Monday, December 19, 2016

Disputes Arising out of Trusts Non Arbitrable in India

[The following guest post is contributed by Bhushan Shah & Anchal Singh from Mansukhlal Hiralal & Company. The views expressed in the post are personal.]

The Indian Trusts Act, 1882 Act ("Trusts Act"), which is a comprehensive code, broadly deals with the manner of creation of trusts, the rights, powers and duties of trustees, breach of trust and remedies.

In Vimal Shah v Jayesh Shah, ("Vimal Shah"), the Supreme Court has earlier this year held that the disputes relating to trusts, trustees and beneficiaries arising out of the trust deed and/ or the Trusts Act are not capable of being adjudicated by an arbitrator despite the existence of an arbitration agreement in the Trust Deed.

Brief Facts of Vimal Shah:

1.         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.

2.         After 1990, certain differences arose amongst the beneficiaries. They invoked the arbitration clause in the Trust Deed, and subsequently some of the beneficiaries made an application for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") ("Section 11 Application").

3.         The said Section 11 Application was contested, among other things, 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 nor can such Trust Deed be termed as an arbitration agreement within the meaning of sections 2(b), 2(h) and 7 of the Arbitration Act.

4.         The Bombay High Court allowed the Section 11 Application and appointed a sole arbitrator for adjudication of disputes. One of the parties appealed to the Supreme Court.

Issues for Determination: The following issues arose for determination in the Supreme Court:

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

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

Judgement and Analysis

Trust Deed and Arbitration

With regard 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 Court placed reliance on its own judgment in the Vijay Kumar Sharma case ("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. 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 Trust Deeds with a Will of the Testator, the Supreme Court held that the principles laid down in Vijay's Case apply to an arbitration clause in a Trust Deed in the light of the fact that in both cases it is the Settlor / Testator alone who signs the document 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 Calcutta High Court in Bijoy Ballav Kundu’s case  ("Bijoy Case"). In this case, an Arbitration clause in a Trust Deed was invoked and an award was passed. The legality of the Award was challenged. The Calcutta High Court said 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

The Supreme Court also held that disputes relating to trust, trustees and beneficiaries arising out of the Trust Deed and the Trusts Act are not capable of being decided by an arbitrator despite the existence of arbitration agreement to that effect between the parties. The Supreme Court placed reliance on another of its own judgments - the Booz Allen case - wherein the following six categories of disputes were held to be non-arbitrable: 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-arbitrable namely, cases arising out of Trust Deed and Trusts Act.

Conclusion

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, a liberal approach must be followed in the sense that availing of benefits 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-arbitrable in India.

- Bhushan Shah & Anchal Singh


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