Court May Decline To Refer Parties To Arbitration If Dispute Doesn’t Correlate To Arbitration Agreement: Delhi High Court Reiterates

While dealing with a petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A&C Act), the Court observed that in the guise of seeking reference to an arbitrator, the petitioner was seeking recovery of the costs that it had been directed to pay as compensation to the homebuyers by the National Consumer Disputes Redressal Commission (NCDRC).

The bench of Justice Chandra Dhari Singh concluded that the dispute raised by the petitioner seeking recovery of costs, neither arose out of the agreement executed between the parties for construction of a housing project, and nor was it a subject matter of a dispute which may be referred for arbitration.

While dismissing the petition, the Court remarked that while adjudicating a Section 11 petition, a court shall endeavour to evaluate whether the party has made out a prima facie arbitrable case or not.

The petitioner, GTM Builders and Promoters Pvt Ltd, is a construction company who entered into an agreement with the respondent, Sneh Development Pvt Ltd, for the purpose of constructing a group housing society.

Certain homebuyers instituted complaints against the petitioner before the State Consumer Disputes Redressal Commission (SCDRC), alleging that the petitioner delayed in completing the housing project and failed to hand over the possession of their flats on time. The SCDRC, however, concluded that there was no delay on the part of the petitioner in handing over possession to the home buyers.

In an appeal filed by the homebuyers against the decision of the SCDRC, the National Consumer Disputes Redressal Commission (NCDRC) held that the petitioner was liable for the delay in handing over the possession and was directed to pay compensation to the homebuyers.

The petitioner, GTM Builders, issued a legal notice to the respondent, Sneh Development, seeking to recover the penalty imposed on it by the NCDRC. The petitioner alleged that, by virtue of an indemnity bond as well as an undertaking, the respondent was responsible for paying the petitioner any harm or loss that may be suffered by it in the course of the housing project.

After the respondent failed to reply to the legal notice, the petitioner filed a petition under Section 11(6) of the A&C Act before the Delhi High Court seeking reference of the dispute to arbitration.

The petitioner, GTM Builders, submitted before the High Court that it was burdened with the obligation to pay compensation to the homebuyers due to the delays and default committed by the respondent, Sneh Development. Therefore, it argued that by virtue of the indemnities and undertakings executed by the respondent in favour of the petitioner, the petitioner was liable to recover the said compensation amount from the respondent.

Perusing the arbitration clause contained in the agreement, the High Court observed that a crucial and indispensable requirement before seeking the intervention of the court and subsequently of an arbitrator, is that the dispute between the parties must be arising out of the agreement.

While reckoning that the petitioner was seeking recovery of the costs that it had been directed to pay as compensation to the homebuyers who had approached the NCDRC, the bench concluded that the dispute sought to be referred to arbitration was neither related to the completion of the housing project and nor did it stem from the said project.

Perusing the undertaking given by the respondent in favour of the petitioner, the Court said, “A reading of the undertaking reveals that the same was only to the effect that the respondent would not claim any such amount above and beyond which was decided by way of the Agreement between the parties and only where the Company of the petitioner suffered any loss due to the failure on the part of the respondent/executor to comply with the undertaking, the respondent would be liable to pay the Company. There is no undertaking to show that any kind of loss suffered by the petitioner would be covered under this undertaking.”

The Court thus concluded that under the said undertaking/ “Undertaking-cum-indemnity”, the respondent was not liable to indemnify the petitioner towards the penalty imposed upon the latter by the NCDRC for the delay in handing over the possession to the homebuyers.

“Therefore, it is evident that the dispute which the petitioner has raised, for the adjudication of which it is seeking the appointment of an arbitrator, is in no manner arising out of the Agreement dated 10th March 2005 or even the undertakings signed and executed thereafter,” the Court said. It added: “Even otherwise if such an obligation arose between the parties, it certainly did not arise from the Agreement in question and was neither the subject matter of the disputes which may be referred for arbitration.”

The bench further held that while adjudicating a petition under Section 11(6) of the A&C Act, a court shall endeavour to evaluate whether there exists a written agreement between the parties for resolution of disputes through arbitration, and whether the aggrieved party has made out a prima facie arbitrable case.

Referring to Supreme Court’s decision in DLF Home Developers Limited vs. Rajapura Homes Pvt Ltd & Anr. (2021), the Court reiterated that mere existence of an arbitration agreement or arbitration clause would not be sufficient to refer the parties to arbitration. Even in the presence of an arbitration agreement, the court may decline the reference or appointment of an arbitrator when the dispute does not correlate to the agreement, the bench noted.

The Court thus concluded that the petitioner did not invoke the arbitration clause pertaining to any issue or dispute arising out of the agreement between the parties. “Instead, the petitioner is seeking recovery in the guise of reference to an arbitrator from the respondent for a cost which is neither arising out of the Agreement, nor is covered in the undertakings furnished by the respondent qua the amount involved in the Agreement,” the Court said.

Therefore, the petitioner had failed to show that the dispute sought to be referred to arbitration had arisen out of the agreement and that the same was arbitrable in nature, the Court ruled.

“The dispute against which Section 11(6) is invoked is not an arbitrable dispute culminating from the Agreement between the parties but is merely arising out of compliance of an order passed by the NCDRC, therefore, does not warrant the indulgence of this Court,” the bench said.

The Court thus dismissed the petition.

Case Title: GTM Builders and Promoters Pvt Ltd vs. Sneh Development Pvt Ltd

Citation: 2023 LiveLaw (Del) 283

Counsel for the Petitioner: Mr. Ashish Kumar

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