2008 (2) TMI 852 - HC - Companies Law

Appointment of sole Arbitrator for adjudication of the disputes seeked for adjudication of the disputes arising out of or in connection with the Trust Deed - Held that - A person may while making a Will and appointing somebody as Executor of the Will, provide for an arbitration clause that any dispute between the beneficiaries of the Will, will be decided by the Arbitrator. Such a clause would not be binding on the beneficiaries, because they were not party to the Arbitration Agreement although they may be getting benefits out of the Will. A person can dispose of his property by Will but a person cannot create a contract between two other persons by his Will. Similarly, Settlor and Trustees can create a Trust and specify who will be the beneficiaries under the Trust but they cannot create a binding contract between the beneficiaries in respect of settlement of dispute and cannot say that all disputes between the beneficiaries shall be decided by arbitration. The arbitration clause relied upon by the applicant is therefore not binding on the beneficiaries and this application is not maintainable and is hereby dismissed as such.

Issues:
1. Validity of Arbitration Agreement in Trust Deed for appointment of sole Arbitrator.
2. Interpretation of Section 7 of the Arbitration and Conciliation Act regarding the requirement of an Arbitration Agreement.
3. Whether beneficiaries reaping benefits under a Trust are bound by an Arbitration Clause in the Trust Deed.

Issue 1: Validity of Arbitration Agreement in Trust Deed for appointment of sole Arbitrator

The application under Section 11 of the Arbitration and Conciliation Act sought the appointment of a sole Arbitrator to adjudicate disputes arising from a Trust Deed dated 14th September, 1984. The Trust Deed established the 'Chinar Trust' between parties, designating beneficiaries and trustees. A dispute arose when respondents intended to transfer their share of benefits to a third party without offering it to other beneficiaries, leading to the application for arbitration. The applicant argued that the Arbitration Agreement in the Trust Deed should govern the resolution of disputes, while respondents contended that no such agreement existed between them. The court examined whether the beneficiaries, although not signatories to the Trust Deed, were bound by the Arbitration Clause contained therein.

Issue 2: Interpretation of Section 7 of the Arbitration and Conciliation Act

Section 7 of the Arbitration and Conciliation Act defines an Arbitration Agreement as an agreement by parties to submit disputes to arbitration. The Act requires parties to be ad-idem, agreeing to refer disputes to an Arbitrator. The court emphasized that for a valid Arbitration Agreement, both parties must consent to arbitration in case of disputes. The Act specifies that an Arbitration Agreement must be in writing, signed by parties or evidenced through written communication. The court highlighted the importance of mutual agreement between parties for arbitration to be enforceable under the Act.

Issue 3: Binding nature of Arbitration Clause on Trust beneficiaries

The court analyzed whether beneficiaries reaping benefits under a Trust were bound by an Arbitration Clause in the Trust Deed. It clarified that beneficiaries receive benefits according to Trust terms, not through contractual agreements with the Settlor or Trustees. A Trust is a contract between the Settlor and Trustees, and beneficiaries' benefits are determined by Trust provisions. The court ruled that beneficiaries cannot be bound by an Arbitration Clause in the Trust Deed unless there is an independent Arbitration Agreement among beneficiaries. It highlighted that minors and persons of unsound mind, who can be beneficiaries under a Trust, are not legally competent to enter into agreements, making Arbitration Agreements inapplicable to them. The judgment emphasized that beneficiaries cannot be bound by Arbitration Clauses created by Settlors and Trustees without their explicit consent.

In conclusion, the court dismissed the application for the appointment of a sole Arbitrator, ruling that the Arbitration Clause in the Trust Deed was not binding on beneficiaries who were not signatories to the agreement. The judgment underscored the importance of mutual consent for Arbitration Agreements to be enforceable and clarified that beneficiaries' rights and disputes under a Trust are distinct from contractual obligations, necessitating separate agreements for arbitration among beneficiaries.

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