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Arbitration leading to other parties and involving third parties are not Arbitrable: In Karnataka High Court

The Karnataka High Court has ruled that referring a dispute to arbitration is not permissible if it would result in the splitting of the cause of action and cause determination on matters that were not contemplated for arbitration.

The Single Bench of Honourable Justice B. M. Shyam Prasad in the case of South India Biblica Seminary Vs. Indraprastha Shelters Pvt. Ltd. (Writ Petition No. 104172 of 2021) held that the claimant’s rights could not be fully adjudicated unless the third parties were also heard, and thus the matter was demonstrably non-arbitrable.

Facts of the case are that the petitioner South India Biblical Seminary (SIBS Ministries) and the respondents signed a Joint Development Agreement (JD Agreement). The first respondent, Indraprastha Shelters Pvt Ltd, built a residential apartment building in accordance with the JDA. According to the JDA, the specified property was owned by the second respondent, Evangelical Trust Association of South India, and the petitioner was the Administrative Trustee in charge of the specified property’s affairs. Arbitration was provided for in the JDA as a means of resolving disputes between the parties. Following that, a disagreement arose between the parties regarding the allocation of the apartments. The petitioner petitioned the Karnataka High Court to refer the dispute to arbitration under Sections 11(4) and 11(6) of the Arbitration and Conciliation Act, 1996.

The second respondent, Evangelical Trust Association, asserted before the High Court that it was the sole and exclusive owner of the specified property and the JD Agreement. As a result, the second respondent contended that the dispute over property allotment would have to be resolved solely between the first and second respondents, and thus the petitioner could not invoke the arbitration clause.

The second respondent also claimed that it had levelled serious allegations of fraud against the first respondent for conspiring with the second respondent’s former employers/office bearers to create third-party rights in the specified property. As a result, the second respondent contended that arbitration could not be held because there were serious allegations of fraud.

The first respondent, Indraprastha Shelters, argued before the High Court that the petitioner’s claim was not arbitrable because the petitioner and the second respondent had assigned all of their rights under the JD Agreement to third parties in exchange for valuable consideration. As a result, the first respondent contended that neither the petitioner nor the second respondent had any reason to resort to arbitration.

The High Court noted that the parties’ disagreement was over the delivery of the specified apartments. The Court noted that the petitioner and respondents had entered into memorandums of understanding (MOUs) with third parties, agreeing to assign their rights in the specified properties to the third parties, who were not parties to the current petition for appointment of an arbitrator.

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

The High Court ruled that the dispute involved factual issues that could not be resolved without giving due consideration to third parties who would not be parties to the arbitral proceedings. The Court ruled that the petitioner’s rights to the specified properties could not be fully adjudicated unless third parties were also heard. Allowing the dispute to be resolved through arbitration would result in the splitting up of the cause of action and cause determination on matters that were not contemplated for arbitration, as well as a multiplicity of proceedings, according to the Court.

After considering all the facts and arguments, the Court determined that the case was demonstrably unarbitrable and that the respondents should be shielded from being forced to arbitrate.

The Court also said that the facts of the case and the dispute presented rare exceptional circumstances under which the Court could reasonably conclude that the dispute was non-arbitrable. The Court went on to say that the parties must seek redress in properly instituted proceedings in which third parties are also given an opportunity to contest the claim. As a result, the petition was denied by the Court.

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