Parties Not Signatories To Joint Venture Agreement Cannot Be Forced To Arbitration Proceedings: Karnataka High Court

Brief Facts:

The Platintiff approached the Karnataka High Court (“High Court”) and filed a writ of certiorari to annul the order to refer the dispute to the Arbitrator under Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

The Plaintiff contended that it filed the suit seeking mandatory injunction against Defendant No.3 to deposit a certain amount in an Escrow account, and the Defendants, including respondent No.1, submitted their written statements. However, when the matter proceeded to the Plaintiff's evidence stage, Respondent No.1 filed an application under Section 8 of the Arbitration Act, seeking arbitration and dismissal of the suit. The Plaintiff objected, arguing that Defendants No.3 to 5 were not parties to the Joint Venture Agreement, thus the matter couldn't be arbitrated. Moreover, it asserted that the cause of action couldn't be divided among different defendants and that the Civil court had jurisdiction over the relief sought. These objections were not addressed by the Trial Court, which casually referred to the arbitration clause in the agreement and dismissed the suit.

The Plaintiff further contended that since defendants No.3 to 5 weren't signatories to the agreement and the plaintiff had specific claims against all defendants, the matter shouldn't have been referred to arbitration.

Observations by the High Court:

The High Court noted that the Petitioner sought perpetual injunctions against defendant No.1 from diverting funds away from the Escrow account and against defendant No.5 from alienating the property until payments were made. It noted that defendant No.1 entered a Joint Venture Agreement with the plaintiff and defendant No.2, while defendants No.3, No.4, and No.5 were not parties to this agreement. Despite references to another agreement between defendant No.1 and defendant No.5, the Joint Venture Agreement expressly stipulated arbitration for disputes arising specifically between the parties involved. It held that the clause did not extend to disputes involving parties outside of the agreement, as per Clause VIII of the Joint Venture Agreement.

The High Court held that the Plaintiff's lawsuit encompassed claims against all defendants, including defendant No.3, seeking relief that cannot be segregated for arbitration purposes based on the terms of the Joint Venture Agreement between the plaintiff and defendants No.1 and No.2. Since defendants No.3 to No.5 were not parties to this agreement, the High Court cannot mandate their inclusion in arbitration proceedings. It held that the Civil Court's jurisdiction under Section 9 of the CPC remains intact when there is no arbitration agreement between the litigating parties. Therefore, it held that the Joint Venture Agreement cannot bind defendants No.3 to No.5, who were not signatories to the agreement.

“When admittedly the defendant Nos.3 to 5 are not parties to the arbitration agreement, the Court cannot direct them to be parties to the arbitration proceedings as per the terms of the Joint Venture Agreement entered into between the plaintiff and defendant Nos.1 and 2.”

Consequently, the High Court allowed the writ petition, thereby overturning the Trial Court's decision.

Case Title: M/S. Mvr Constructions Vs M/S. V.M.R Constructions And Others.

Citation No: 2024 LiveLaw (Kar) 154

Case Number: WRIT PETITION NO. 4604 OF 2018 (GM-CPC)

Advocate for the Petitioner: Imran Pasha

Advocate for the Respondent: V Raghunatha Naidu

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