by Promod Nair & Shivani Singhal .In its recent judgment in Shri Vimal Kishor v. Mr. Jayesh Dinesh Shah, the Supreme Court held that disputes arising out of trust deeds are not arbitrable and that such disputes should be added to the list of “well-recognised examples of non-arbitrable disputes” which were identified by the Court’s earlier decision in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532..Factual Background.The case involved a trust deed which established a private family trust. The trust deed contained an arbitration clause which required that disputes between trustees inter se, trustees and beneficiaries, or beneficiaries inter se be resolved through arbitration. At the time of execution of the trust deed, the beneficiaries of the trust were minors. Subsequently, disputes arose between the beneficiaries regarding the manner in which the business of the trust was being conducted..When the dispute could not be resolved amicably and the beneficiaries (who had since attained majority) could not agree on the appointment of an arbitrator, one set of beneficiaries filed an application before the Bombay High Court under section 11 of the Arbitration and Conciliation Act 1996 (the “Arbitration Act”) seeking appointment of an arbitrator..The maintainability of the application under section 11 was challenged before the Bombay High Court primarily on the grounds that (i) the beneficiaries were not signatories to the trust deed and (ii) at the time of execution of the trust deed, the beneficiaries being minors, they were not competent to contract. Accordingly, it was contended that there was no ‘arbitration agreement’ between the beneficiaries within the meaning of section 7 of the Arbitration Act..The respondents relied on the Delhi High Court’s decision in Chhaya Shriram v. Deepak Shriram (2008) where, in a similar fact situation, it was held that disputes between beneficiaries could be referred to arbitration only if there was an independent arbitration agreement between the beneficiaries for referring the disputes to arbitration. According to the Delhi High Court, a trust is in the nature of a contract between the settlor and the trustees. The settlor and the trustee could not create a contract to bind beneficiaries of the trust..The Bombay High Court, however, rejected the objections to maintainability and appointed an arbitrator. According to the court, on attaining majority, the beneficiaries had become entitled to adopt the arbitration agreement and invoke it..Decision of the Supreme Court.The Supreme Court allowed the appeal against the Bombay High Court’s decision on the basis of the reasoning summarized below..In circumstances where the trust deed was not signed by the beneficiaries, they could not be considered as parties to the arbitration agreement contained in the document. This would be the case even though the beneficiaries had otherwise accepted the trust deed..Further, the court held that since the effect of an arbitration agreement is to oust the jurisdiction of courts, such agreements should be strictly construed. The Supreme Court also held that the remedy under the Arbitration Act was impliedly barred in view of the fact that the Indian Trusts Act 1882 (the “Trusts Act”) was a complete code and provided a comprehensive machinery for dealing with all issues relating to the trust, trustees and beneficiaries (and provided an adequate forum for adjudication of all disputes arising between beneficiaries and trustees inter se). On this basis, the court concluded that disputes arising out of a trust deed are not capable of being resolved through arbitration..No Legal Basis for a Blanket Ban on Arbitration of Trust Disputes.The Supreme Court’s blanket prohibition on the arbitration of trust disputes appears to be flawed for a number of reasons..First, the Supreme Court held that one of the essential conditions for constituting a valid and enforceable arbitration agreement is that the agreement should have been signed by the parties to the document. A document that is not signed by beneficiaries could not be binding on them. However, in reaching this conclusion, the Supreme Court appears to have ignored its own ruling in Govind Rubber Ltd. Louids Dreyfus Commodities Asia P. Ltd. (2015) 13 SCC 477, in which it had held that (i) it is not necessary for an arbitration agreement in writing to be signed by all the parties and (ii) if it could be otherwise established that there was a consensus between the parties, the mere fact that one of the parties did not sign the agreement will not negate the existence of a valid and binding arbitration agreement..On the basis of the court’s previous decision in Govind Rubber, the question as to whether beneficiaries can be considered parties to an arbitration agreement in a trust deed ought to be decided on a case to case basis, depending on whether the beneficiaries have expressly or impliedly consented to being bound by all the terms of the trust deed, including the arbitration agreement..The Supreme Court did not even discuss the “deemed acceptance theory” according to which beneficiaries claim “under or through” a settlor and are hence to be considered parties to the arbitration agreement on this basis. The Arbitration and Conciliation (Amendment) Act 2015 has amended section 8 to allow for the possibility of a person “claiming through or under” a party to the arbitration agreement to seek reference of disputes to arbitration. A beneficiary could potentially be considered to be claiming through or under the settlor of the trust deed. This could have been a possible basis for allowing a beneficiary to invoke the arbitration agreement..Courts in other common law countries have held that a beneficiary who seeks to enforce the provisions of a trust deed has acquiesced to its other provisions, including the arbitration clause. For instance, the Texas Supreme Court in Hal Rachal John W. Reitz (2013) held an arbitration agreement in a trust deed to be enforceable by the beneficiary on the basis of the ‘direct benefits estoppel’ doctrine, which provides that where a party has obtained substantial benefits under an agreement, that party is estopped from attempting to avoid the contract’s burden, such as the obligation to arbitrate. A beneficiary cannot pick and choose which parts of the trust instrument he or she accepts- and if it can be established that a beneficiary has accepted portions of a trust instrument, he or she should also be bound by an arbitration clause contained in such an instrument..Whilst the principal ground on which the appeal was allowed was that the beneficiaries were not party to the arbitration agreement, the Supreme Court also laid down a broad principle to the effect that “disputes relating to Trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by the arbitrator despite the existence of arbitration agreement to that effect between the parties”. This suggests that even if the beneficiaries had entered into a separate arbitration agreement, they would have been unable to refer their dispute to arbitration. Apart from the fact that the two reasons cited by the Supreme Court are inconsistent with each other, the second ground is based on an incorrect appreciation of the decision in Booz Allen. In Booz Allen the Supreme Court held that generally all disputes relating to rights in personam are capable of being resolved by arbitration, and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals. The six “well-recognised examples of non-arbitrable disputes” identified by the court relate to rights in rem. In Vimal Kishor, the Supreme Court failed to adequately explain why a dispute concerning rights in personam, such as the inter se rights of the beneficiaries of a trust deed, is incapable of being arbitrated even in cases where beneficiaries are party to (or otherwise bound by) the arbitration agreement..The Supreme Court concluded that civil courts have exclusive jurisdiction to resolve disputes arising out of a trust instrument. There is nothing in the Trusts Act which indicates that exclusive jurisdiction was intended to be conferred on the civil courts.Even in cases where jurisdiction is conferred on special tribunals, the arbitration agreement is not necessarily inoperable. In the context of analyzing powers conferred on Debt Recovery Tribunals (a special forum established to resolve disputes involving banks), a Full Bench of the Delhi High Court in HDFC Bank Ltd. Satpal Singh Bakshi (2012) applied the principles set out in Booz Allen and held that matters which come within the scope and jurisdiction of Debt Recovery Tribunal are also arbitrable.The court held that not all matters over which jurisdiction is conferred on special tribunals will be non-arbitrable. Only in cases where an enactment creates special rights and obligations and gives special powers to a tribunal, which are not available to a civil court, will the dispute be non-arbitrable. For example, matters under the Rent Control Act relating to statutory protection of tenants are considered to be non-arbitrable. Applying the reasoning adopted in Booz Allen and HDFC Bank, even though the Trust Act confers jurisdiction in respect of certain matters on civil courts, such jurisdiction is not of an exclusive nature and cannot be the basis for holding that all disputes arising out of a trust deed are non-arbitrable..For the above reasons, the Supreme Court’s decision in imposing a blanket ban on arbitrability of disputes arising out of a trust deed is problematic and ought to be reconsidered..However, until this happens, arbitration clauses in trust documents will be unenforceable in India..Promod Nair (promod.nair@aristachambers.com) and Shivani Singhal (shivani.singhal@aristachambers.com) are advocates at Arista Chambers, a specialist dispute resolution practice.
by Promod Nair & Shivani Singhal .In its recent judgment in Shri Vimal Kishor v. Mr. Jayesh Dinesh Shah, the Supreme Court held that disputes arising out of trust deeds are not arbitrable and that such disputes should be added to the list of “well-recognised examples of non-arbitrable disputes” which were identified by the Court’s earlier decision in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532..Factual Background.The case involved a trust deed which established a private family trust. The trust deed contained an arbitration clause which required that disputes between trustees inter se, trustees and beneficiaries, or beneficiaries inter se be resolved through arbitration. At the time of execution of the trust deed, the beneficiaries of the trust were minors. Subsequently, disputes arose between the beneficiaries regarding the manner in which the business of the trust was being conducted..When the dispute could not be resolved amicably and the beneficiaries (who had since attained majority) could not agree on the appointment of an arbitrator, one set of beneficiaries filed an application before the Bombay High Court under section 11 of the Arbitration and Conciliation Act 1996 (the “Arbitration Act”) seeking appointment of an arbitrator..The maintainability of the application under section 11 was challenged before the Bombay High Court primarily on the grounds that (i) the beneficiaries were not signatories to the trust deed and (ii) at the time of execution of the trust deed, the beneficiaries being minors, they were not competent to contract. Accordingly, it was contended that there was no ‘arbitration agreement’ between the beneficiaries within the meaning of section 7 of the Arbitration Act..The respondents relied on the Delhi High Court’s decision in Chhaya Shriram v. Deepak Shriram (2008) where, in a similar fact situation, it was held that disputes between beneficiaries could be referred to arbitration only if there was an independent arbitration agreement between the beneficiaries for referring the disputes to arbitration. According to the Delhi High Court, a trust is in the nature of a contract between the settlor and the trustees. The settlor and the trustee could not create a contract to bind beneficiaries of the trust..The Bombay High Court, however, rejected the objections to maintainability and appointed an arbitrator. According to the court, on attaining majority, the beneficiaries had become entitled to adopt the arbitration agreement and invoke it..Decision of the Supreme Court.The Supreme Court allowed the appeal against the Bombay High Court’s decision on the basis of the reasoning summarized below..In circumstances where the trust deed was not signed by the beneficiaries, they could not be considered as parties to the arbitration agreement contained in the document. This would be the case even though the beneficiaries had otherwise accepted the trust deed..Further, the court held that since the effect of an arbitration agreement is to oust the jurisdiction of courts, such agreements should be strictly construed. The Supreme Court also held that the remedy under the Arbitration Act was impliedly barred in view of the fact that the Indian Trusts Act 1882 (the “Trusts Act”) was a complete code and provided a comprehensive machinery for dealing with all issues relating to the trust, trustees and beneficiaries (and provided an adequate forum for adjudication of all disputes arising between beneficiaries and trustees inter se). On this basis, the court concluded that disputes arising out of a trust deed are not capable of being resolved through arbitration..No Legal Basis for a Blanket Ban on Arbitration of Trust Disputes.The Supreme Court’s blanket prohibition on the arbitration of trust disputes appears to be flawed for a number of reasons..First, the Supreme Court held that one of the essential conditions for constituting a valid and enforceable arbitration agreement is that the agreement should have been signed by the parties to the document. A document that is not signed by beneficiaries could not be binding on them. However, in reaching this conclusion, the Supreme Court appears to have ignored its own ruling in Govind Rubber Ltd. Louids Dreyfus Commodities Asia P. Ltd. (2015) 13 SCC 477, in which it had held that (i) it is not necessary for an arbitration agreement in writing to be signed by all the parties and (ii) if it could be otherwise established that there was a consensus between the parties, the mere fact that one of the parties did not sign the agreement will not negate the existence of a valid and binding arbitration agreement..On the basis of the court’s previous decision in Govind Rubber, the question as to whether beneficiaries can be considered parties to an arbitration agreement in a trust deed ought to be decided on a case to case basis, depending on whether the beneficiaries have expressly or impliedly consented to being bound by all the terms of the trust deed, including the arbitration agreement..The Supreme Court did not even discuss the “deemed acceptance theory” according to which beneficiaries claim “under or through” a settlor and are hence to be considered parties to the arbitration agreement on this basis. The Arbitration and Conciliation (Amendment) Act 2015 has amended section 8 to allow for the possibility of a person “claiming through or under” a party to the arbitration agreement to seek reference of disputes to arbitration. A beneficiary could potentially be considered to be claiming through or under the settlor of the trust deed. This could have been a possible basis for allowing a beneficiary to invoke the arbitration agreement..Courts in other common law countries have held that a beneficiary who seeks to enforce the provisions of a trust deed has acquiesced to its other provisions, including the arbitration clause. For instance, the Texas Supreme Court in Hal Rachal John W. Reitz (2013) held an arbitration agreement in a trust deed to be enforceable by the beneficiary on the basis of the ‘direct benefits estoppel’ doctrine, which provides that where a party has obtained substantial benefits under an agreement, that party is estopped from attempting to avoid the contract’s burden, such as the obligation to arbitrate. A beneficiary cannot pick and choose which parts of the trust instrument he or she accepts- and if it can be established that a beneficiary has accepted portions of a trust instrument, he or she should also be bound by an arbitration clause contained in such an instrument..Whilst the principal ground on which the appeal was allowed was that the beneficiaries were not party to the arbitration agreement, the Supreme Court also laid down a broad principle to the effect that “disputes relating to Trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by the arbitrator despite the existence of arbitration agreement to that effect between the parties”. This suggests that even if the beneficiaries had entered into a separate arbitration agreement, they would have been unable to refer their dispute to arbitration. Apart from the fact that the two reasons cited by the Supreme Court are inconsistent with each other, the second ground is based on an incorrect appreciation of the decision in Booz Allen. In Booz Allen the Supreme Court held that generally all disputes relating to rights in personam are capable of being resolved by arbitration, and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals. The six “well-recognised examples of non-arbitrable disputes” identified by the court relate to rights in rem. In Vimal Kishor, the Supreme Court failed to adequately explain why a dispute concerning rights in personam, such as the inter se rights of the beneficiaries of a trust deed, is incapable of being arbitrated even in cases where beneficiaries are party to (or otherwise bound by) the arbitration agreement..The Supreme Court concluded that civil courts have exclusive jurisdiction to resolve disputes arising out of a trust instrument. There is nothing in the Trusts Act which indicates that exclusive jurisdiction was intended to be conferred on the civil courts.Even in cases where jurisdiction is conferred on special tribunals, the arbitration agreement is not necessarily inoperable. In the context of analyzing powers conferred on Debt Recovery Tribunals (a special forum established to resolve disputes involving banks), a Full Bench of the Delhi High Court in HDFC Bank Ltd. Satpal Singh Bakshi (2012) applied the principles set out in Booz Allen and held that matters which come within the scope and jurisdiction of Debt Recovery Tribunal are also arbitrable.The court held that not all matters over which jurisdiction is conferred on special tribunals will be non-arbitrable. Only in cases where an enactment creates special rights and obligations and gives special powers to a tribunal, which are not available to a civil court, will the dispute be non-arbitrable. For example, matters under the Rent Control Act relating to statutory protection of tenants are considered to be non-arbitrable. Applying the reasoning adopted in Booz Allen and HDFC Bank, even though the Trust Act confers jurisdiction in respect of certain matters on civil courts, such jurisdiction is not of an exclusive nature and cannot be the basis for holding that all disputes arising out of a trust deed are non-arbitrable..For the above reasons, the Supreme Court’s decision in imposing a blanket ban on arbitrability of disputes arising out of a trust deed is problematic and ought to be reconsidered..However, until this happens, arbitration clauses in trust documents will be unenforceable in India..Promod Nair (promod.nair@aristachambers.com) and Shivani Singhal (shivani.singhal@aristachambers.com) are advocates at Arista Chambers, a specialist dispute resolution practice.
