Telangana High Court

M/S. S.V. Properties vs G. Chalapathi Rao on 15 March, 2024

Author: K. Lakshman

Bench: K. Lakshman

               HON'BLE SRI JUSTICE K. LAKSHMAN

      ARBITRATION APPLICATION NOs. 75 AND 76 Of 2020

COMMON ORDER:

Since the parties in both the Applications are same, these two

Applications are heard together and being disposed of by way of this

common order.

2. The present Applications are filed to appoint an Arbitrator

under Section 11(6) of the Arbitration and Conciliation Act, 1996 (for

short, 'the Act') to adjudicate the disputes between the Applicant and

the Respondents.

3. Heard Sri Ch. Ravi Kumar, learned counsel representing Sri

Sunil B. Ganu, learned counsel for applicant, Sri U.Santhosh Kumar,

learned counsel representing Sri S.Sridhar, learned counsel for

respondents 2 and 3 and Sri Mohd. Islamuddin Ansari, learned counsel

for respondents 1 and 4.

4. Brief Facts:-

i. The Applicant is a Partnership firm represented by its Managing Partner. The Respondents claim to be the owners of land admeasuring 6413 Sq. yards in Sy.Nos. 62, 68A & 68AA of Madinaguda Village, Serilingampally Mandal, Ranga Reddy District (for short 'the subject property').

ii. The Applicant and Respondents have entered into a registered

Development Agreement - cum - General Power of Attorney

(Hereinafter 'DGPA') dated 12.03.2007 vide document

No. 4795/2007 on the specific terms and conditions mentioned

therein with regard to development of the subject property. The

Applicant had paid an amount of Rs. 2,40,00,000/- to the

Respondents as refundable deposit.

iii. Thereafter the Respondents approached the Applicant and sought

for cancellation of DGPA and they both entered into deed for

cancellation of DGPA vide document No. 14132/2013 dated

19.09.2013. The Respondents had issued few cheques dated

19.09.2013 for Rs. 2,40,00,000/- to the Applicant towards refund

of security deposit.

iv. At the request of Respondents that there is insufficient funds, the

Applicant did not present the cheques, but the Respondents had

paid only an amount of Rs. 1,88,50,000/- to the Applicant and

balance of Rs. 51,50,000/- left unpaid. The Respondents offered

to convey two flats adjusting the balance amount in the complex

proposed to be developed by another developer in the same

property.

v. Accordingly an Agreement of sale of the flat bearing No. 201 in

the 2nd floor of the complex admeasuring 1000 sq.ft was entered

between the Applicant and the Respondents No. 1, 3 and 4 for

consideration of Rs. 20,00,000/- dated 15.10.2013 adjusting one

of the cheque issued by Respondent No. 3 for an amount of

Rs. 20,00,000/- towards refund.

vi. Another Agreement of sale in respect of flat bearing No. 203 in

the 2nd floor of the complex admeasuring 1500 sq.ft was entered

between the Applicant and the Respondents No. 1, 3 & 4 for

consideration of Rs. 31,50,000/- dated 15.10.2013 and the same

is adjusted towards one of the cheque issued by Respondent No. 1

for an amount of Rs. 30,00,000/- and the remaining Rs. 1,50,000/-

adjusted by the Respondent No. 1 from one of the cheques issued

to the Applicant for Rs. 60,00,000/- towards refund of security

deposit.

vii. As per the terms of Agreements, the Respondents had to handover

the said two flats within 30 months from the date of the

Agreements and in case of delay, the Respondents had to pay

damages at the rate of 5% per sq.ft to the Applicant till handing

over of the flats.

viii. The New Developer Nikhil Sai Krishna Constructions had entered

in place of the Applicant and obtained construction permissions

for 5 floors on 06.03.2014 for constructing residential apartment.

Further the Applicant is following up with Respondent but they

failed to hand over the same and postponed it for one or other

reasons. On enquiry, it was informed that construction was

completed in the year 2017 itself.

ix. The Applicant compelled the Respondent to execute sale deed in

respect of the two flats in February 2019, whereas the

Respondents informed that no construction was carried out due to

change in the layout of the complex and the Respondents had

agreed to refund an amount of Rs. 51,50,000 along with an

interest of 18% to the Applicant within 6 months, but did not

repay it.

x. The Applicant had issued a notice dated 07.02.2020 to the

Respondents to make payment of an amount of Rs. 51,50,000/-

along with 18% interest and also referred Arbitration clause 20 of

the Agreements of sale dated 15.10.2013 and informed that he is

nominating Sri. Chalapathi Rao, Retired District Judge as an

Arbitrator and requested them to appoint an Arbitrator from their

side within 30days.

xi. The Respondents Nos. 1 and 4 received the notice, but did not

issue any reply and the Respondents No. 2 and 3 issued a reply

notice denying the averments of notice. In the present

applications, the Applicant herein claims an amount of

Rs.44,42,082/- along with interest at the rate of 18% in respect of

Flat No. 201 which is the subject matter of A.A. No. 75 of 2020

and also claims an amount of Rs. 69,96,279/- along with interest

at the rate of 18% in respect of Flat No. 201 which is the subject

5. Thus, according to the Applicant, there are disputes with regard

to the aforesaid transactions and agreements of sale. These are arbitrable

disputes. Therefore, the Applicant herein filed the present applications

under section 11(6) of the Act, for appointment of Arbitrator to

adjudicate the disputes between them.

Contentions of the Applicant :

6. Even though the Respondent No. 2 is not a party to both the

Agreements of sale dated 15.10.2013 as he being the one of the party to

the DGPA entered between the Applicant and all the Respondent for an

amount of Rs. 2,40,00,000/-. Therefore, the Respondent No. 2 is made

as party to the proceedings and the Respondents are jointly and severally

liable.

Contentions of the Respondent Nos. 1 and 4 :-

7. The Respondent herein admits to the fact in respect of

existence of registered DGPA dated 12.03.2007, cancellation of DGPA

dated 19.09.2023, MOU dated 21.12.2006 and also states that the

Respondent No.1 issued cheques totaling Rs.1,20,00,000/- out of

Rs.2,40,00,00/-. The Respondent herein along with Respondents 3 and 4

entered into two agreements of sale dated 15.10.2013 to convey Flat No.

201 and 203 in the proposed complex but the Respondent No. 1 is

concerned with only Flat No. 203. There is no written Agreement in

respect of promise made in repayment of the amount and further the

Agreement of sale was executed on 15.10.2013 and the 30 months

period fell on 14.04.2016 but the Applicant issued notice on 07.02.2020.

Even assuming that there are disputes between the parties in respect of

Agreements of Sale dated 15.10.2013 and the same is barred by

limitation and the present application is liable to be dismissed.

Contentions of the Respondent No.3 :-

8. The Respondent No.3 admits with respect to the existence of

DGPA dated 12.03.2007 and the receipt of Rs. 2,40,00,00/- which is a

refundable security deposit and two separate Agreement of sale dated

15.10.2013 to convey the two flats i.e., Flat No. 201 & 203 in the

proposed complex. 2nd Respondent is not a party to the two Agreements

of sale but he made as a party to the present Application and further

states that just because respondent No.2 is a party to the DGPA, he

cannot be made as a party to the Arbitration. The performance of

obligation of Respondents No. 1, 3 and 4 under Agreement of sale dated

15.10.2013 have become impossible and the contract is void. The

Respondent herein denies the plea of refund of Rs. 51,50,000/- with

18% interest per annum and even assuming it to be true, an oral

agreement cannot be enforceable without existence of Arbitration

clause. The Agreements of sale dated 15.10.2013 have become void in

view of the alleged oral fresh agreement, which do not have Arbitration

clause and therefore the Applicant cannot invoke the Arbitration clause.

The Respondent herein relies on the decision of Hon'ble Supreme Court

in Union of India vs Kishorilal Gupta and Bros 1.

Findings of the Court :-

9. The aforesaid rival submissions would reveal that there are

disputes between the Applicant and the Respondents towards part

payment of refundable security deposit of Rs.51,50,000/- which the

Applicant had deposited with Respondent at the time of execution of

Registered DGPA dated 12.03.2007. The Respondents No. 1 and 4

received the notice, but did not issue any reply and the Respondents No.

AIR 1959 SC 1362

2 and 3 issued a reply notice denying the averments of notice. The

Respondents in their Counters raised the contention that the Applicant

claiming the amounts along with interest on a promise and he cannot

institute an application without existence of Arbitration clause. The

Respondent states that the present Application is barred by limitation as

the Agreements of Sale are entered in the year 2013. 2nd Respondent is

not a party to the Agreements of sale and he cannot be made party to the

Arbitration proceedings.

10. It is appropriate to refer and extract the Arbitration clause

referred in the agreement of sale dated 15.10.2013.

Clause 20 : It is agreed between both the parties that any dispute arising out of this Agreement, shall be referred to Arbitration under the Arbitration and Conciliation Act, 1996. It is further agreed that the Arbitral Tribunal for arbitration shall consist of 3 Arbitrators, one Arbitrator appointed by each of the parties and the third Arbitrator shall be choosen by two Appointed Arbitrators. In case of any disputed the Courts at Ranga Reddy District will have jurisdiction.

11. Now the issue falls for consideration is as to whether a non-

signatory and third party to an Agreement be made as party to the

Arbitration?

12. The same objection is raised by the registry at the time of

scrutiny and after hearing the learned counsel for Applicant on the said

objection, this Court directed the registry to number the application and

held that the issue of 2nd Respondent as necessary party can be gone into

after other side enters appearance and raises any objection.

13. It is relevant to note that the Apex Court in MTNL v. Canara

Bank 2 held as follows:-

10.5. The group of companies doctrine has been invoked by courts and tribunals in arbitrations, where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group. The doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts. [ Interim award in ICC Case No. 4131 of 1982, IX YB Comm Arb 131 (1984); Award in ICC Case No. 5103 of 1988, 115 JDI (Clunet) 1206 (1988). See also Gary B. Born : International Commercial Arbitration, Vol. I, 2009, pp. 1170-1171.]

10.6. The circumstances in which the "group of companies" doctrine could be invoked to bind the non-signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject-matter; the composite nature of the transaction between the parties. A "composite transaction" refers to a transaction which is interlinked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.

(2020) 12 SCC 767

10.8. The "group of companies" doctrine has been invoked and applied by this Court in Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc. [Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 : (2013) 1 SCC (Civ) 689The Madras High Court has invoked the group of companies doctrine in a foreign seated arbitration in SEI Adhavan Power (P) Ltd. v. Jinneng Clean Energy Technology Ltd., 2018 SCC OnLine Mad 13299 : (2018) 4 CTC 464.] , with respect to an international commercial agreement. Recently, this Court in Ameet Lalchand Shah v. Rishabh Enterprises [Ameet Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678 : (2019) 1 SCC (Civ) 308] , invoked the group of companies doctrine in a domestic arbitration under Part I of the 1996 Act.

14. The Apex Court in Chloro Controls India (P) Ltd. v. Severn

Trent Water Purification Inc. 3 held as follows:-

72. This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, "intention of the parties" is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.

73. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the court would have to examine whether a composite reference of such parties would serve the ends of justice.

Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would

(2013) 1 SCC 641

fall within the exception afore-discussed.

74. In a case like the present one, where origin and end of all is with the mother or the principal agreement, the fact that a party was non- signatory to one or other agreement may not be of much significance. The performance of any one of such agreements may be quite irrelevant without the performance and fulfilment of the principal or the mother agreement. Besides designing the corporate management to successfully complete the joint ventures, where the parties execute different agreements but all with one primary object in mind, the court would normally hold the parties to the bargain of arbitration and not encourage its avoidance. In cases involving execution of such multiple agreements, two essential features exist; firstly, all ancillary agreements are relatable to the mother agreement and secondly, performance of one is so intrinsically interlinked with the other agreements that they are incapable of being beneficially performed without performance of the others or severed from the rest. The intention of the parties to refer all the disputes between all the parties to the Arbitral Tribunal is one of the determinative factors.

100. We have already referred to the judgments of various courts that state that arbitration could be possible between a signatory to an agreement and a third party. Of course, heavy onus lies on that party to show that in fact and in law, it is claiming under or through a signatory party, as contemplated under Section 45 of the 1996 Act.

102. Joinder of non-signatory parties to arbitration is not unknown to the arbitration jurisprudence. Even the ICCA's Guide to the Interpretation of the 1958 New York Convention also provides for such situation, stating that when the question arises as to whether binding a non-signatory to an arbitration agreement could be read as being in conflict with the requirement of written agreement under Article I of the Convention, the most compelling answer is "no" and the same is supported by a number of reasons.

103. Various legal bases may be applied to bind a non-signatory to an arbitration agreement:

103.1. The first theory is that of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on good faith principle. They

apply to private as well as public legal entities.

103.2. The second theory includes the legal doctrines of agent-

principal relations, apparent authority, piercing of veil (also called "the alter ego"), joint venture relations, succession and estoppel. They do not rely on the parties' intention but rather on the force of the applicable law.

107. If one analyses the above cases and the authors' views, it becomes abundantly clear that reference of even non-signatory parties to an arbitration agreement can be made. It may be the result of implied or specific consent or judicial determination. Normally, the parties to the arbitration agreement calling for arbitral reference should be the same as those to the action. But this general concept is subject to exceptions which are that when a third party i.e. non- signatory party, is claiming or is sued as being directly affected through a party to the arbitration agreement and there are principal and subsidiary agreements, and such third party is signatory to a subsidiary agreement and not to the mother or principal agreement which contains the arbitration clause, then depending upon the facts and circumstances of the given case, it may be possible to say that even such third party can be referred to arbitration.

109. The New York Convention clearly postulates that there should be a defined legal relationship between the parties, whether contractual or not, in relation to the differences that may have arisen concerning the subject-matter capable of settlement by arbitration. We have referred to a number of judgments of the various courts to emphasise that in given circumstances, if the ingredients above- noted exist, reference to arbitration of a signatory and even a third party is possible. Though heavy onus lies on the person seeking such reference, multiple and multi-party agreements between the parties to the arbitration agreement or persons claiming through or under such parties is neither impracticable nor impermissible.

149. The courts have also accepted and more so in group company cases that the fact that a party being non-signatory to one or other agreement may not be of much significance, the performance of one may be quite irrelevant with the performance and fulfilment of the principal or the mother agreement. That, in fact, is the situation in the present case.

165.1. Section 45 is a provision falling under Chapter I of Part II of the 1996 Act which is a self-contained code. The expression "person

claiming through or under" would mean and take within its ambit multiple and multi-party agreements, though in exceptional case. Even non-signatory parties to some of the agreements can pray and be referred to arbitration provided they satisfy the prerequisites under Sections 44 and 45 read with Schedule I. Reference of non- signatory parties is neither unknown to arbitration jurisprudence nor is it impermissible.

165.2. In the facts of a given case, the court is always vested with the power to delete the names of the parties who are neither necessary nor proper to the proceedings before the court. In the cases of group companies or where various agreements constitute a composite transaction like mother agreement and all other agreements being ancillary to and for effective and complete implementation of the mother agreement, the court may have to make reference to arbitration even of the disputes existing between signatory or even non-signatory parties. However, the discretion of the court has to be exercised in exceptional, limiting, befitting and cases of necessity and very cautiously.

15. In the case on hand, the Respondent No. 2 is a party to the

Principal Agreement i.e., the registered DGPA dated 12.03.2007 along

with other Respondents and the Applicant. The contractual relationship

between the parties flow from this Agreement and the balance

refundable amount of Rs.51,50,000/- is part of the said Agreement.

Therefore, the Respondent No. 2 is a proper party to the present

Arbitration Applications and necessary for adjudication of disputes

between them.

16. With respect to another issue i.e., the issue of limitation, it is

relevant to note that in Vidya Drolia vs. Durga Trading Corporation

the Apex Court held that the question whether a claim is barred by

limitation can be decided at the stage of appointment of an arbitrator. It

was further held that only where the claims are ex facie time-barred, the

Court can refuse to appoint an arbitrator. In all other cases, the matter

shall be referred to arbitration where the arbitrator shall decide such

issues. The relevant paragraph is extracted below:

148. Section 43(1) of the Arbitration Act states that the Limitation Act,1963 shall apply to arbitrations as it applies to court proceedings. Sub-section (2) states that for the purposes of the Arbitration Act and Limitation Act, arbitration shall be deemed to have commenced on the date referred to in Section 21.

Limitation law is procedural and normally disputes, being factual, would be for the arbitrator to decide guided by the facts found and the law applicable. The court at the referral stage can interfere only when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. All other cases should be referred to the Arbitral Tribunal for decision on merits. Similar would be the position in case of disputed "no-claim certificate" or defence on the plea of novation and "accord and satisfaction". As observed in Premium Nafta Products Ltd. [Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd., 2007 UKHL 40 :

2007 Bus LR 1719 (HL)] , it is not to be expected that commercial men while entering transactions inter se would knowingly create a system which would require that the court should first decide whether the contract should be rectified or avoided or rescinded, as the case may be, and then if the contract is held to be valid, it would require the arbitrator to resolve the issues that have arisen.

17. Further, it is to be noted that that the power of this Court

under Section 11 of the Act, 1996 is extremely limited. The Supreme

Court in Vidya Drolia (Supra) laid down the test to exercise power

under Section 11 of the Act, 1996. In his separate opinion, /Former

Chief Justice of India, held as follows:

244. Before we part, the conclusions reached, with respect to Question 1, are:

244.1. Sections 8 and 11 of the Act have the same ambit with respect to judicial interference.

244.2. Usually, subject-matter arbitrability cannot be decided at the stage of Section 8 or 11 of the Act, unless it is a clear case of deadwood.

244.3. The court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of non-

existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding. 244.4. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above i.e. "when in doubt, do refer". 244.5. The scope of the court to examine the prima facie validity of an arbitration agreement includes only:

244.5.1. Whether the arbitration agreement was in writing? or 244.5.2. Whether the arbitration agreement was contained in exchange of letters, telecommunication, etc.?

244.5.3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?

244.5.4. On rare occasions, whether the subject-matter of dispute is arbitrable?

18. In the present case, as discussed supra, though both

agreements of sale were executed on 15.10.2013, deed of cancellation of

DGPA No.14132/2013 was executed on 19.09.2013, cheques were

issued on 19.09.2013 itself, the same were dishonoured, Thereafter, part

payment was made, respondents offered to convey two flats; new

developer i.e. M/s Nikhil Sai Krishna Constructions had entered in the

place of applicant and it obtained construction permission on

06.03.2014, construction was completed in the year 2017; the applicant

compelled the respondents to execute sale deeds in the year 2019,

respondents failed to do so; therefore Applicant had issued notice dated

07.02.2020 invoking arbitration clause. Despite receiving and

acknowledging the said notice, respondents 1 and 4 did not issue any

reply to it. R.2 and R.3 issued reply making certain allegations.