A non-signatory becomes a veritable party where its performance is integral to the underlying contract.

KKH Finvest Pvt. Ltd. proposed to acquire Sensorise Digital Services Pvt. Ltd. and its sister concern under a Memorandum of Settlement dated 09.05.2022 (“MoS”), executed by the buyer, the companies and their promoters.

Ashiesh Shukla was not a signatory to the MoS but was identified in its Schedule 2 as a consultant/employee shareholder holding 1,480 shares.

Pursuant to the MoS, he executed a Share Purchase Agreement (“SPA”) on the same date, agreeing to sell his shares to the buyer for the proportionate settlement amount.

The MoS contained an arbitration clause.

After disputes arose, the buyer initially invoked arbitration against the promoters, and a sole arbitrator was appointed under Section 11 of the Arbitration and Conciliation Act, 1996.

The buyer subsequently sought reference of disputes against Ashiesh Shukla and other non-signatories.

The Delhi High Court held the other concerned non-signatories to be “veritable parties” to the arbitration agreement but excluded Ashiesh Shukla because Clause 16 of his SPA stated that the share transfer was independent of and unconnected with the MoS.

The Supreme Court considered the appeal limited to that conclusion.

Whether Ashiesh Shukla, although not a signatory to the MoS, was a “veritable party” to the arbitration agreement contained in it and could be referred to arbitration.

Whether Clause 16 of Ashiesh Shukla’s SPA excluded the operation of the MoS arbitration clause and disentitled the appellants from referring their disputes with him to arbitration.

The Court applied Sections 11 and 16 of the Arbitration and Conciliation Act, 1996, concerning the appointment of arbitrators and the arbitral tribunal’s competence to rule on its jurisdiction.

Relying principally on Cox and Kings Ltd. v. SAP India Pvt. Ltd., (2024) 4 SCC 1, the Court held that a non-signatory may be bound by an arbitration agreement where, viewed holistically, the person’s legal relationship with the signatories, participation in the negotiation or performance of the underlying contract, commonality of subject matter, mutual intention and the composite nature of the transaction demonstrate that the person is a “veritable party.”

The Court also relied on Oil and Natural Gas Corporation Ltd. v. Discovery Enterprises Pvt. Ltd., (2022) 8 SCC 42, for the relevant factors to determine whether a non-signatory intended to be bound by the underlying contract and its arbitration agreement.

The Court held that Ashiesh Shukla’s SPA was executed pursuant to and in furtherance of the MoS.

Its recitals expressly acknowledged the MoS, the acquisition of shares of the management team and other shareholders, and payment of his proportionate settlement amount.

His transfer of 1,480 shares was essential to the MoS’s objective of enabling the buyer to acquire complete ownership and control of Sensorise; without that transfer, the transaction would remain incomplete.

The Court further noted that the SPAs of the other non-signatories, whom the High Court had treated as veritable parties, contained clauses materially identical to Clause 16 of Ashiesh Shukla’s SPA.

Accordingly, Clause 16 could not logically distinguish his case or negate the interconnectedness between the SPA and the MoS.

Applying Cox and Kings, the Court concluded that Ashiesh Shukla’s participation in performance of the composite transaction demonstrated his intention to be bound by the MoS, including its arbitration clause.

The Supreme Court held that Ashiesh Shukla was a “veritable party” to the MoS and was amenable to arbitration in respect of disputes with KKH Finvest Pvt. Ltd. and Sensorise Digital Services Pvt. Ltd.

The Court appointed Hon’ble Mr. Justice T.S. Thakur (Retired), Former Chief Justice of India, as the sole arbitrator for those disputes, with the other terms of appointment prescribed by the Delhi High Court continuing to apply.

All issues were left open for determination by the arbitrator in accordance with law, and the parties were directed to bear their own costs.