Arbitration Involving Third Parties And Leading To Other Proceedings - Not Arbitrable : Karnataka High Court

The Single Bench of Justice B. M. Shyam Prasad held that there cannot be a complete adjudication of the claimant's rights unless the third parties were also heard, therefore, the matter was demonstrably non-arbitrable.

A Joint Development Agreement (JD Agreement) was executed between the petitioner South India Biblical Seminary (SIBS Ministries) and the respondents. In performance of the JDA, a residential apartment building was constructed by the first respondent Indraprastha Shelters Pvt Ltd. As per the JDA, the second respondent Evangelical Trust Association of South India was the owner of the specified property and the petitioner was the Administrative Trustee managing the affairs of the specified property. The JDA provided for resolution of disputes between the parties through arbitration. Thereafter, a dispute arose between the parties with respect to the allotment of the apartments. The petitioner filed a petition under Section 11(4) and Section 11(6) of the Arbitration and Conciliation Act, 1996 before the Karnataka High Court to refer the dispute to arbitration.

The second respondent Evangelical Trust Association submitted before the High Court that it was alone the absolute owner of the specified property under the JD Agreement. The second respondent thus contended that the dispute with respect to allotment of the property would have to be resolved only between the first and the second respondents, and thus the petitioner could not invoke the arbitration clause.

The second respondent also averred that it had levied serious allegations of fraud against the first respondent for colluding with the erstwhile employers/office bearers of the second respondent to bringing about third-party rights in the specified property. Thus, the second respondent contended that since there were serious allegations of fraud, arbitration could not be conducted.

The first respondent Indraprastha Shelters submitted before the High Court that the petitioner's claim was non- arbitrable since the petitioner and the second respondent had assigned all their rights under the JD Agreement in favour of third parties for valuable consideration. Thus, the first respondent contended that there was no cause for the petitioner or the second respondent to resort to arbitration.

The High Court noted that the dispute inter se the parties was with respect to the delivery of the specified apartments. The Court observed that the petitioner and the respondents had entered into MOUs with third parties agreeing to assign their rights in the specified properties to the third parties, who were not parties to the present petition for appointment of an arbitrator.

The Court noted that the petitioner was proposing adjudication of its right to recover possession of the specified property in the absence of the third parties, while admitting the creation of third-party rights in the specified property.

The High Court ruled that the dispute involved questions of facts which could not be decided without giving due opportunity to the third parties, who would not be parties to the arbitral proceedings. The Court held that there cannot be a complete adjudication of the petitioner's rights with respect to the specified properties unless the third parties were also heard. The Court added that allowing reference of the dispute to arbitration would lead to splitting up of the cause of action, and cause determination on matters which were not contemplated for arbitration as well as lead to multiplicity of proceedings.

The Court thus held that the matter was demonstrably non-arbitrable and the respondents must be protected from being forced to arbitrate.

The Court added that the circumstances of the case and the dispute presented rare exceptional circumstances wherein the Court could reasonably hold that the said dispute was non-arbitrable. The Court added that the parties must seek out remedies in properly instituted proceedings where the third parties are also given an opportunity to contest the claim.

The Court thus rejected the petition.

Case Title: South India Biblical Seminary versus Indraprastha Shelters Pvt Ltd and Anr.

Dated: 28.03.2022 (Karnataka High Court)

Citation: 2022 LiveLaw (Kar) 141

Counsel for the Petitioner: Joshua Hudson Samuel

Counsel for the Respondents: Navakesh Batra and B.R. Dhanalakshmi for Respondent No. 1; V.B. Shivakumar for Respondent No. 2

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