Arbitration Proceedings Can't Be Commenced Against Third Parties Who Are Not Parties To Agreement: Bombay High Court

Brief Facts:

The Respondents are owners of independent Bungalows. They had filed civil suits before the court, seeking injunctive relief against the Co-operative Housing Society. In both civil suits, the respondents preferred an Interim Application seeking to stay the resolutions passed by the Co-operative Housing Society and not to take steps to evict them from the Bungalows during the pendency of suit.

The Appellant/developer had filed an interim application under Section 8 of the Arbitration and Conciliation Act, 1996. The developer sought the return of plaint to proper court and referral of the entire dispute to arbitration. The Appellant preferred a petition under Section 9 of the Arbitration Act, seeking interim measures pending the commencement of arbitration proceedings. On 23.09.2021, the Court dismissed the Section 8 Interim Applications and Section 9 Arbitration Petition.

The Appellants filed the appeals under Section 37 of the Arbitration Act, challenging the impugned judgment and order dated 23.09.2021.

Submissions:

On behalf of the Appellant/Developer:

• As per section 8 of the Arbitration Act, a party claiming through and under is included in the definition of a “party”. By amendment to Section 8(1) of the Arbitration Act the relevant “party” that is entitled to apply seeking reference to arbitration has been clarified/amplified to include persons claiming “through or under” such a party to the arbitration agreement.
• By signing the Development Agreement, it was the mutual intention of the Society as well as the Developer to bind the signatories as well as the non-signatories, being the dissenting members of the society.
• Once an individual becomes a member of a cooperative society then such member loses his individuality and gets merged with the cooperative society and becomes a party.
• Respondents are members of the Society, who have actively participated in the redevelopment process and voted in favour of redevelopment and have proposed resolutions approving the development, the tender and the appellant as the Developer. Hence, at a later stage, they cannot oppose redevelopment.
• The word “existing members” in the arbitration clause includes within its compass the society and all its members and not merely those who had signed the Development Agreement.

On behalf of the Respondents:

• The society is in favour of the redevelopment project. The Respondents' actions stalled the entire redevelopment process. The Respondents would be bound by the Development Agreement.
• The application under section 8 against non-signatories to arbitration agreement is not maintainable.
• The Development Agreement consisting of Arbitration Agreement is restrictive and limited to the extent of disputes stated therein. An appointed arbitrator cannot grant reliefs that fall outside its scope.
• The original plaintiffs didn't need to sign the Development Agreement, except to claim the benefit of exemption under the Stamp Act.
• An arbitration agreement between two or more parties would operate to bind other parties as well.

Observations:

The court noted that the Respondents neither signed the agreement nor were their names mentioned in the Development Agreement. It had to be seen whether the clauses of the Development Agreement would bind the Respondents.

The court observed that section 7(4) (a) of the Arbitration Act mentions that the Development Agreement must be signed by the parties. In this regard, it referred to the following judgments:

Vardhaman Developers Limited vs. Andheri Krupa Prasad CHS Ltd., where the court held that in the absence of the Development Agreement being individually signed by the members of a Society, the members who have not signed the agreement cannot be relegated to arbitration.

Wadhwa Estate Developers (India) Pvt. Ltd. vs. Omprakash Raheja and others, where the Court held that in the absence of dissenting members having signed the Development Agreement, there is no arbitration agreement between the parties.

Mukesh Nanji Gala vs. Heritage Enterprises, which held that only party to arbitration agreement can challenge an arbitral award.

Shankar Vithoba Desai & ors. vs. Gauri Associates & ors., which held that arbitration cannot be invoked by individual members or group of members of the society for resolving the disputes emanating from the conduct of the developer, even if such disputes arise out of the import of the Development Agreement. The court reasoned that individual members were not parties to the arbitration agreement in the Development Agreement.

Ketan Champaklal Divecha vs. DGS Township Pvt. Ltd. & Anr., where it was held that an individual member cannot invoke arbitration under the Development Agreement.

The court observed that either the developer or the society, who has signed the Development Agreement can invoke the arbitration agreement in case of dispute. A party who is not mentioned in the Development Agreement and who has not signed the contract cannot be referred to arbitration.

The court noted that the impugned order, which allowed the developer to redevelop the property belonging to the society (other than two bungalows) would continue till the disposal of the suits filed by the respondents.

The court dismissed the appeals.

Case Title: AVENUES SEASONS PROPERTIES LLP VS. NISSA HOOSAIN NENSEY & ORS.

Case Numbers: APPEAL NO. 42 OF 2024 IN INTERIM APPLICATION (L) NO. 18441 OF 2021 WITH INTERIM APPLICATION (L) NO. 22423 OF 2021 IN APPEAL NO. 42 OF 2024 WITH APPEAL NO. 43 OF 2024 IN INTERIM APPLICATION (L) NO. 18438 OF 2021 WITH

INTERIM APPLICATION (L) NO. 22422 OF 2021 IN APPEAL NO. 43 OF 2024 WITH APPEAL NO. 44 OF 2024 IN ARBITRATION PETITION NO. 1 OF 2023

Appearances: Mr. Virendra Tulzapurkar, Senior Advocate, with Mr. Sean Wassoodew, Mr. Rupesh Mandhare, and Ms. Ashna Shah for the appellants.

Mr. Mandar Soman, with Ms. Vijaya S. Ingule, for respondent no. 2 in Appeal No. 42 of 2024, respondent no. 3 in Appeal No. 43 of 2024, and respondent no. 1 in Appeal No. 44 of 2024.

Mr. J. P. Sen, Senior Advocate, with Mr. Parag Khandhar, Ms. Pranita Saboo, and Ms. Nidhi Chauhan i/b. DSK Legal for the respondent.

Date of judgment: 22.10.2024

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