Arbitration Act | Referral Court Not A 'Monotonous Automaton', Must Prima Facie Scrutinise If Non-Signatory Is A Veritable Party: Madhya Pradesh High Court

"To hold so, would relegate the referral Court to the status of a monotonous automation. To countenance such an extreme proposition would lead to disastrous consequences, where absolute strangers could walk into the referral court and contend that the matter has to refer to the arbitral Tribunal for a decision on the veritable nature of the party." High Court of Madhya Pradesh at Indore, in an authoritative decision pronounced on October 23, 2026, held that referral courts under Section 11 of the Arbitration and Conciliation Act, 1996 cannot act as a "monotonous automaton" and mechanically refer non-signatories to arbitration without conducting a prima facie inquiry into whether they constitute "veritable parties."

Justice Vinay Saraf observed that where there is a complete absence of positive, direct, and substantial involvement or mutual intention to bind non-signatories, referral courts must dismiss Section 11 applications qua such non-signatories rather than delegating the issue to the arbitral tribunal.

The applicant, Sam Industries Ltd., entered into a development agreement on February 4, 2025, with non-applicant no. 1 for developing 2.358 hectares out of 5.67 hectares of undivided ancestral land jointly owned by three brothers. Non-applicants no. 2 and 3 did not sign the agreement, and subsequent disputes led to civil suits for declaration and partition, alongside applications under Order 39 Rules 1 and 2 of the CPC. When non-applicant no. 1 disputed execution and alleged fraud, the applicant invoked Clause 14 of the agreement and petitioned the High Court under Section 11(6) of the 1996 Act seeking reference against all three co-owners.

The primary questions before the court were whether allegations of fraud and forgery raised against a development agreement preclude a reference to arbitration at the pre-referral stage, and whether non-signatory joint co-owners can be referred to arbitration as "veritable parties" under Section 11 or if the determination of their joinder must invariably be delegated to the arbitral tribunal under Section 16.

Civil Disputes Involving Allegations Of Fraud Are Referrable To Arbitration

Addressing the objection of fraud and forgery raised by non-applicant no. 1, the bench examined the contours of non-arbitrability settled by the Supreme Court in Vidya Drolia & Ors. v. Durga Trading Corporation (2021) 2 SCC 1. The court underscored that after overruling N. Radhakrishnan, allegations of fraud are arbitrable when they pertain purely to civil disputes and lack erga omnes effect or wider public ramifications.

"allegations of fraud can be made a subject-matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability."

Relying further on Pravin Electricals (P) Ltd. v. Galaxy Infra & Engg. (P) Ltd. (2021) 5 SCC 671, the court observed that financial transactions occurred between the applicant and non-applicant no. 1 pursuant to the agreement. Because the allegations of forgery and fraud were interwoven with a commercial agreement between private parties, the court ruled that the dispute between the signatory parties was squarely referrable to arbitration.

Scope Of Judicial Scrutiny Under Section 11(6A) Confined To Prima Facie Review

The bench delineated the demarcation of jurisdiction between the referral court under Section 11(6A) and the arbitral tribunal under Section 16 of the 1996 Act. Citing SBI General Insurance Co. Ltd. v. Krish Spinning (2024) 12 SCC 1 and the Constitution Bench ruling In re Interplay between Arbitration Agreements under Arbitration and Conciliation Act 1996 & Stamp Act, 1899 (2024) 6 SCC 1, the court highlighted that the legislative mandate to "examine" existence under Section 11(6A) does not sanction a laborious trial.

"The purport of using the word 'examination' connotes that the legislature intends that the Referral Court has to inspect or scrutinise the dealings between the parties for the existence of an arbitration agreement... On the other hand, Section 16 provides that the Arbitral Tribunal can 'rule' on its jurisdiction, including the existence and validity of an arbitration agreement."

Referral Court Cannot Act As A Monotonous Automaton For Non-Signatories

Addressing the applicant's contention that the joinder of non-signatories must be left exclusively to the arbitrator under the principles laid down in Cox & Kings Ltd. v. SAP India Pvt. Ltd. (2024) 4 SCC 1 and ASF Buildtech Pvt. Ltd. v. Shapoorji Pallonji and Co. Pvt. Ltd. (2025), the High Court held that this discretion cannot be exercised blindly. Grounding its reasoning in the Supreme Court’s recent pronouncement in Hindustan Petroleum Corporation Ltd. v. BCL Secure Premises Pvt. Ltd. (2025), the court made it clear that a referral court is not powerless.

The court reiterated that allowing strangers to drag third parties into arbitration simply by filing a Section 11 petition would destroy the foundational principle of party autonomy. It observed that the referral court retains the vital gatekeeping role of ascertaining prima facie whether a non-signatory is a veritable party or whether its involvement in the negotiation, execution, or performance of the underlying contract was direct, positive, and substantial.

"The Supreme Court held that it does not mean that where the referral court finds prima facie a party is not a veritable party, still the matter is left to the arbitral tribunal. To hold so, would relegate the referral Court to the status of a monotonous automation."

Absence Of Privity Shields Non-Signatory Co-Owners From Arbitration

Applying these standards, the bench scrutinized the factual matrix surrounding non-applicants no. 2 and 3. The court noted that although non-applicant no. 2's name appeared in the text of the agreement, he never signed it, nor did he receive any monetary consideration. Furthermore, non-applicant no. 3 was neither named nor had his undivided share demarcated in the contract, and he had actively challenged the transaction by filing a separate civil suit for declaration and permanent injunction.

The court observed that in the said civil suit, the applicant had unsuccessfully filed an application under Order 7 Rule 11 of the CPC read with Section 8 of the 1996 Act, which was dismissed by the trial court. Emphasizing the pre-litigation correspondence, the bench noted that the applicant’s own legal notice issued on September 18, 2025, proposing mediation, contained no whisper alleging that non-applicants no. 2 and 3 were veritable parties or had participated in the negotiations.

"in view of this Court even prima facie in the absence of any material, it cannot be accepted that non applicant No. 2 and 3 are the veritable parties to the agreement and thus the non applicant No. 2 and 3, those are the non signatory parties cannot be referred for arbitration in the absence of any privity of contract between the applicant and non applicant No. 2 and 3."

Distinguishing cases like Hemant D Shah HUF v. Chittaranjan D. Shah HUF (2026) and Ajay Madhusudan Patel v. Jotinder S. Patel (2025) 2 SCC 147, the court held that composite transactions and mutual intent were completely absent. Consequently, the High Court held that the referral application could only proceed against the signatory party, non-applicant no. 1, while fully exonerating non-applicants no. 2 and 3 from the arbitral process.

The High Court partly allowed the application under Section 11(6) of the 1996 Act by proposing to appoint Shri Justice J.K. Maheshwari, Former Judge of the Supreme Court of India, as the sole arbitrator to resolve the disputes strictly between the applicant and non-applicant no. 1. The application was dismissed qua non-applicants no. 2 and 3, reaffirming that the referral court must filter out non-signatories who share no privity of contract before setting the arbitral machinery into motion.

Date of Decision: October 23, 2026