Deutsche Post Bank
Home Finance Ltd. Vs. Taduri Sridhar & ANR.
J U D G M E N T
R.V.RAVEENDRAN, J.
1.
Leave
granted.
2.
The
second respondent (referred to as the `Developer') entered into a development agreement
with the owners of certain lands at Bachupally village, Qutubullapur Mandal, Ranga
Reddy District, for constructing independent houses and multistoried Apartment buildings
with common facilities in a layout known as `Hill County township'. The
landowners as the first party, the developer as the second party and the first
respondent who wanted to acquire an apartment therein as the third party entered
into an agreement for sale dated 16.10.2006 under which the land-owners agreed
to sell an undivided share equivalent to 87 sq.yds. out of a total extent of 16.95
acres to the first respondent and the developer agreed to construct a
residential apartment measuring 1889 sq.ft. for the first respondent. The total
consideration for the undivided share in the land, apartment and car parking
space was agreed as Rs.55,89,368. The agreement contemplating the entire price being
paid in installments, that is 10% on booking, 85% in seven instalments upto
15.3.2008 and 5% at the time of delivery. Clause (14) of the said agreement
dated 16.10.2006 provided for settlement of disputes by arbitration.
3.
On
the request of the first respondent, the appellant (earlier known as `BHW Home
Finance Ltd.') sanctioned a housing loan of Rs.52 lakhs to the first respondent
for purchase of the said apartment in terms of a loan agreement dated
21.12.2006 entered into between the first respondent as the borrower and the
appellant as the lender. The said loan agreement contained the terms of the loan,
rate of interest, provisions for amortization, consequences of delay in payment
of EMIs, security for repayment, and general covenants of borrower. Clause (11)
thereof provided for settlement of all disputes (that is, all matters, questions,
disputes, differences and/or 3claims arising out of and/or concerning and/or in
connection and/or in consequences of breaches, termination or invalidity
thereof or relating to the Agreement) by arbitration by the Managing Director
of the appellant or his nominee as sole Arbitrator. The first respondent subsequently
had entered into a supplemental loan agreement with the appellant on 29.10.2007
for reducing the loan amount from Rs.52 lakhs to Rs.49,78,527/-; and the said
loan has been disbursed in terms of the said loan agreements.
4.
It
is alleged that a tripartite agreement was also executed on 21.12.2006 among
first respondent as borrower, the developer as guarantor and the appellant as the
lender, under which it was agreed that the loan amount should be disbursed by
the appellant directly to the developer and such amounts paid to the developer
shall be deemed to be disbursement of loan by the appellant to the first
respondent.
5.
In
pursuance of the agreement of sale dated 16.10.2006, the first respondent paid
the entire sale price to the developer through the appellant. Thereafter, the land-owners
and the developer executed a registered sale deed dated 21.2.2008 for a consideration
Rs.21,27,409/-, conveying to the first respondent, an undivided share in the
land equivalent to 87 sq.yds. with the semi finished apartment bearing No.3E in
the third floor of Nainital Block of Hill County with one reserved parking
space. On the same day the first respondent entrusted the construction of the unfinished
flat to the developer under a construction agreement dated 21.2.2008, under
which the developer acknowledged the receipt of the total cost of construction,
that is Rs.33,22,226 from the first respondent and agreed to complete the
construction of the apartment and deliver the same to the first respondent by
16.10.2008 with a grace period of three months. Clause 7 of the said construction
agreement dated 21.2.2008 between the first respondent and the developer
provided for arbitration and is extracted below : " Arbitration
a. In the event of any
dispute between the parties in connection with the validity, interpretation,
implementation or breach of any provision of this agreement or any other
disputes including the question of whether there is proper termination of the
agreement shall be resolved through arbitration by appointing a sole arbitrator
by the Vice Chairman of the First Party. The decision of the Arbitrator shall be
final and binding on both the parties.
b. The arbitration
proceedings shall be in accordance with the provisions laid down in the Arbitration
and Conciliation Act, 1996 and shall be governed by the laws in A.P. subject to
the authorized arbitration clauses.
The venue of the Arbitration
proceedings shall be Hyderabad and the language shall be in English. All the proceedings
are subject to the exclusive jurisdiction of the courts at Hyderabad
limits."On the execution of the sale deed dated 21.2.2008 and construction
agreement dated 21.2.2008, the earlier agreement for sale dated 16.10.2006
apparently lost its relevance, as the land-owners went out of the picture on 5execution
of the sale deed regarding the undivided share and a fresh construction
agreement dated 21.2.2008 was executive regarding completion of the apartment
by the developer.
6.
The
first respondent issued a notice dated 31.7.2009 to the developer, alleging
delay in construction and delivery of the apartment and called upon it to pay
Rs.54,778 per month as compensation for the period of delay, that is from the due
date of completion (16.10.2008) till date of actual completion and delivery of
the apartment. By another letter dated 15.9.2009 addressed to the developer, first
respondent invoked the arbitration clause contained in clause (7) of the
construction agreement dated 21.2.2008 and sought reference of the disputes
between them to arbitration. There was no response from the developer.
7.
Thereafter,
the first respondent filed a petition under section 11 of the Arbitration and Conciliation
Act, 1996 ("Act" for short) in the Andhra Pradesh High Court, for
appointment of an Arbitrator. In the said petition, the appellant was brought
into the dispute, for the first time, by impleading it as a respondent along with
the developer. In the said petition, the first respondent alleged that the
developer had failed to complete and deliver the apartment in terms of the construction
agreement dated 21.2.2008. 6He also alleged that the developer had arranged the
housing loan from the appellant; and that the appellant-lender 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. He
contended that the circumstances disclosed collusion, fraud and
misrepresentation on the part of the developer and the appellant. First
respondent further alleged that the following disputes had arisen between him on
the one hand, and the respondents therein (the developer and the appellant) on
the other, which required to be decided by arbitration :
a. The developer committed
breach of contract in not fulfilling its part of contractual obligations and consequently
was liable to refund all the amounts collected from him and the appellant, together
with interest thereon at 24% per annum with monthly rests from the date of its respective
dates of collections till payment, besides the interest and damages that may be
charged by the appellant.
b. The appellant clandestinely
and deliberately released the entire payments to the developer without verifying
the ground realities about the progress of construction and without intimation to
him (first respondent) and thus committed breach of trust and was liable for
all consequences.
c. In view of the breach
of trust and non-fulfillment of the obligations, the developer was also liable to
pay a sum of Rs.15 lakhs towards miscellaneous expenditure incurred and mental agony
suffered by the petitioner.
d. The developer was also
liable to pay/reimburse whatsoever that may be demanded by the appellant in respect
of the entire transaction.
e. The developer and the
appellant were liable to pay the first respondent all the expenditure incurred/to
be incurred towards legal and other miscellaneous charges.
f. The developer and the
appellant were liable to compensate him for his financial and mental suffering.
g. The developer and the
appellant were liable to pay commercial rate of interest to the first
respondent on the amounts found due from the due date till payment. The first
respondent relying upon clause (7) of the construction agreement dated
21.2.2008, sought appointment of a sole arbitrator to adjudicate upon the
disputes between him and the developer and the appellant in respect of purchase
of the apartment.
8.
The
said petition was resisted by the appellant. The appellant contended that it
had nothing to do with the dispute between first respondent and developer; that
for the first time, the first respondent had chosen to make allegations against
the appellant in the petition under section 11 of the Act, apparently in
collusion with the developer, to avoid payment of EMIs due to the appellant; and
that the petition under section 11 of the Act was not maintainable against it,
as the dispute was between the first respondent and 8the developer (second
respondent) and it was not a party to the arbitration agreement invoked by the first
respondent (that is clause 7 of the construction agreement dated 21.2.2008).
9.
The
designate of the Chief Justice of Andhra Pradesh High Court by the impugned order
dated 12.4.2010 allowed the said application under section 11 and appointed a
retired Judge of High Court as the sole arbitrator. The learned designate referred
to the construction agreement dated 21.2.2008 between the first respondent and
second respondent and clause (7) therein providing for arbitration. The said order
did not refer to the contention of the appellant that it was not a party to the
dispute and therefore the petition under section 11 was not maintainable
against it. In view of the impugned order, the appellant though not concerned with
the disputes between the first respondent and the developer, is made a party to
the arbitration.
10.
The
said order is challenged by the appellant urging the following contentions :(i)
As the first respondent and the developer were the only parties to the construction
agreement dated 21.2.2008 containing the arbitration agreement, the appellant
could not be dragged into a dispute between them, by impleading it as a party
to the petition under section 11 of the Act. 9(ii) The designate of the Chief Justice
ought to have examined whether both respondents in the petition under section 11
of the Act were parties to the arbitration agreement (clause 7 of the construction
agreement dated 21.2.2008) before making an order appointing an arbitrator
under section 11 of the Act. On the contentions urged, the question that arises
for our consideration is whether the appellant could be made a party to the
arbitration, even though the appellant was not a party to the arbitration agreement
contained in clause (7) of the construction agreement dated 21.2.2008.
11.
In
this case, the first respondent made a demand for damages against the developer
in his notice dated 31.7.2009. As the developer refused to comply, the first
respondent invoked the arbitration agreement contained in clause (7) of the
Construction Agreement dated 21.2.2008 between him and the developer. Therefore,
in so far as the disputes between the first respondent and the developer (second
respondent) are concerned, the designate of the Chief Justice was justified in
appointing an arbitrator. But the question is whether the appellant, a non-party
to the construction agreement containing the arbitration agreement as per
clause (7), could be roped in, as a party to such arbitration.
12.
In
Jagdish Chander vs. Ramesh Chander [2007 (5) SCC 719] this court held : 10 "The
existence of an arbitration agreement as defined under Section 7 of the Act is a
condition precedent for exercise of power to appoint an arbitrator/Arbitral Tribunal,
under Section 11 of the Act by the Chief Justice or his designate. It is not permissible
to appoint an arbitrator to adjudicate the disputes between the parties in the
absence of an arbitration agreement or mutual consent." In Yogi Agarwal
vs. Inspiration Clothes & U [2009 (1) SCC 372], this court observed : "When
Sections 7 and 8 of the Act refer to the existence of an arbitration agreement between
the parties, they necessarily refer to an arbitration agreement in regard to the
current dispute between the parties or the subject-matter of the suit. It is
fundamental that a provision for arbitration, to constitute an arbitration
agreement for the purposes of Sections 7 and 8 of the Act, should satisfy two
conditions. Firstly, it should be between the parties to the dispute. Secondly,
it should relate to or be applicable to the dispute."In S. N. Prasad vs. Monnet
Finance Ltd - (2011) 1 SCC 320, this Court held: "There can be reference to
arbitration only if there is an arbitration agreement between the parties. 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........As there was no arbitration
agreement between the parties, the impleading of the appellant as a respondent
in the proceedings and the award against the appellant in such arbitration
cannot be sustained." Therefore, if `X' enters into two contracts, one
with `M' and another with `D', each containing an arbitration clause providing for
settlement of disputes arising under the respective contract, in a claim for
arbitration by `X' against `M' in regard to the contract with `M', `X' cannot
implead `D' 11as a party on the ground that there is an arbitration clause in
the agreement between `X' and `D'.
13.
The
existence of an arbitration agreement between the parties to the petition under
section 11 of the Act and existence of dispute/s to be referred to arbitration are
conditions precedent for appointing an Arbitrator under section 11 of the Act.
A dispute can be said to arise only when one party to the arbitration agreement
makes or asserts a claim/demand against the other party to the arbitration agreement
and the other party refuses/denies such claim or demand. If a party to an
arbitration agreement, files a petition under section 11 of the Act impleading
the other party to the arbitration agreement as also a non-party to the
arbitration agreement as respondents, and the court merely appoints an
Arbitrator without deleting or excluding the non-party, the effect would be
that all parties to the petition under section 11 of the Act (including the non-party
to arbitration agreement) will be parties to the arbitration. That will be contrary
to the contract and the law. 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,
the court should either delete such party from the array of parties, or when
appointing an Arbitrator make it clear that 12the Arbitrator is appointed only
to decide the disputes between the parties to the arbitration agreement.
14.
The
arbitration agreement relied upon by the first respondent to seek appointment
of arbitrator, is clause (7) of the construction agreement dated 21.2.2008. The
appellant was not a party to the said construction agreement dated 21.2.2008
containing the arbitration agreement. It is no doubt true that the loan agreement
dated 21.12.2006 between the first respondent as borrower, and the appellant as
the creditor, also contains an arbitration clause (vide Article 11) providing
for resolution of disputes in regard to the said loan agreement by arbitration.
But the developer was not a party to the loan agreement. There is no arbitration
agreement between the developer and the appellant. The disputes between the first
respondent and the developer cannot be arbitrated under Article 11 of the Loan
Agreement. The first respondent invoked the arbitration agreement contained in
clause 7 of the construction agreement (between first respondent and developer)
and not the arbitration agreement contained in clause 11 of the loan agreement
(between appellant and first respondent). The existence of an arbitration
agreement in a contract between appellant and first respondent, will not 13enable
the first respondent to implead the appellant as a party to an arbitration in
regard to his disputes with the developer.
15.
The
first respondent obviously cannot involve the appellant as a party to an
arbitration in regard to his disputes arising out of the claims made by him against
the developer which are covered by clause (7) of the construction agreement. The
disputes referred to in the petition under section 11 of the Act relate to the
claims of the first respondent against the developer. It is however true that there
is reference to the appellant in disputes (b), (e) and (f) and reference to
collusion between the developer and the appellant in those `disputes'. The
first respondent has also alleged that the appellant by releasing the payments
to the developer without verifying the ground realities about the progress and construction
and without intimation to him, had committed breach of trust and therefore
liable to pay compensation for the financial and mental suffering of the first
respondent as also the legal and other expenses. No such claim was ever been
made against the appellant before filing the petition under section 11 of the
Act, nor did the first respondent at any time seek arbitration in regard to such
claims against the appellant. The said claims against the appellant cannot be
arbitrated in an arbitration in pursuance of clause (7) of the construction
agreement between the first respondent and the developer.
16.
The
first respondent did not issue any notice or demand making any claim against the
appellant nor did he issue any notice claiming that the appellant is liable for
the consequences of non-performance by the developer, of its obligations. Nor
did the first respondent issue any notice to the appellant seeking reference of
any disputes to arbitration. Therefore it could not be said that any dispute
existed between the first respondent and appellant, when the petition under
section 11 of the Act was filed. Even in the application under section 11 of
the Act, there is no reference to clause No.(11) of the loan agreement which
contains the arbitration agreement in regard to disputes that may arise between
the appellant as lender and the first respondent as the borrower. There is no
claim or dispute in regard to the loan agreement. The first respondent has not invoked
clause (11) of the loan agreement for deciding any dispute with the appellant.
17.
If
there had been an arbitration clause in the tripartite agreement among the first
respondent, developer and the appellant, and if the first respondent had made claims
or raised disputes against both the developer and the appellant with reference to
such tripartite agreement, the position would have been different. But that is
not so. The petition under section 11 15of the Act against the appellant was
therefore misconceived as the appellant was not a party to the construction
agreement dated 21.2.2008.
18.
In
view of the above, we allow this appeal and set aside the order dated 12.4.2010
of the designate of the Chief Justice, in part, in so far as the appellant is
concerned. We make it clear that the appointment of arbitrator under the
impugned order shall remain undisturbed in so far as the disputes between first
respondent and the second respondent (developer) are concerned. We further make
it clear that this order will not come in the way of first respondent making any
claim or raising a dispute against the appellant or appellant making any claim
or raising a dispute against the first respondent and either of them seeking recourse
to arbitration in regard to such disputes.
___________________J.
(R. V. Raveendran)
___________________J.
(A. K. Patnaik)
New
Delhi;
March
29, 2011.
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