Courts' duty when non-party to arbitration agreement is impleaded under Section 11 - International Law Office

International Law Office

Litigation - India

Courts' duty when non-party to arbitration agreement is impleaded under Section 11

April 19 2011

Introduction
Facts
Decision
Comment


Introduction

In Deutsche Post Bank Home Finance Ltd v Taduri Sridhar(1) the Supreme Court made an important pronouncement on the scope of the duty of the courts when a person that is not a party to the arbitration agreement is impleaded under a Section 11 petition under the Arbitration and Conciliation Act 1996. The court was of the opinion that in such cases, if a person that is not a party to the arbitration agreement is impleaded as a party to the petition under Section 11 of the act, the court should either delete such party from the group of parties or, when appointing an arbitrator, make it clear that the arbitrator is appointed to decide only the disputes between the parties to the arbitration agreement.

Facts

Taduri Sridhar (first respondent) entered into an agreement for sale dated October 16 2006 with a developer (second respondent) and some land owners. Deutsche Post Bank (the appellant), on the request of the first respondent, sanctioned a housing loan of Rs5.2 million to the first respondent for the purchase of the apartment in terms of a loan agreement dated December 21 2006. Thereafter, in pursuance of the agreement for sale dated October 16 2006, the first respondent paid the entire sale price to the developer through the appellant. The first respondent then entrusted the construction of the unfinished apartment to the developer under a construction agreement dated February 21 2008, under which the developer acknowledged receipt of the total cost of construction and agreed to complete the construction of the apartment and deliver the same to the first respondent by October 16 2008 with a grace period of three months. The agreement dated February 21 2008 contained an arbitration clause in Clause 7 which read as follows:

"7. Arbitration

a. In the event of any dispute between the parties in connection with the validity, interpretation, implementation or breach of any provision of this agreement or any other disputes including the question of whether there is proper termination of the agreement shall be resolved through arbitration by appointing a sole arbitrator by the Vice Chairman of the First Party. The decision of the Arbitrator shall be final and binding on both the parties.

b. The arbitration proceedings shall be in accordance with the provisions laid down in the Arbitration and Conciliation Act, 1996 and shall be governed by the laws in A.P. subject to the authorized arbitration clauses. The venue of the Arbitration proceedings shall be Hyderabad and the language shall be in English. All the proceedings are subject to the exclusive jurisdiction of the courts at Hyderabad limits."

Thereafter, the first respondent issued a notice dated July 31 2009 to the developer, alleging a delay in the construction and delivery of the apartment, and called on the developer to pay compensation for the delay. By another letter dated September 15 2009, the first respondent invoked the arbitration clause contained in Clause 7 of the construction agreement dated Februray 21 2008 and sought reference of the disputes between them to arbitration.

On receiving no response from the developer, the first respondent filed a petition under Section 11 of the act before the Andhra Pradesh High Court for appointment of an arbitrator. The appellant was impleaded in the petition as a respondent along with the developer. The appellant resisted the petition, contending that it had nothing to do with the dispute between the first respondent and the developer, and that the petition under Section 11 of the act was not maintainable against it, as it was not a party to the arbitration agreement invoked by the first respondent (Clause 7 of the construction agreement dated February 21 2008).

Through an order dated April 12 2010, the designate of the chief justice of the Andhra Pradesh High Court allowed the application and appointed a retired judge of the high court as the sole arbitrator. The order did not refer to the appellant's contention that it was not a party to the dispute and that therefore the petition under Section 11 was not maintainable against it. Aggrieved, the appellant filed a special leave petition before the Supreme Court of India.

Decision

The appellant's challenge against the order dated April 12 2010 was twofold:

  • First, as the first respondent and the developer were the only parties to the construction agreement dated February 21 2008 containing the arbitration agreement, the appellant could not be dragged into a dispute between them by impleading it as a party to the petition under Section 11 of the act; and
  • Second, the designate of the chief justice ought to have examined whether both respondents in the petition under Section 11 of the act were parties to the arbitration agreement (Clause 7 of the construction agreement dated February 21 2008) before making an order appointing an arbitrator under Section 11 of the act.

The Supreme Court was of the opinion that the question that had arisen for consideration was whether the appellant could be made a party to the arbitration, even though it was not a party to the arbitration agreement contained in Clause 7 of the construction agreement dated February 21 2008.

The Supreme Court was of the view that as far as the disputes between the first respondent and the developer were concerned, the designate of the chief justice was justified in appointing an arbitrator. However, the question as to whether the appellant, as a non-party to the construction agreement containing the arbitration agreement, could be roped in as a party to such arbitration should have been correctly considered by the high court.

Relying on the proposition of law expounded in Jagdish Chander v Ramesh Chander(2) and Yogi Agarwal v Inspiration Clothes & U,(3) the court ruled that there can be reference to arbitration only if there is an arbitration agreement between the parties. If there is a dispute between a party to an arbitration agreement and other parties to the arbitration agreement, as well as non-parties to the arbitration agreement, reference to arbitration or the appointment of an arbitrator can be with respect only to the parties to the arbitration agreement and not the non-parties. In this regard, the Supreme Court also relied on its earlier judgment rendered in SN Prasad v Monnet Finance Ltd.(4)

The court further held that the existence of an arbitration agreement between the parties to the petition under Section 11 of the act and the existence of disputes to be referred to arbitration are conditions precedent for appointing an arbitrator under Section 11. If a person that is not a party to the arbitration agreement is impleaded as a party to the petition under Section 11, the court should either delete such party from the group of parties or, when appointing an arbitrator, make it clear that the arbitrator is appointed to decide only the disputes between the parties to the arbitration agreement.

Based on the above reasoning, the Supreme Court held that the petition under Section 11 against the appellant was misconceived, as the appellant was not a party to the construction agreement dated February 21 2008, and allowed the appeal setting aside the high court's order dated April 12 2010, in part, as far as the appellant was concerned. However, the Supreme Court made it clear that the appointment of an arbitrator under the order would remain undisturbed as far as the disputes between the first respondent and the developer were concerned.

Comment

This judgment seeks to reinforce the primary aim of arbitration proceedings to resolve disputes between parties to an arbitration agreement. In the event that a person or entity that is not a party to the arbitration agreement is dragged into the adjudication process, the same would be contrary to the contract and the law.

For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (bishwajit.dubey@amarchand.com or tamal.mandal@amarchand.com).

Endnotes

(1) Civil Appeal 2691/2011 (arising out of Special Leave Petition (C) 34139/2010), decided on March 29 2011.

(2) 2007 (5) SCC 719.

(3) 2009 (1) SCC 372.

(4) 2011 (1) SCC 320.


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