Dissenting Flat Owner Not Bound By Arbitration Clause In Redevelopment Agreement He Refused To Sign: Bombay High Court

The Bombay High Court recently refused to appoint an arbitrator in a dispute arising out of a housing redevelopment project in Mumbai, holding that a dissenting flat owner who had deliberately refused to sign the development agreement could not be compelled to arbitrate claims brought by the developer.

Justice Sandeep V. Marne observed that arbitration is founded on consent and that the mere fact that redevelopment arrangements involve multiple interconnected agreements cannot bind a non-signatory to an arbitration clause.

The court said, “A member who dissents from the decision taken by the society and refuses to sign the Development Agreement, but is forced to act in terms of DA by application of principle of loss of individuality vis-à-vis society, cannot be treated as a veritable party to the DA and particularly to the arbitration agreement contained therein."

Referring to the Supreme Court's decision in Cox and Kings Ltd. v. SAP India Pvt. Ltd., the court noted that a non-signatory can be treated as a “veritable party” only where the person's conduct demonstrates acceptance of contractual obligations. Justice Marne observed, “The factors of 'active participation in performance' and 'creation of impression on opposite party of taking over contractual obligations' would weigh more for deciding whether a non-signatory is a veritable party than the factors of composite nature of transaction.”

The court was dealing with a plea filed by developer Space Master Realtors seeking appointment of an arbitrator to pursue a claim of about Rs 13.13 crore against a member of Mulund Sandhyaprakash Cooperative Housing Society, who had opposed the redevelopment of the building and refused to vacate his flat even after municipal approvals were obtained for the project.

The society had resolved in 2017 to redevelop its ageing building and later executed a development agreement with the developer in July 2021. After the Municipal Corporation issued the Intimation of Disapproval required for the project, the developer asked members to vacate their flats so demolition could begin.

Ten of the eleven members vacated their flats by January 2024, but the occupant of Flat No. 10 refused to leave. The developer moved the Bombay High Court and obtained an interim order directing him to vacate after the municipal approval for the project was issued. When possession was still not handed over, the court receiver stepped in and took possession of the flat in November 2024, after which the old building was demolished.

The member later entered into a Permanent Alternate Accommodation Agreement with the developer for a flat in the redeveloped building. The developer then claimed that the delay in vacating the flat had caused heavy financial losses, including increased construction costs and lost business opportunities, and invoked the arbitration clause in the development agreement seeking to recover more than Rs 13 crore.

Before the court, the developer argued that the development agreement and the alternate accommodation agreement were part of a single redevelopment arrangement. On that basis, it said the dissenting member should be treated as a “veritable party” to the arbitration clause, particularly since he had ultimately signed the accommodation agreement and stood to receive a flat in the new building.

The member opposed the move, saying he had consciously refused to sign the development agreement and had never consented to arbitration under it. Justice Marne agreed with this position, noting that the developer's claims stemmed from alleged obligations under the development agreement, not from the alternate accommodation agreement that the member signed later.

The court noted that dissenting members often execute such rehabilitation agreements once demolition becomes inevitable and that doing so does not amount to voluntary participation in the development contract. The court said that although the development agreement and the alternate accommodation agreement were interconnected, that fact alone could not bind a person who had deliberately refused to sign the development agreement.

“Composite nature of transaction effected vide twin documents of DA and PAAA may be a reason for foisting the contractual obligations arising out of DA on the dissenting member who has executed the PAAA, but the same cannot be a reason enough for making him bound by the arbitration agreement contained in the DA, which he has refused to sign."

"It is too far-fetched to hold that the language employed in arbitration clauses in DA or PAAA is so wide that the same contemplates adjudication of disputes arising out of DA through arbitration mechanism agreed in PAAA. The intention of the parties is clear and manifest that if any dispute arises out of DA, the same would not be arbitrable and would go before civil court," the court observed.

Finding no arbitration agreement between the developer and the dissenting member under the development agreement, the court declined to appoint an arbitrator.

For Applicant: Advocates Mayur Khandeparkar, Vikramjit Garewal, Vishwanath Patil, Nidhi Chauhan instructed by Advocate Akshay Naidu.

For Respondent No. 1 (Mulund Sandhyaprakash CHS Ltd.): Advocate Dhruvin J. Modi.

For Respondent No. 2: Advocates Karl Tamboly, Ryan D'Souza, Meezan Patel, Harshada Kamble.