Around a month ago, the Supreme Court addressed yet another interesting question dealing with third parties and arbitration proceedings, an issue discussed earlier here. The facts of Deutsche Post Bank Home Finance Ltd v Taduri Sridhar are more tedious than complex, and need elaboration.
The case involved four agreements between different combinations of parties, all but three of which contained arbitration clauses. The first was a standard agreement entered into between the landowner, the developer and the prospective purchaser (respondent) of a flat being constructed on the land [Agreement I]. This agreement contained an arbitration clause. The prospective purchaser also entered into a loan agreement with the appellant bank, which contained another arbitration clause [Agreement II]. There was a third alleged agreement between the appellant and respondent, with the developer standing as guarantor, which provided that the loan amounts be provided directly by the appellant to the developer [Agreement III]. Finally, in pursuance of ‘Agreement I’, an undivided share in the land and a semi-finished apartment was transferred to the respondent, after which he entered into a construction agreement with the developer [Agreement IV] to complete the construction of the apartment. This agreement also contained an arbitration clause. On account of delays in the construction under ‘Agreement IV’, the respondent filed a section 11 petition against the developer. It was in these proceedings that the appellant (which was not party to ‘Agreement IV’, but only to ‘Agreement II’) was also impleaded. The cause of action against the appellant was that it had “had released the total loan amount to the developer without ensuring that there was sufficient progress of construction and without verifying the ‘ground realities’ and thereby failed to perform its minimum obligations and responsibilities as a lender”.
Thus, the simple issue before the Supreme Court was whether the appellant could be impleaded in a section 11 petition filed by the respondent against the developer, based on the fact that the respondent had entered into independent arbitration agreements with both the appellant and the developer, and that the causes of action against both of them were greatly overlapping. The Court, speaking through Justice Raveendran, answered this question in the negative; placing reliance on the following observation from S.N. Prasad vs. Monnet Finance Ltd, (2011) 1 SCC 320,
If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non-parties to the arbitration agreement, reference to arbitration or appointment of arbitration can be only with respect to the parties to the arbitration agreement and not the non-parties.
On the language of the provisions of the Arbitration Act, and prior precedent of the Supreme Court, one cannot take issue with the decision. However, what it does mean is that proceedings which should have been heard and disposed of together will have to either be heard independently, or be disposed off without recourse to arbitration. The possibility of irreconcilable decisions in two independent proceedings against the developer and the appellant could force the respondent to undertake court proceedings, defeating the purpose of encouraging arbitration. Having said that though, viewing the arbitration agreement from a strictly contractual perspective, and based on the law as it stands,the decision was plainly correct.