Non-Signatories Bound By Arbitration Clause When Purchasing Property From Agreement Parties: Karnataka High Court
The Karnataka High Court bench of Justice Anu Sivaraman and Justice Anant Ramanath Hegde has held that a person who is not a party to the arbitration agreement but buys property from someone who is a party to the agreement is still bound by the arbitration clause that applies to their vendors.
The High Court noted that the Constitution Bench of the Supreme Court decision in Cox and Kings Limited v. SAP India Private Limited and Another was primarily concerned with whether the phrase "claiming through or under" in Section 8 of the Arbitration Act includes the "Group of Companies" doctrine and whether this doctrine, as previously outlined in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., constitutes valid law.
The Supreme Court in Cox and Kings addressed several issues. As noted in paragraph 17 of the judgment, the Constitution Bench was tasked with determining the validity of the Group of Companies doctrine within Indian arbitration jurisprudence. It also considered broader ancillary questions including whether the Arbitration Act permits the joinder of a non-signatory to an arbitration agreement and whether Section 7 of the Arbitration Act allows for the determination of an intention to arbitrate based on the conduct of the parties.
In paragraph 170.1, it was held by the Supreme Court that the definition of “parties” under Section 2(1)(h) of the Arbitration Act, read with Section 7, encompasses both signatories and non-signatories to the arbitration agreement. Paragraph 170.2 noted that the conduct of non-signatory parties could indicate their consent to be bound by the arbitration agreement. Paragraph 170.3 clarified that the requirement for a written arbitration agreement does not preclude the possibility of binding non-signatory parties. Paragraph 170.9 elaborated on the limitations of asserting rights as a person “claiming through or under” the agreement, recognizing the derivative right of signatories. Finally, paragraph 230.4 stated that the phrase “claiming through or under” in Sections 8 and 45 provides for derivative rights and does not enable a non-signatory to become a party to the arbitration agreement.
The High Court noted that only a party who has signed the arbitration agreement can be directly bound by it. However, if a non-signatory claims through or under a party to the agreement and holds a derivative right, they are bound by the arbitration clause.
Even if the principles in Cox and Kings were limited to the Group of Companies doctrine, the High Court held that the Respondent could still enforce the arbitration clause against the Appellant who had acquired the properties from the vendors. Section 8(1) of the Arbitration Act allows for referral to arbitration if a party or someone claiming through them applies regardless of prior judgments or orders.
According to Section 8(1), a judicial authority must refer the matter to arbitration if an application is made by a party or someone claiming through them, provided that the agreement is valid. The High Court noted that the section underscores the right of anyone claiming through or under a party to seek resolution through arbitration, and conversely, it implies that such a person can also be subjected to the arbitral tribunal's jurisdiction.
It noted that the Appellant, as the purchaser of properties subject to an arbitration agreement, inherited all related rights and obligations. The transferee is bound by these obligations unless waived by the original party. The Appellant did not claim such a waiver.
It noted that the Appellant, being a pendente lite purchaser, could not unilaterally terminate the arbitration agreement.
Brief Background:
M/s Bhumika North Gardenia (Respondent) entered into a registered agreement to purchase certain immovable properties and paid an advance of Rs.80 lakhs out of a total sale consideration of Rs.16,14,37,500. Later, the vendors issued a notice to the Respondent and cancelled the sale agreement and informing that the advance amount was repaid. The Respondent insisted on specific performance of the agreement. M/s Devtree Corp. Llp. (Appellant) published a notice expressing its intention to purchase the properties. The Respondent filed an application under Section 9 of the Arbitration Act and sought interim measures against the vendors with only the Respondent and the vendors being parties to the proceeding. The Respondent initiated proceedings under Section 21 of the Arbitration Act against the vendors. The Section 9 petition reserved for orders. Then, the Appellant purchased the properties from the vendors. On January 2, 2024, the Section 9 Court passed an order restraining the vendors from alienating the properties. The Respondent filed a Section 9 application against the Appellant, a pendente lite purchaser. By the impugned order dated April 15, 2024, the Section 9 Court restrained the Appellant from alienating the properties. Feeling aggrieved, the Appellant challenged the Section 9 proceeding in the High Court.
The Appellant argued that the Section 9 application was not maintainable because under Section 7 of the Arbitration Act an arbitration agreement must be in writing and signed by the parties. It argued that the Appellant was not a party to the agreement and thus was not bound by the arbitration clause
Case Title: M/s Devtree Corp. Llp. Vs M/s Bhumika North Gardenia
Case Number: MISCELLANEOUS FIRST APPEAL NO. 2978 OF 2024 (AA)
Advocate for the Appellant: Uday Holla and Hiran Krishnaswamy
Advocate for the Respondent: CK Nanda Kumar and Sushal Tiwari
Date of Judgment: 24th July 2024