have worked on the transaction forming part of the Arbitration Agreement for and on behalf of a party to the Arbitration Agreement, cannot directly claim but have to claim through a party to the Arbitration Agreement.

End-Notes:
  1. Chloro Controls(I) P.Ltd vs Severn Trent Water Purification, Supreme Court [Civil Appeal No. 7134 of 2012 (Arising out of SLP (C) No. 8950 of 2010)]; Judgement dated 28th September 2012.
  2. Ameet Lalchand Shah v Rishabh Enterprises, Supreme Court [Civil Appeal No. 4690 of 2018 (Arising out of SLP (C) No. 16789 of 2017)]; Judgement dated 03rd May 2018.

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