Non-Signatory Parties Can Be Referred to Arbitration After Prima Facie Review: Supreme Court in Ajay Madhusudan Patel & Ors. Vs Jyotrindra S. Patel & Ors.

Introduction

A significant question in arbitration law concerns the extent to which a court, at the referral stage under Section 11 of the Arbitration and Conciliation Act, 1996, may examine whether a non-signatory to an arbitration agreement should be joined as a party to arbitral proceedings. The Supreme Court of India addressed this issue comprehensively in Ajay Madhusudan Patel & Ors. Vs Jyotrindra S. Patel & Ors., a petition arising from a complex inter-group family business arrangement.

Background and Factual Context

The Three Groups and the Family Arrangement Agreement

The dispute involved three distinct groups — the AMP Group (Petitioners), the JRS Group (Respondents 1–6, 14 & 15), and the SRG Group (Respondents 7–13, 16 & 17). The AMP and JRS Groups, whose leading members are co-brothers, had been engaged in joint businesses and co-owned multiple entities over several years.

The Family Arrangement Agreement dated 28.02.2020 (hereinafter, "the FAA") was executed solely between the AMP Group and the JRS Group to settle longstanding disputes arising between 2013 and 2019, including proceedings pending before the National Company Law Tribunal (NCLT) at New Delhi, Mumbai, and Ahmedabad. The fundamental objective of the FAA was a comprehensive separation of group businesses, with the AMP Group taking over certain entities and the JRS and SRG Groups co-owning others.

The SRG Group held a 40% equity stake in Millenium Estates Pvt. Ltd. ("Millenium") and had interests in Deegee Software Pvt. Ltd. ("Deegee") — two entities whose exit arrangements formed a central part of the FAA.

The SRG Group was admittedly not a signatory to the FAA or the arbitration clause embedded within it. This non-signatory status was the crux of the legal controversy before the Supreme Court.

Key Clauses of the FAA Involving the SRG Group

Several operative provisions of the FAA directly implicated the SRG Group's participation, even though the SRG Group had not formally executed the agreement:

Clause 2.1.4 read with Schedule 7 — Millenium Exit:

"Within 30 (thirty) days from the Trigger Date ("Millenium Transfer Date"), Parties shall execute duly stamped agreement(s) with SRG to record and finalize their understanding with respect to exit of AMP Group from Millenium by way of transfer/buy back of all Class A equity shares in Millenium ("Millenium Exit") in the manner set out in Schedule 7. The Parties agree that the valuation of Millenium for the purposes of the Millenium Exit shall be INR 130,00,00,000 (Rupees One Hundred Thirty Crores)."

Clause 2.1.6 read with Schedule 8 — Deegee Exit:

"Within 30 (thirty) days from the Trigger Date ("Deegee Transfer Date"), Parties shall and shall ensure that SRG executes duly stamped agreement(s) to record their understanding with regards to exit of JRS Group and SRG from Deegee Software..."

Schedule 7 — Millenium Exit framework:

  • The SRG Group was required to purchase approximately 11% shares of the AMP Group in Millenium post-receipt of balance JRS purchase price.
  • The remaining 25% shares were to be bought back by Millenium from funds received from Deegee Software.

Schedule 8 — Deegee Exit framework:

  • JRS Group and SRG were to exit Deegee Software, with the total property value fixed at INR 141,00,00,000.
  • Shares held by both JRS Group and SRG in Deegee Software were to be transferred to the AMP Group.

Amendment to the FAA — 15.05.2020

A subsequent Amendment to the FAA was executed on 15.05.2020 between the AMP and JRS Groups, modifying certain provisions including Clause 2.1.5(a) relating to the Aurosagar Lease Deed and Clause 2.1.6(b) relating to due diligence timelines for Deegee Software.

Pre-Execution Negotiations and the SRG Group's Participation

Correspondence Prior to the FAA

A series of communications prior to the execution of the FAA indicated the SRG Group's involvement in the underlying negotiations:

  • Email dated 14.01.2020 from Mr. Kalpesh Parmar (Chartered Accountant representing the JRS Group) to the AMP Group stated:

"…The pending details from Pankaj, if I correctly understand then it is related to documents of Millenium and Deegee, Even if we consider both of it to be treated separately, it can be done because even after valuation, the matter needs to be discussed out with Samarjitsinh before finalising…"

  • Email dated 25.01.2020 from Mr. Kalpesh Parmar suggested:

"…For Millenium Sanjaybhai, Samarjitsinh & AMP can sit and close it along with issue of residential flats…"

  • A joint meeting was arranged by Mr. Kalpesh Parmar and attended by Mr. Ashit Patel (AMP Group) and Respondent No. 9 (SRG Group) during the pre-FAA negotiations.

Post-Execution Communications

Following execution of the FAA, emails and communications continued to involve the SRG Group or its representatives:

  • Email dated 08.05.2020 from Mr. Kalpesh Parmar explicitly stated, while discussing the Aurosagar Lease Deed:

"…On Aurosagar point, this email I am sending to put forward views of Samarjitsinh (SRG) and not JRS. SRG is clear that Millenium can give POA to AMP and his immediate family…though SRG is not a signatory to FAA, he is ready to honour what was agreed with him over phone call…My hands are tied on this since I have to safeguard interest of SRG…"

  • Email dated 11.05.2020 stated:

"…this can very well be taken up in due course with Millenium when Samarjitsinh is the only decision maker and JRS is at best the facilitator if needed…"

  • Emails dated 27.11.2020 from Mr. Kalpesh Parmar forwarded draft Share Purchase Agreements (SPAs) relating to Millenium and Deegee to SRG lawyers, with a copy marked to Respondent No. 9.