In Deutsche Post Bank Home Finances Ltd. v Taduri Sridhar and Anr. the Supreme Court considered the duty of a court when an entity which is not a party to an arbitration agreement is involved in the arbitration proceedings.
Where there is no mention of a party in an arbitration agreement can arbitration proceedings be instituted against it, even if it is involved in the dispute in question?
The owners (the “Landowners”) of certain land (the “Land”) entered in to a development agreement with a developer (the “Developer”) for construction of houses and apartments on the Land. Taduri Sridhar (the “Buyer”) wanted to acquire an apartment on the Land and entered in to an agreement for sale with the Landowners. For the said purpose the Buyer took a loan from the Deustsche Post Bank Home Finances Ltd. (the “Lender”) and paid the entire sale price to the Developer through the Lender.
The Buyer had entered into a construction agreement (“Agreement”) on February 21, 2008 with the Developer under which the Developer acknowledged the receipt of the total cost of construction from the Buyer and agreed to complete construction of the apartment and deliver the same to the Buyer by October 16, 2008 with a grace period of 3 months. The Agreement contained an arbitration clause according to which parties agreed to settle disputes relating to the Agreement by arbitration. Thereafter the Buyer issued notice to the Developer on July 31, 2009 and September 15, 2009; alleging delay in construction and delivery of the apartment and invoking the arbitration clause in the Agreement. Since there was no response from the Developer the Buyer filed a petition in the Andhra Pradesh High Court for the appointment of arbitrator to settle the dispute. The Buyer added the Lender in the dispute by impleading it as a respondent. The Buyer alleged that Lender had released the loan amount to the Developer without ensuring that there was sufficient progress of construction and without verifying the ‘ground realities’ and therefore failed to perform its minimum obligations as a Lender.
The Lender argued that it was not a party to the arbitration agreement and thus could not be included in the dispute between the Buyer and the Developer. Since the High Court appointed an arbitrator without considering the above contention of the Lender, the Lender appealed to the Supreme Court.
Supreme Court Judgment
The Supreme Court held that if a person who is not a party to the arbitration agreement is impleaded as a party to the petition under Section 11 of the Act (for the appointment of arbitrator), the court should either delete such party from the group of the parties, or when appointing the arbitrator make it clear that the arbitrator is appointed only to decide the disputes between the parties to the arbitration agreement. As the Lender was not a party to the arbitration agreement between the Developer and the Buyer the petition filed in the Andhra Pradesh High Court was not maintainable against it.
Though the appointment of the arbitrator by the High Court remained undisturbed the Supreme Court made it clear that since the Lender was not a party to the arbitration agreement no arbitration proceeding can be instituted against it.
This judgment of the Supreme Court reiterated the position that arbitration proceedings can resolve disputes only between parties to an arbitration agreement, therefore reference to arbitration or appointment of an arbitrator can only be with respect to the parties to arbitration agreement and not non-parties.