DISPUTES ARISING OUT OF TRUSTS | NON ARBITRAL IN INDIA

The Indian Trusts Act, 1882 Act ("Trust Act"), which is a comprehensive code broadly, lays down inter alia the manner of creation of trust, the rights, powers and duties of the Trustees, provisions relating to breach of trusts, remedies for seeking redressal of grievances arising out of the Trust Deed etc.

In a recent case of Vimal Shah & Ors V/s Jayesh Shah and Ors ("Vimal Case"), the Supreme Court of India ("Supreme Court") has held that the disputes relating to Trusts, Trustees, and beneficiaries arising out of the Trust Deed and/ or Trust Act are not capable of being adjudicated by an arbitrator despite existence of an arbitration agreement between the parties.

Brief Facts of Vimal Case:

• A private trust deed was executed in favor of six minor beneficiaries in 1983 ("Trust Deed"). Under the Trust Deed, two trustees were appointed to manage the affairs of the Trust. The Trust Deed also provided for an arbitration clause.
• Since 1990, certain differences arose amongst the beneficiaries. The arbitration clause in the Trust Deed was invoked by them and subsequently, an application for appointment of Arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") was preferred by some of the beneficiaries ("Section 11- Application").
• The said Section 11- Application was contested inter alia on the ground that the said Application is not maintainable as the beneficiaries having not signed the Trust Deed, they cannot be termed as 'parties' to such Trust Deed and nor can such Trust Deed be termed as an arbitration agreement within the meaning of Section 2(b), 2(h) and Section 7 of the Arbitration Act.
• The Bombay High Court allowed the Section 11- Application and appointed a sole arbitrator for adjudication of disputes. Aggrieved by the order one of the parties preferred an appeal before Supreme Court.
  

Issues for Determination: The following issues cropped up before the Supreme Court for its determination:

• Whether an arbitration clause in a Trust Deed constitutes a valid arbitration agreement under provisions of the Arbitration Act?

• Whether disputes relating to the management of Trust are capable of being settled through arbitration?

Judgement and Analysis:

Trust Deed and Arbitration

With regards to the validity of arbitration clause in a Trust Deed, the Supreme Court held that an arbitration clause in a Trust Deed does not constitute a valid arbitration agreement as required under Section 2(b) read with Section 7 of the Arbitration Act. The SC placed reliance on its own judgment in Vijay Kumar Sharma case (2010 (2) SCC 486, 2010 (1) SCR 582) ("Vijay's Case"). In this case, a similar question arose as to whether a clause in a Will which provided for settling disputes by an arbitrator in respect of bequeathed property would constitute a valid arbitration agreement or valid arbitration Clause. It was held that in no case an arbitration clause in a Will constitutes a valid arbitration agreement. It was further held that such a clause is a unilateral declaration by the testator.

While comparing the Trust Deeds with Will of the Testator, the Supreme Court opined that principles laid down in Vijay's case must be made applicable to an arbitration clause in a Trust Deed, in the light, that, in both the cases it is the Settlor / Testator who signs the document alone in favour of Beneficiaries / Legatees, the Beneficiaries / Legatees are not required to sign the document and hence they are not regarded as party to such deed or an agreement between such parties.

The Supreme Court while deciding the issue also placed reliance on a judgment of Honorable Calcutta High Court in Bijoy Ballav Kundu’s case (AIR 1965 Calcutta 628) ("Bijoy Case"). In this case, an Arbitration clause in a Trust Deed was invoked and an award was passed. The legality of Award was challenged in the Civil Court. The same was set aside by the Civil Court. An appeal was preferred to the Calcutta High Court. The Calcutta High Court analysed that for a valid agreement there must be a proposal and an acceptance. It further held that by accepting a trust, a trustee merely undertakes to carry out obligations of managing a trust. In accepting the Trust, the trustees are bound to follow the provisions of the Trust Deed whether or not they accept the clauses of the Trust Deed.

The Supreme Court, applying the principles in Bijoy’s Case, opined that, the concept of proposal and acceptance which are integral conditions of a valid agreement are not required in the case of a Trust. Although the Trustees accept the creation of the trust, they merely undertake to carry out the terms of Trust Deed. Such terms are mere directions in respect of how the affairs of the Trust are supposed to be managed. It cannot be said that the Trustees or beneficiaries have agreed amongst themselves as to how they should spend the money or manage the Trust. The Supreme Court held that the Trusts Act provides a forum for redressal of grievances and the same should be strictly interpreted.

Management of Trust | Settled through Arbitration

Supreme court held that the disputes relating to trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by an arbitrator despites existence of arbitration agreement to that effect between the parties. The Supreme Court placed reliance on another of its own judgement in the Booz Allen case (2011) 5 SCC 532 ("Booz Case") wherein, the following six categories of disputes were held to be non-arbitral disputes which include (i) rights and liabilities arising out of or giving rise to criminal offences; (ii) matrimonial disputes; (iii) guardianship matters; (iv) insolvency and winding up; (v) testamentary matters; (vi) eviction or tenancy matters where tenants enjoy statutory protection.

The Supreme Court opined that the Trusts Act specifically confers jurisdiction on civil courts to redress grievances in the respect of Trusts and hence the same cannot be decided by an arbitrator under the Arbitration Act. Finally, the Supreme Court laid down an additional seventh category of disputes that are non-arbitral namely, cases arising out of Trust Deed and Trusts Act.

MHCO COMMENT

Many countries across the globe are considering the introduction of arbitration provisions in trust laws. Although strictly speaking, the Trust Deed cannot be considered as an agreement as rightly laid down by the High Court, however, a liberal approach and modification must be followed in the sense that benefiting from the trust may be deemed an agreement to submit to arbitration. However, until then, in the light of the above judgment, disputes relating to trusts are non-arbitral in India.

ARBITRABILITY OF FRAUD | IS EVERY FRAUD ARBITRABLE?

Fraud is broadly understood as a concealment of material facts or a false representation through statements or actions that injure the person who relies upon them. Arbitrability of fraud, has been a highly contested issue in the field of alternate dispute resolution. The Supreme Court in N Radhakrishnan v Maestro Engineers and Ors ("Radhakrishnan Case") held that, cases where fraud and serious malpractices are alleged, the matter can only be settled by court and are not subject to arbitration. However, recently the apex court in A Ayyasamy vs A Paramasivam & Ors ("Ayyasamy Case"), held that simple fraud is subject to arbitration provided an arbitration agreement exists between the parties. However serious frauds such as criminal offences, shall continue to be adjudicated by courts.

FACTS OF THE AYYSAMY CASE:

• Five brothers and their father, entered into a partnership deed for the running of a hotel in Tamil Nadu, that contained an arbitration clause.

• The business was being managed and administered by the father and after his death, the same was entrusted to the Appellant, the eldest brother.

• Disputes arose between the parties and the Appellant fraudulently signed a cheque to transfer money to his son from the hotel account, without the knowledge and consent of the Respondents instead of depositing the same into the common bank account of the partnership firm. He also refused to show accounts books of the hotel to the Respondents.

• The Respondents therefore were forced to file a declaratory suit, proclaiming that they were entitled to participate in the administration of the hotel and seeking a permanent injunction restraining the Appellant from interfering with the same.

• The Appellant meanwhile filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") to refer the dispute to arbitration.

• The Trial Court, however dismissed the aforesaid application, relying on the Radhakrishnan Case wherein the Supreme Court laid down that serious offences such as allegations of criminal acts, malpractices and serious allegation of fraud are required to be determined by the Courts and when the matter is complicated and requires the parties to adduce evidence for the determination of the offence, then the judicial authority i.e. the Court can refuse to refer the dispute to arbitration and adjudicate the same, despite the subsistence of an arbitration agreement between the parties.

Thereafter, the Appellant filed a revision petition in the High Court contending that the trial court committed a jurisdictional error. However, High Court dismissed the Petition, also relying upon the Radhakrishnan Case. Being aggrieved by the same, the Appellant preferred an appeal before the Supreme Court.

The Supreme Court in this judgement has clearly stated that the Arbitration Act does not make a provision excluding any category of disputes by treating them as non-arbitrable. When an agreement has an arbitration clause, in such cases the judicial intervention would be minimal. Under the Arbitration Act, an Arbitral Tribunal has the power to rule its own jurisdiction and the civil court does not possess jurisdiction to decide the same. The Supreme Court has held where there are mere allegations of fraud simpliciter, such issues can be determined by the Arbitral Tribunal.

Well-recognised examples of Non-Arbitrable disputes: In the Ayyasamy Case, the Supreme Court has also laid down the well-recognised examples of non-arbitrable disputes which are:

• disputes relating to rights and liabilities which give rise to or arise out of criminal offences;

• matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;

• guardianship matters;

• insolvency and winding-up matters;

• testamentary matters (grant of probate, letters of administration and succession certificate); and

• eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes. Fraud is one such category spelled out by the decisions of this Court where disputes would be considered as non-arbitrable.

Supreme Court has further held that rights in personam (right exercisable against specific individuals) are considered to be amenable to arbitration; and all disputes relating to rights in rem (rights exercisable against the world) are required to be adjudicated by courts and public tribunals.

The Supreme Court has held that (i) when there is a serious allegation of fraud which makes it a criminal offence, or (ii) when the allegation of fraud becomes so complicated that it becomes necessary that such complex issues wherein extensive evidence is required to be produced by the parties for the determination of the offence by the civil court, or (iii) where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, then the Court can dismiss an application under Section 8 of the Arbitration Act and proceed with the suits on merit.

Therefore, the Supreme Court has made it clear that simple fraud is arbitrable whereas instances of serious fraud are to be determined by Courts. However, the Supreme Court has not provided any definition of `serious fraud` and interpretation of the same shall be interpreted on a case to case basis.

MHCO COMMENTS:

Ayyasamy Case will prevent parties from delaying arbitral proceedings on the grounds that fraud is not arbitrable. This is also in line with the recent amendments to the Arbitration Act. The basic principle of the Arbitration Act is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with knowledge of the efficacy of the arbitral process. In view of the aforesaid, the parties are bound to relegate the dispute to arbitration unless it involves serious issues which are non-arbitrable.

This article was released on 22 November 2016.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.