Section 2(h) of Arbitration and Conciliation Act 1996 (the Act) defines the term 'party' as a party to an arbitration agreement.

Section 7 of the Act defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

Under the Act it is mandatory that an arbitration agreement should be in writing. For these purposes, an arbitration agreement is deemed to be in writing if it is contained in:

Section 11 of the Act provides the procedure for appointment of arbitrators.

In Indowind Energy Ltd v Wescare (I) Ltd and Anr (the Indowind decision), a sale agreement (Agreement) was entered into between Wescare (I) Ltd (the first respondent) and Subuthi Finance Ltd (the second respondent) for the sale of certain business assets. The Agreement described the second respondent and its nominee Indowind Energy Limited (Indowind) as the "buyer" and described the second respondent as the promoters of Indowind (the petitioner).

Disputes arose between the respondents in relation to the Agreement. Subsequently, the first respondent filed three petitions against the petitioner and the second respondent under section 9 of the Act for the grant of certain interim reliefs, and a petition under section 11(6) of the Act seeking the appointment of a sole arbitrator before the Madras High Court. The court dismissed the section 9 applications on the ground that the petitioner was not a party to the Agreement as it had neither signed nor ratified the Agreement. However, the court appointed a sole arbitrator on the ground that the petitioner was prima facie a party to the Agreement for the purposes of section 7 of the Act. The Madras High Court's reasons for this decision were as follows:

This judgment was challenged by the petitioner before the Supreme Court.

The Supreme Court held that the petitioner was not bound by the Agreement (and consequently the arbitration agreement) as it had not signed, ratified, approved or confirmed the Agreement.

Further, the Court, relying on its decisions in SBP & Co. v Patel Engineering Limited and in National Insurance Co. Ltd v Boghara Polyfab Pvt. Ltd, held that the courts in deciding an application under section 11 of the Act must decide in a final (and not interim) manner, the issue of whether an arbitration agreement existed between the parties. It is not permissible to merely hold that a party is prima facie a party to the arbitration agreement and bound by it.

This decision may appear to be at odds with the principle that it is the arbitrators who have the final decision as to whether they have jurisdiction, a subset of which is whether the parties before them are bound by the arbitration agreement. However, the court was bound by the Supreme Court's earlier ruling in SBP & Co. v Patel Engineering Limited.

In Andhra Pradesh Tourism Development Corpn. and Anr v Pampa Hotels Limited (the Pampa decision), Andhra Pradesh Tourism Development Corporation Limited (the appellant) and Pampa Hotels Limited (the respondent) entered into a lease agreement and a development and management agreement (Agreements) in relation to certain properties which contained an arbitration clause. The appellant terminated the Agreements. The respondent filed an arbitration application under section 11 of the Act for the appointment of a sole arbitrator before Andhra Pradesh High Court. The appellant resisted the application on the ground that there was no arbitration agreement as the Agreements in question were executed when the respondent was not in existence (as the respondent company was incorporated a year after the Agreements were executed). The court appointed the sole arbitrator and left all of the contentious issues, including the issue of the existence of an arbitration agreement, to be decided by the arbitrator. This decision was challenged by the appellant before the Supreme Court.

The Supreme Court, on an analysis of the facts, concluded that since the respondent was non-existent at the time of entering into the Agreements there was no contract, and consequently no arbitration agreement between the parties. However the doctrine of prospective overruling (by which any overruling of previously well settled law is applied on a prospective basis such that pre-existing disputes will not be affected by such overruling) was sought to be applied as regards the applicability of SBP & Co. v Patel Engineering Limited judgment. Due to this technicality the Supreme Court refused to set aside the appointment of the arbitrator. Rather it directed the arbitrator to "…to decide the issue in regard to the existence/validity of the arbitration agreement as a preliminary issue relating to jurisdiction in the light of what has been stated above."

In both cases, the Supreme Court was dealing with contracts entered into for the benefit of a non-party. The outcome is different only because of the doctrine of prospective overruling coming into play in one case. It is clear that the Supreme Court believes it has to go strictly by the letter and not the spirit. Furthermore, in view of SBP & Co. v Patel Engineering Limited, the court has to take a final (and not a preliminary) view as to whether an arbitration agreement does actually exist between the parties and not leave such an extensive determination of facts to the arbitral tribunal.