Arbitration, in absence of third party, leads the proceeding non-arbitrable

South India Biblical Seminary Vs Indraprastha Shelters Pvt. Ltd. (Karnataka High Court)

Facts- Joint Development Agreement (JDA) was executed between the petitioner and the respondents. In performance of the JDA, a residential apartment building was constructed by the first respondent. As per the JDA, the second respondent 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 first respondent 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.

Conclusion- The petitioner, while thus admitting creation of third party rights, proposes adjudication of its right to recover possession of the subject apartments in the absence of these third parties.

The dispute over the subject apartments, in this Court’s considered view, encompasses those questions of facts which will have to be necessarily decided with due opportunity to the third parties who will not be parties to the arbitration proceedings. These questions of facts arise because of the admitted transactions involving third parties after the J D Agreement. The petitioner does not even assert that the third parties would be bound by the arbitration clause as contained in the J D Agreement. It is obvious that larger questions of facts involving third party rights are to be decided and such third parties will not even be parties to the arbitration proceedings. There cannot be complete adjudication of the petitioner’s rights in the subject apartments unless the aforesaid third parties are also heard. This will lead to splitting up of cause of action, a determination on matters which are not contemplated for arbitration and to multiplicity of proceedings. With these circumstances, it can be conclusively opined that the respondents must be protected from being forced to arbitrate when the matter is demonstrably non-arbitrable.

Please become a Premium member. If you are already a Premium member, login here to access the full content.