We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
18 October 2018
In the recent case of Prabhat Steel Traders Private Limited v Excel Metal Processors Private Limited,(1) the Bombay High Court issued a landmark ruling regarding third parties' right to challenge interim measures granted by an arbitral tribunal under Section 17 of the Arbitration and Conciliation Act 1996.
In an arbitration between Respondent 1 and Respondent 2, the arbitral tribunal passed certain interim measures against Respondent 1 in favour of Respondent 2.
In total, 13 arbitration petitions were filed by various third parties – including the petitioner – under Section 37 of the Arbitration and Conciliation Act, requesting leave to appeal against the arbitral tribunal's order principally on the grounds that the interim measure was causing severe prejudice to the interests of said parties, including the petitioner.
Respondent 2 raised a preliminary objection about the maintainability of the arbitration petition on the grounds that none of the petitioners were parties to the arbitration agreement between Respondents 1 and 2 and therefore they could not invoke Section 37 of the act.
The petition in support of maintainability argued that various provisions – including Sections 8, 9, 17 and 34 of the Arbitration and Conciliation Act – expressly contemplate an application made by a party; however, no such restriction is found under Section 37 of the act, which is open ended and merely states that "an appeal shall lie from the following order".
According to the petitioner, if a third party affected by an interim measure granted by a tribunal cannot challenge such order under Section 37, the arbitral proceedings could be used to abuse and prejudice third parties (where the rights and interest of such third parties are involved).
Third parties have the right to file an appeal with leave of the court if their rights are prejudiced by any order passed in proceedings to which they are not party. This right is recognised under the Code of Civil Procedure 1908.
On the contrary, the respondent submitted that third parties cannot interfere in the arbitration process or invoke Section 37. According to the respondent, since the petitioners were not parties to the arbitration agreement, an appeal under Section 37 was not maintainable.
The respondent further contended that the only remedy available to petitioners is to await the outcome of the arbitral proceedings and, if an application for the execution of the arbitral award is made, to oppose the execution application as and when it is filed. There has been a statutory bar against third parties from interfering in arbitral proceedings since the beginning. If any appeal by the third party is permitted under Section 37, it would open the floodgates to litigation.
Finally, the responded argued that Section 17 of the Arbitration and Conciliation Act applies only to the parties under an arbitral agreement and thus Section 37 can be invoked only by such parties – not by third party. Section 37(2) of the act must be read with Section 17. Since Section 17 can be invoked only by parties to an arbitration agreement, Section 37 can also be invoked only by a party to the arbitration agreement.
The single judge of the Bombay High Court held that appeals filed by petitioners under Section 37 of the Arbitration and Conciliation Act are maintainable. While arriving at this conclusion, the high court observed as follows:
The Bombay High Court's ruling is a welcome reprieve for non-signatories to arbitration proceedings in situations where disputes between arbitrating parties have a bearing on their rights and interests. The ruling is a step towards balancing innocent parties' interests. The conventional theory that only parties to an arbitration can question the correctness of interim measures and innocent third parties are mute spectators does not advance the cause of justice. While the facts of each case and the nature of prejudice will be considered when determining whether a third party can intervene, the arbitration community will undoubtedly closely follow further rulings on the subject.
For further information on this topic please contact Ajay Bhargava, Arvind Kumar Ray or Maithili Moondra at Khaitan & Co by telephone (+91 11 4151 5454) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.