Disputes arising out of a trust deed not arbitrable

By Vivek Vashi and Shaheda Madraswala, Bharucha & Partners
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The Supreme Court in its recent judgment in Vimal Kishor Shah & Ors v Jayesh Dinesh Shah & Ors held that disputes relating to trusts, trustees and beneficiaries arising out of the trust deed and the Indian Trusts Act, 1882, cannot be resolved through arbitration. The court thus added a seventh category of non-arbitral disputes to the list laid down in its judgment in Booz Allen & Hamilton Inc v SBI Home Finance Ltd (2011).

In the Shah case, one Mr Modi settled a trust in favour of his six children (then minors). Dinesh Shah and Saryu Shah were appointed as managing trustees of the trust. The trust deed at clause 20 provided that any disputes arising among the trustees, among the beneficiaries or between the trustees and beneficiaries were to be referred to arbitration.

Vivek Vashi, Mainstay of the litigation team, Bharucha_&_Partners
Vivek Vashi
Mainstay of the litigation team
Bharucha_&_Partners

Disputes arose among the beneficiaries in relation to the manner in which the affairs and the business were being conducted. This led to one set of beneficiaries filing an application under section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The appellants contested the application on grounds that: (a) the parties were neither parties to the trust deed nor its signatories, as they had not signed the trust deed, so they could not be termed as a “party” to the trust deed; and (b) the trust deed could not be termed as an arbitration agreement within the meaning of sections 2(b) and 2(h) read with section 7 of the Arbitration Act.

Bombay High Court allowed the application and appointed a sole arbitrator, invoking clause 20 of the trust deed.

The court’s order was referred to the Supreme Court, to decide whether clause 20 of the trust deed was a valid arbitration agreement and, if so, whether the beneficiaries were parties to the deed and agreement. The Supreme Court, while examining sections 2(b) and 2(h) and section 7 of the Arbitration Act, cited the case of Vijay Kumar Sharma Alias Manju v Raghunandan Sharma Alias Baburam & Ors (2010), in which a question arose as to whether a subsequent declaration that provided for a dispute arising out of a will to be settled by an arbitrator could be considered as an arbitration agreement under the act.

Shaheda Madraswala, Associate, Bharucha & Partners
Shaheda Madraswala
Associate
Bharucha_&_Partners

In that case, Justice Raveendran, speaking for the bench, held that: “A unilateral declaration by a father that any future disputes among the sons should be settled by an arbitrator named by him, can by no stretch of imagination be considered as an arbitration agreement among his children, or such of his children who become parties to a dispute. At best, such a declaration can be an expression of a fond hope by a father that his children, in the event of a dispute, should get the same settled by arbitration.”

Drawing similarities between executing a will and a trust deed, the court held that if a will containing an arbitration clause is held not to constitute an arbitration agreement, the same must apply to a trust deed. In this regard, it was held that the trustees and beneficiaries are only required to carry out the provisions of the trust deed. There cannot be any agreement among the trustees or beneficiaries to carry out any such activity.

Further, the court stated that the Indian Trusts Act is a complete code in itself and specifically confers jurisdiction on civil courts for adjudication of grievances. This implies that the applicability of the Arbitration Act is excluded for deciding the disputes relating to trusts, trustees and beneficiaries.

In light of the above, the court held that clause 20 of the trust deed did not satisfy the requirements of sections 2(b) and 2(h) read with section 7 of the Arbitration Act and therefore could not be held to be a valid agreement to arbitrate.

Even though the court has added a seventh category to the categories of non-arbitrable disputes as laid down in the case of Booz Allen, the basis on which the seventh category has been added is completely different from the basis for the other six.

The six categories of disputes laid down in Booz Allen are non-arbitrable because judgments in these categories would be judgments in rem. Matters pertaining to trust deeds have been added to this list because: (a) the Indian Trusts Act is a complete code in itself which provides for adjudication of disputes; and (b) the beneficiaries and trustees of a trust deed are not “parties” to the agreement and therefore the trust deed cannot constitute an arbitration agreement.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Shaheda Madraswala is an associate.

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