Acquiring Property Interest Alone Does Not Bind Transferee To Arbitration Clause: Bombay High Court

The Bombay High Court on 7 September held that acquiring an interest in property covered by a Development Agreement, by itself, does not make a transferee a party to the arbitration agreement contained in the Development Agreement.

Justice Amit Borakar added that a transferee can become bound by the arbitration clause only where material shows assignment, incorporation, acceptance or unequivocal adoption of the underlying agreement, and appointed a sole arbitrator for disputes between the developers and the original owners/confirming parties, but declined to appoint an arbitrator against the subsequent transferee. The Bench observed:

“….There is no document shown by the Applicants by which Respondent No.1 agreed to take upon the obligations of the Developer or the Owners under that agreement. The Applicants rely upon the fact that Respondent No.1 acquired rights in the Petition Property. This fact is not sufficient. Acquisition of an interest in the property and acquisition of rights under the Development Agreement are separate matters.”

The applicants approached the Court under Section 11 of the Arbitration and Conciliation Act, 1996 seeking appointment of an arbitrator in disputes arising from a registered Assignment of Development Rights.

They were the developers under the agreement, while Respondent Nos.2 to 4 were the owners/confirming parties. Respondent No.1 subsequently acquired leasehold rights in the property from Respondent Nos.3 and 4. They invoked the arbitration clause against Respondent No.1 as well, contending that it had acquired the rights as an assignee and therefore remained bound by Clause 39 of the Development Agreement.

Relying on Cox & Kings Ltd. v. SAP India (P) Ltd., the Court noted that a non-signatory cannot be excluded at the Section 11 stage merely because it did not sign the agreement. It must examine whether a prima facie basis exists to conclude that the non-signatory became a party to the arbitration agreement. Where such a basis exists but the issue requires evidence or examination, the arbitral tribunal may determine the issue.

It distinguished between a lease and an assignment. A lease creates or transfers an interest in property, whereas an assignment transfers rights and obligations. Although both may arise in the same transaction, the expressions do not have the same meaning. It noted that the position may differ where the lease incorporates the Development Agreement and the lessee accepts the obligations arising under it. It held:

“If the reference to “assignees” is only in the title or heading of the agreement and there is no definition which includes lessees within that expression, such reference would not be enough to hold that the lessee is an assignee for the purpose of Section 11. Therefore, a lessee does not become an assignee under a Development Agreement.”

On the limitation objection raised by the original owner, the Bench relied on SBI General Insurance Co. Ltd. v. Krish Spinning and held that the it should not undertake an intricate evidentiary enquiry into limitation at the Section 11 stage.

Accordingly, the High Court appointed a sole arbitrator to adjudicate the disputes between the applicants and Respondent Nos.2 to 4, while rejecting the request for appointment of an arbitrator against Respondent No.1.