Rethinking Arbitration in Layered Contracts: A Supply-Chain Perspective on HPCL v. BCL

[Ashutosh is a student at Dharmashastra National Law University.]

Arbitration is designed to work on consent, but modern supply chains rarely fit neatly within the boundaries of the arbitration framework. Recently, the Supreme Court (SC) in Hindustan Petroleum Corporation Limited v. BCL Secure Premises Private Limited (HPCL v. BCL) highlighted this tension. The SC ruled that a sub-vendor cannot force a principal employer to arbitrate unless there is clear privity and an explicit agreement between the parties. Simply put, just because companies work together, they do not automatically share the right to arbitrate unless there exists a direct contract between them.

The decision appears doctrinally sound, but it also exposes a gap in Indian commercial law. Multi-tier supply chains are common across sectors, and sub-vendors often handle the most critical parts of the projects, yet they remain legally invisible during disputes. This can lead to heavy losses, as the law offers them no route to seek a neutral forum unless the contractor voluntarily involves them. India lacks a coherent framework for handling arbitration in layered supply chains. Contracts are drafted as isolated islands, even though business ecosystems function as networks. Globally, limited participation of non-signatories is sometimes allowed when the project is functionally integrated, however India is yet to explore this holistically.

The article considers whether India should develop a “supply-chain arbitration framework”, which maintains the core principle of consent, but also offers a structured way for sub-vendors to seek relief. The SC’s ruling in HPCL v. BCL sheds light on the current legal position clear, however the larger question to answer is whether the law is adequate for todays’ complex commercial relationships.

Reality of Modern Supply Chains

Rather than simple bilateral contracts, modern supply chains operate through multi-tier contractual agreements, where a principal employer engages a main contractor who further appoints sub-contractors or sub-vendors. Although each relationship is governed by a separate contract but the project itself functions as a single integrated commercial enterprise. Decisions taken at the top level of the chain have downstream consequences. Although sub-vendors have no direct contractual relationship with the principal employer, any delay in approval, suspension of work, or changes in technical specifications by the principal can immediately disrupt timelines, cash flows and performance obligations of sub-vendors.

This exposes a structural mismatch. Legally, contracts are treated as isolated documents, strictly governed by the principle of privity. Commercially, however, performance is collective and interdependent. Arbitration clauses, like other contractual rights, remain fragmented despite the integrated nature of project execution.

Absence of a Supply-Chain Arbitration Model in India

Under the Arbitration and Conciliation Act 1996 (Act), arbitration is primarily based on party autonomy and privity of contract. Section 7 of the Act requires a valid arbitration agreement between the parties, in the absence of which the dispute will not be referred to arbitration. In HPCL v. BCL, the SC reaffirmed this principle, holding that a non-signatory sub-vendor cannot compel a principal employer into arbitration unless there is a clear contractual consent or privity.

However, courts have developed some exceptions as well, such as the group of companies doctrine, where a non-signatory can be treated as a party to an arbitration agreement if the surrounding circumstances show a mutual intention to bind both signatories and non-signatory affiliates with the same group of companies to that agreement. However, the problem with this is that its application depends upon factual and contextual analysis of party conduct, making its application limited and inconsistent.

Further, the application of this doctrine needs the non-signatory to be a part of the same corporate group as a sub-vendor may be economically dependent on the principal’s decisions but legally invisible as it is not part of the same corporate group. As a result, the arbitration framework in India remains ill-suited for independent and multi-tier supply chains. The absence of an explicit supply-chain arbitration model leaves economically dependent sub-vendors without access to a neutral dispute resolution, an area that remains largely under-theorised in Indian arbitration literature.

Should India Develop a “Supply-Chain Arbitration Framework”?

To fill this doctrinal gap in Indian arbitration law, a structured supply-chain arbitration framework is required, which allows sub-vendors limited rights to join or invoke arbitration at the point where the commercial relationship justifies it. This will not undermine the principle of consent contained in Section 7 of the Act, but uplift the rights of sub-vendors. HPCL v. BCL  affirmatively upheld that to refer any dispute to arbitration, a valid arbitration agreement is required. In this case, the SC held that a non-signatory cannot compel a principal employer into arbitration if there is no contractual consent or privity.

So, there is a need for framing the arbitration law in a way so that the rights of sub-vendors are not infringed. A model could be adopted where a sub-vendor could be allowed limited arbitration rights where certain objective conditions are met. A brief explanation of this approach is outlined below:

1. Principal’s control: Where the principal directly dictates specifications, approvals, timelines or operational decisions that directly control the sub vendor’s performance;

2. Integrated performance: Where the sub-vendor’s work is inseparable from the principal’s project, such that the dispute fundamentally concerns the same subject matter; and

3. Functional privity: Where contractual obligations are connected in a composite transaction and the obligations of sub-vendors are such that the principal’s outcome is impacted.

Indian courts from time to time have touched upon these issues but never fully resolved them for cases involving independent supply chains. The SC does recognise that non-signatories in a composite transaction could be bound to arbitrate if there is a mutual understanding evidenced by conduct. However, this doctrine has limitations as it typically applies only to corporate affiliates with strong organisational skills, which does not naturally extend to independent sub-vendors.

So, to preserve party autonomy, any supply chain mechanism requires either of express multi-party arbitration agreements covering all tiers of participants from the outset, mandating arbitration for disputes arising from the project and a statutory opt-in mechanism enabling sub vendors to join arbitration if objective criteria are satisfied.

Comparative Insights from Other Jurisdictions

A more flexible approach can be seen for non-signatories in the United States (US). The SC of the US in the case of GE Energy Power Conversion France v. Outokumpu Stainless USA, LLC held that the equitable estoppel doctrine can allow a non-signatory to compel arbitration if the signatory party’s claims against that of the non-signatory depend on the contract containing the arbitration clause.

A contrasting view can be seen in the United Kingdom (UK), where the SC in the case of Dallah Real Estate & Tourism Holding Co v. Ministry of Religious Affairs (Pakistan), refused to give an award against a government that was not a party to the agreement, highlighting that explicit contractual consent is the foundation of arbitration law. Now, a leading arbitration hub, Singapore, generally upholds the principle that a non-signatory cannot be forced into arbitration until and unless there is clear consent. Singaporean courts and institutional rules require explicit consent for joinders of third parties.

When taken together, these comparative approaches underline a clear path for the Indian Arbitration framework. The law does not ned to abandon consent to accommodate modern supply chains, but it needs to be framed in a manner so that it recognises consent within structured and objective limits. These jurisdictions demonstrate that consent can be preserved without freezing arbitration doctrine in a bilateral contract model.

Conclusion and Way Forward

The SC’s decision in HPCL v. BCL correctly reaffirms that the core principle of arbitration is consent and privity; this seems doctrinally sound, but the judgment also brings into focus the limitations of the Indian Arbitration framework in cases involving modern multi-tier commercial arrangements. Supply chains today operate as integrated economic units, even though the law continues to treat them as a series of isolated bilateral contracts.

This creates consequences for sub-vendors who are economically dependent on the principal’s act or decisions, which often lead to project suspension, delays, etc., but these sub-vendors are left with no neutral dispute redressal forum. The existing judicial doctrines are developed mainly for big corporate groups and offer limited and inconsistent relief to independent sub-vendors.

Therefore, the challenge for India is not to dilute the principle of consent but to rethink how consent operates in interconnected commercial projects. A supply chain arbitration framework must be designed carefully, providing objective indicators like control, integration, and functional privity. Such a model would modernise dispute resolution along with reduce fragmented litigation, and better reflect commercial reality, without sacrificing arbitration’s foundational principles.