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Arbitrability of Trust Disputes in India: Critical Analysis of the SC judgment
Introduction
Trusts in India have developed over time from being primarily philanthropic to being a successful commercial vehicle for succession and estate planning. The inevitable raven - "disputes" – arose with the rising complexity of trust documents and the continuously shifting nature of trusts. Arbitrating trust issues – which has a number of advantages over litigation, including secrecy, party autonomy, limited curial review, lower costs, and faster resolution – appeared to be a viable choice. However, in many countries, including India, arbitration of trust disputes creates difficulties that render trust conflicts non-arbitral.
Facts
The Supreme Court of India examined the subject of the arbitrability of trust deed disputes in Vimal Kishor Shah[1]. The court was considering an appeal from a High Court of Bombay ruling appointing an arbitrator to settle disputes over a family trust deed. The other beneficiaries ("Respondents") objected to the application on various grounds, including that the beneficiaries are not parties nor signatories to the trust deed, and therefore the trust deed cannot be regarded an "agreement," let alone an "arbitration agreement." The Bombay High Court dismissed the Respondents' objections.
As a result, the Bombay High Court appointed an arbitrator to resolve the Petitioners' and Respondents' disagreements. The Respondents appealed the Bombay High Court's decision to the Supreme Court, and it was in this appeal that the Supreme Court determined on the question of arbitrability of issues arising out of a trust deed/the Trust Act.
Issues
- Whether a clause in a trust deed that allows for arbitration to resolve disputes amongst the trust's beneficiaries may be considered an "arbitration agreement"?
- Is the Petitioners' application for arbitration under Section 11 of the Arbitration Act maintainable?
- Whether disputes pertaining to the trust's operations and administration, such as those occurring between trustees and beneficiaries over their appointment, powers, responsibilities, obligations, removal, and so on, are capable of being resolved by arbitration under the provisions of the Arbitration Act.
Decision
The Supreme Court held that the trust deed's arbitration clause, which allowed for the resolution of disputes/differences amongst the trust's beneficiaries, did not form an arbitration agreement inter se beneficiaries within the meaning of Sections 2(b), 2(h), and 7 of the Arbitration Act. Section 7 of the Arbitration Act mandates, among other things, that
- An arbitration agreement must exist, either separately or as part of a contract;
- it must be in writing;
- and the parties must sign the arbitration agreement/document/contract containing the arbitration agreement.
For a legitimate and binding arbitration agreement, all of the above conditions must be properly followed. In the case of a trust, however, the settlor executes the deed in the beneficiaries' favor, and the settlor is the only one who signs the document/trust deed. The beneficiaries cannot be considered parties to the trust deed since they are not compelled to sign it and so do not do so. As a result, a trust deed cannot be considered as a legitimate and enforceable arbitration agreement between the parties (settlor and/or beneficiaries inter se), and a trust deed including an arbitration clause cannot be viewed as such.
Analysis
The Supreme Court, on the other hand, overlooked certain critical aspects of modern-day arbitrations that are problematic. The Supreme Court held that because beneficiaries do not sign trust deeds, beneficiaries under a trust deed including an arbitration clause cannot be considered “parties” to the arbitration agreement under the Arbitration Act. SC has omitted to consider the following: to begin with, the parties' signatures on an arbitration agreement cannot be considered a deciding element in evaluating the agreement's legality and enforceability. In the past, however, courts and arbitral tribunals applied a stringent interpretation to the arbitration agreement's writing obligation. Various jurisdictions are now interpreting the writing requirement more loosely. The absence of a signature will not impact the validity of a legitimate and enforceable arbitration agreement, according to courts in the United States, Singapore, and even India.
Second, the Supreme Court overlooked the legislature's meaning behind the recent change to Section 8 of the Arbitration Act in reaching its decision. Section 8 has been amended to provide that arbitration may be sought not only by a party to the arbitration agreement but also by “persons claiming through or under” a party to the arbitration agreement.
Third, the Supreme Court has refused to recognize the common law theory of "Direct Advantages Estoppel or Deemed Acquiescence," which states that if a party intentionally seeks the benefits of an agreement containing an arbitration clause, it is estopped from avoiding or being bound by arbitration.
In conclusion, Arbitration has the potential to be a successful means of resolving trust issues, particularly because of its private and secret nature, which is a key concern in conflicts involving family trusts in India. Vimal Kishor Shah, on the other hand, has plainly declared all trust issues (even those between beneficiaries) non-arbitrable in India until he is reviewed. New legislative amendments are required to bring in change into this matter.
Links Referred:
http://arbitrationblog.kluwerarbitration.com/2017/03/27/trust-disputes-non-arbitrable-in-india/
[1] Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788.
(This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, or Religion, Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre Foundation shall not be responsible for any errors caused due to human error or otherwise.)
- Introduction
- Decision
- Analysis
