India: The Supreme Court Of India Carves Out A Seventh Category Of Dispute Which Is Not Arbitrable

Last Updated: 22 August 2016
Article by Rajat Taimni and Naval Sharma

In its judgment of Booze Allen & Hamilton Inc. v SBI Home Finance Ltd. and Ors 1 the Supreme Court of India had listed six categories of disputes which are non – arbitrable, these included (i) disputes which give rise to or arise out of criminal offences, (ii) matrimonial disputes, (iii) guardianship matters, (iv) insolvency and winding up matters, (v) testamentary matters and (vi) eviction or tenancy matters. 

The Apex Court in its recent decision in Shri Vimal Kishor Shah & Ors v Mr. Jayesh Dinesh Shah & Ors 2 has now carved out a seventh category of non-arbitrable disputes namely cases arising out of trust deeds and the Trust Act 1882 ['the Act']. The Court has ruled that the Act being a complete code in itself impliedly bars the Application of the Arbitration and Conciliation Act 1996 ['the Arbitration Act']. The reasoning applied by the Court in reaching upon its decision may lead to the creation of additional categories of disputes which could be considered non-arbitrable. 

Facts

A family trust deed was created in the favour of six minor beneficiaries.  Clause 20 of the trust deed contained an arbitration clause which provided that resolution of every difference/dispute between the beneficiaries shall be resolved in accordance with the provisions of the Indian Arbitration Act 1940.

Differences arose between the six beneficiaries and arbitration was invoked. Parties however could not agree on the name of the arbitrator and Jayesh Dinesh Shah, one of the beneficiaries filed an application under §11 of the Arbitration Act in the Bombay High Court. This was opposed by the other beneficiaries led by Vimal Kishore Shah on the grounds that no arbitration agreement existed between the beneficiaries as they were not signatories to the trust deed.

The Bombay High Court in its decision allowed the §11 Application on grounds that at the time the trust deed was executed the six beneficiaries were minors and could not have signed the trust deed. However, the beneficiaries throughout their minority had taken benefit of the trust deed and on attaining majority must be treated as parties to the trust deed.

Contentions raised by parties

In appeal, Vimal Kishor Shah apart from raising the issue of the beneficiaries not being signatories to the trust deed also contended that disputes under the trust deed were not arbitrable as the Act was a complete code in itself and provided for adjudication of disputes between parties by the Civil Court, therefore arbitration was excluded.

Jayesh Dinesh Shah on his part relied upon the decision of the Bombay High Court for support. 

Decision

The Supreme Court in its decision overruled the judgment of the Bombay High Court. Relying upon §2(b) & (h) as well as §(7) of the Arbitration Act which deal with the definition of an arbitration agreement as well as parties to an arbitration agreement, it noted that since these provisions barred the jurisdiction of Civil Courts they must be interpreted strictly. The Court stated that for an arbitration clause to be valid and binding it must be in writing and should be executed by parties.

The Court then ruled that a trust deed is executed by the testator and the beneficiaries to the trust deed are not required to execute it, as such the beneficiaries are not parties to the trust deed and the deed cannot be treated as an agreement between the beneficiaries. The Court noted that the beneficiaries are only required to carry out the provisions of the trust deed and infact there is no agreement between the beneficiaries.  Therefore no arbitration agreement existed between the parties in this case.

The Court thereafter observed that its aforesaid finding was sufficient to decide the entire dispute between parties, but nevertheless proceeded to rule on the issue of whether arbitration was excluded by the provisions of the Act on grounds that it was a pure issue of law and could be decided in Appeal.

Examining the scheme of the Act and the various provisions under it, the Court noted that the Act was in a complete code in itself. Various provisions of the Act provided for the legal remedies available to the author of the trust, trustees and the beneficiaries and jurisdiction was specifically conferred upon a principal Civil Court of Original jurisdiction.

Further relying upon the Constitution Bench decision of Dhulabhai etc. v  State of Madhya Pradesh3 which lays down principles for determining express or/and implied bar on the jurisdiction of Civil Courts, it ruled that since the Act provided the specific remedy of adjudication of disputes by a Civil Court, any remedy through arbitration was impliedly barred. The Court concluded its decision by specifically stating that it was now adding a seventh category of disputes namely cases arising out of trust deed and the Act in the list of disputes considered non-arbitrable that was specifically laid down in its decision in Booz Allen & Hamilton.

Conclusion

The Supreme Court's decision in the present case highlights the evolving nature of the arbitration landscape specifically as it relates to what matters would be held to be outside the purview of arbitration. 

We note that the decision of the Court in relation to validity of the arbitration agreement as well as parties thereto was under the old Arbitration Act. Under the Arbitration & Conciliation (Amendment) Act 2015 parties claiming through or under signatories to arbitration agreements are allowed to be joined in arbitration. It is therefore likely that if the Arbitration & Conciliation (Amendment) Act 2015 was to be applied the decision of the Court on this issue may have been different.

For further information on this topic please contact Tuli & Co 

Tel +91 22 6725 5421, Fax +91 22 6725 5422 or email lawyers@tuli.co.in

www.tuli.co.in


1 (2011) 5 SCC 532

2 Civil Appeal No. 8614 of 2016

3 AIR 1969 SC 78

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