Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2691 OF 2011 [Arising out of SLP [C] No.34139/2010]

Deutsche Post Bank Home Finance Ltd. … Appellant

Vs.

Taduri Sridhar & Anr. … Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted.  

2. The second respondent (referred to as the ‘Developer’) entered into a  

development  agreement  with  the  owners  of  certain  lands  at  Bachupally  

village,  Qutubullapur  Mandal,  Ranga  Reddy  District,  for  constructing  

independent  houses  and  multistoried  Apartment  buildings  with  common  

facilities in a layout known as ‘Hill County township’. The landowners as  

the first party, the developer as the second party and the first respondent who

wanted to acquire an apartment therein as the third party entered into an  

agreement for sale dated 16.10.2006 under which the land-owners agreed to  

sell an undivided share equivalent to 87 sq.yds. out of a total extent of 16.95  

acres  to  the  first  respondent  and  the  developer  agreed  to  construct  a  

residential apartment measuring 1889 sq.ft. for the first respondent. The total  

consideration for the undivided share in the land, apartment and car parking  

space was agreed as Rs.55,89,368. The agreement contemplating the entire  

price  being  paid  in  instalments,  that  is  10% on  booking,  85% in  seven  

instalments  upto 15.3.2008 and 5% at the time of delivery. Clause (14) of  

the said agreement dated 16.10.2006 provided for settlement of disputes by  

arbitration.

3. On the request of the first respondent, the appellant (earlier known as  

‘BHW Home Finance Ltd.’) sanctioned a housing loan of Rs.52 lakhs to the  

first  respondent  for  purchase  of  the  said  apartment  in  terms  of  a  loan  

agreement dated 21.12.2006  entered into between the first respondent as the  

borrower and the appellant as the lender. The said loan agreement contained  

the  terms  of  the  loan,  rate  of  interest,  provisions  for  amortization,  

consequences  of  delay  in  payment  of  EMIs,  security  for  repayment,  and  

general covenants of borrower. Clause (11) thereof provided for settlement  

of all  disputes (that  is,  all  matters,  questions,  disputes,  differences and/or  

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claims  arising  out  of  and/or  concerning  and/or  in  connection  and/or  in  

consequences of breaches, termination or invalidity thereof or relating to the  

Agreement) by arbitration by the Managing Director of the appellant  or his  

nominee as sole Arbitrator. The first respondent subsequently had entered  

into a supplemental  loan agreement  with the appellant  on 29.10.2007 for  

reducing the loan amount from Rs.52 lakhs to Rs.49,78,527/-; and the said  

loan has been disbursed in terms of the said loan agreements.

4. It  is  alleged  that  a  tripartite  agreement  was  also  executed  on  

21.12.2006 among first respondent as borrower, the developer as guarantor  

and the  appellant  as  the  lender,  under  which it  was agreed that  the  loan  

amount should be disbursed by the appellant directly to the developer and  

such amounts paid to the developer shall be deemed to be disbursement of  

loan by the appellant to the first respondent.  

5. In  pursuance  of  the  agreement  of  sale  dated  16.10.2006,  the  first  

respondent paid the entire sale price to the developer through the appellant.  

Thereafter,  the  land-owners  and the  developer  executed  a  registered  sale  

deed dated 21.2.2008 for a consideration Rs.21,27,409/-, conveying to the  

first respondent, an undivided share in the land equivalent to 87 sq.yds. with  

the  semi  finished apartment  bearing No.3E in  the  third  floor  of  Nainital  

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Block of Hill County with one reserved parking space. On the same day the  

first  respondent  entrusted   the  construction  of  the  unfinished  flat  to  the  

developer under a construction agreement dated 21.2.2008, under which the  

developer acknowledged the receipt of the total cost of construction, that is  

Rs.33,22,226  from  the  first  respondent  and  agreed  to  complete  the  

construction of the apartment and deliver the same to the first respondent by  

16.10.2008  with  a  grace  period  of  three  months.  Clause  7  of  the  said  

construction agreement dated 21.2.2008 between the first respondent and the  

developer provided for arbitration and is extracted below :

“ 7. Arbitration   

a. In the event of any dispute between the parties in connection with the  validity, interpretation, implementation or breach of any provision of this  agreement or any other disputes including the question of whether there is  proper termination of the agreement shall be resolved through arbitration  by appointing a sole arbitrator by the Vice Chairman of the First Party.  The  decision  of  the  Arbitrator  shall  be  final  and  binding  on  both  the  parties.

b. The arbitration proceedings shall be in accordance with the provisions  laid  down  in  the  Arbitration  and  Conciliation  Act,  1996  and  shall  be  governed by the laws in A.P. subject to the authorized arbitration clauses.  The  venue  of  the  Arbitration  proceedings  shall  be  Hyderabad  and  the  language  shall  be  in  English.  All  the  proceedings  are  subject  to  the  exclusive jurisdiction of the courts at Hyderabad limits.”

On  the  execution  of  the  sale  deed  dated  21.2.2008  and  construction  

agreement dated 21.2.2008, the earlier  agreement for sale dated 16.10.2006  

apparently lost its relevance, as the land-owners went out of the picture on  

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execution  of  the  sale  deed  regarding  the  undivided  share  and  a  fresh  

construction agreement dated 21.2.2008 was executive regarding completion  

of the apartment by the developer.  

6. The first respondent issued a notice dated 31.7.2009 to the developer,  

alleging delay in construction and delivery of the apartment and called upon  

it to pay Rs.54,778 per month as compensation for the period of delay, that  

is  from  the  due  date  of  completion  (16.10.2008)  till  date  of  actual  

completion and delivery of the apartment. By another letter dated 15.9.2009  

addressed to the developer, first respondent invoked the arbitration clause  

contained in clause (7) of the construction agreement dated 21.2.2008 and  

sought reference of the disputes between them to arbitration. There was no  

response from the developer.

7. Thereafter, the first respondent filed a petition under section 11 of the  

Arbitration  and  Conciliation  Act,  1996  (“Act”  for  short)  in  the  Andhra  

Pradesh High Court, for appointment of an Arbitrator. In the said petition,  

the appellant was brought into the dispute, for the first time, by impleading it  

as  a  respondent  along  with  the  developer.  In  the  said  petition,  the  first  

respondent alleged that the developer had failed to complete and deliver the  

apartment  in  terms  of   the  construction   agreement   dated   21.2.2008.  

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He also alleged that the developer had arranged the housing loan from the  

appellant; and that the appellant-lender had released the total loan amount to  

the  developer  without  ensuring  that  there  was  sufficient  progress  of  

construction and without verifying the ‘ground realities’ and thereby failed  

to  perform its  minimum obligations  and  responsibilities  as  a  lender.  He  

contended  that  the  circumstances  disclosed  collusion,  fraud  and  

misrepresentation  on  the  part  of  the  developer  and  the  appellant.  First  

respondent further alleged that the following disputes had arisen between  

him on the one hand,  and the respondents therein (the developer and the  

appellant) on the other, which required to be decided by arbitration :  

a) The developer  committed  breach of  contract  in not  fulfilling its  part  of  contractual  obligations  and  consequently  was  liable  to  refund  all  the  amounts  collected  from  him  and  the  appellant,  together with interest thereon at 24% per annum with monthly rests  from the date of its  respective dates of collections till  payment,  besides  the  interest  and  damages  that  may  be  charged  by  the  appellant.  

b) The  appellant  clandestinely  and  deliberately  released  the  entire  payments to the developer without verifying the ground realities  about the progress of construction and without intimation to him  (first  respondent)  and  thus  committed  breach  of  trust  and  was  liable for all consequences.

c) In  view  of  the  breach  of  trust  and  non-fulfillment  of  the  obligations, the developer was also liable to pay a sum of Rs.15  lakhs  towards  miscellaneous  expenditure  incurred  and  mental  agony suffered by the petitioner.  

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d) The developer  was also liable  to  pay/reimburse  whatsoever  that  may  be  demanded  by  the  appellant  in  respect  of  the  entire  transaction.  

e) The  developer  and  the  appellant  were  liable  to  pay  the  first  respondent  all  the  expenditure  incurred/to  be  incurred  towards  legal and other miscellaneous charges.  

f) The developer and the appellant were liable to compensate him for  his financial and mental suffering.

g) The developer and the appellant were liable to pay commercial rate  of interest to the first respondent on the amounts found due from  the due date till payment.

The first respondent relying upon clause (7) of the construction agreement  

dated 21.2.2008, sought appointment of a sole arbitrator to adjudicate upon  

the disputes between him and the developer and the appellant in respect of  

purchase of the apartment.  

8. The  said  petition  was  resisted  by  the  appellant.  The  appellant  

contended that it had nothing to do with the dispute between first respondent  

and developer; that for the first time, the first respondent had chosen to make  

allegations against the appellant in the petition under section 11 of the Act,  

apparently in collusion with the developer, to avoid payment of EMIs due to  

the  appellant;  and that  the  petition  under  section  11  of  the  Act  was  not  

maintainable against it, as the dispute was between the first respondent and  

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the developer (second respondent) and it was not a party to the arbitration  

agreement  invoked  by  the  first  respondent  (that  is  clause  7  of  the  

construction agreement dated 21.2.2008).  

9. The designate of the Chief Justice of Andhra Pradesh High Court by  

the  impugned  order  dated  12.4.2010  allowed  the  said  application  under  

section 11 and appointed a retired Judge of High Court as the sole arbitrator.  

The  learned  designate  referred  to  the  construction  agreement  dated  

21.2.2008 between the first respondent and second respondent and clause (7)  

therein  providing  for  arbitration.  The  said  order  did  not  refer  to  the  

contention of the appellant that it was not a party to the dispute and therefore  

the petition under section 11 was not maintainable against it. In view of the  

impugned  order,  the  appellant  though  not  concerned  with  the  disputes  

between  the  first  respondent  and  the  developer,  is  made  a  party  to  the  

arbitration.  

10. The said order  is  challenged by the appellant  urging the following  

contentions :

(i) As the first respondent and the developer were the only parties to the  construction  agreement  dated  21.2.2008  containing  the  arbitration  agreement, the appellant could not be dragged into a dispute between  them, by impleading it as a party to the petition under section 11 of  the Act.     

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(ii) The designate of the Chief Justice ought to have examined whether  both  respondents  in  the  petition  under  section  11  of  the  Act  were  parties  to  the  arbitration  agreement  (clause  7  of  the  construction  agreement  dated  21.2.2008)  before  making  an  order  appointing  an  arbitrator under section 11 of the Act.

On the contentions urged, the question that arises for our consideration is  

whether the appellant could be made a party to the arbitration, even though  

the  appellant  was  not  a  party  to  the  arbitration  agreement  contained  in  

clause (7) of the construction agreement dated 21.2.2008.

11. In this case, the first respondent made a demand for damages against  

the  developer  in  his  notice dated 31.7.2009.  As the developer  refused to  

comply, the first respondent invoked the arbitration agreement contained in  

clause (7) of the Construction Agreement dated 21.2.2008 between him and  

the  developer.  Therefore,  in  so  far  as  the  disputes  between  the  first  

respondent  and  the  developer  (second  respondent)  are  concerned,  the  

designate of the Chief Justice was justified in appointing an arbitrator.  But  

the  question  is  whether  the  appellant,  a  non-party  to  the  construction  

agreement containing the arbitration agreement as per clause (7), could be  

roped in, as a party to such arbitration.  

12. In  Jagdish Chander vs.  Ramesh Chander [2007 (5)  SCC 719] this  

court held :

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“The existence of an arbitration agreement as defined under Section 7 of  the  Act  is  a  condition  precedent  for  exercise  of  power  to  appoint  an  arbitrator/Arbitral  Tribunal,  under  Section  11  of  the  Act  by  the  Chief  Justice or his designate. It is not permissible to appoint an arbitrator to  adjudicate the disputes between the parties in the absence of an arbitration  agreement or mutual consent.”  

In Yogi Agarwal vs. Inspiration Clothes & U [2009 (1) SCC 372], this court  

observed :

“When Sections 7 and 8 of the Act refer to the existence of an arbitration  agreement  between  the  parties,  they  necessarily  refer  to  an  arbitration  agreement  in  regard  to  the  current  dispute  between  the  parties  or  the  subject-matter of the suit. It is fundamental that a provision for arbitration,  to constitute an arbitration agreement for the purposes of Sections 7 and 8  of the Act, should satisfy two conditions. Firstly, it should be between the  parties to the dispute. Secondly, it should relate to or be applicable to the  dispute.”

In  S. N. Prasad vs. Monnet Finance Ltd – (2011) 1 SCC 320, this Court  

held:   

“There  can  be  reference  to  arbitration  only  if  there  is  an  arbitration  agreement between the parties. If there is a dispute between a party to an  arbitration agreement,  with other parties to the arbitration agreement as  also non-parties to the arbitration agreement,  reference to arbitration or  appointment of arbitration can be only with respect to the parties to the  arbitration  agreement  and  not  the  non-parties……..As  there  was  no  arbitration agreement between the parties, the impleading of the appellant  as a respondent in the proceedings and the award against the appellant in  such arbitration cannot be sustained.”  

Therefore, if ‘X’ enters into two contracts, one with ‘M' and another with  

‘D’,  each  containing  an  arbitration  clause  providing  for  settlement  of  

disputes arising under the respective contract, in a claim for arbitration by  

‘X’ against ‘M’ in regard to the contract with ‘M’, ‘X’ cannot implead ‘D’  

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as a party on the ground that there is an arbitration clause in the agreement  

between ‘X’ and ‘D’.

13. The existence of an arbitration agreement between the parties to the  

petition under section 11 of the Act and existence of dispute/s to be referred  

to arbitration are conditions precedent  for  appointing an Arbitrator  under  

section 11 of the Act. A dispute can be said to arise only when one party to  

the arbitration agreement makes or asserts a claim/demand against the other  

party to the arbitration agreement and the other party refuses/denies such  

claim or demand. If a party to an arbitration agreement, files a petition under  

section 11 of the Act impleading the other party to the arbitration agreement  

as also a non-party to the arbitration agreement as respondents, and the court  

merely appoints an Arbitrator without deleting or excluding the non-party,  

the effect would be that all parties to the petition under section 11 of the Act  

(including  the  non-party  to  arbitration  agreement)  will  be  parties  to  the  

arbitration. That will be  contrary to the contract and the law.  If a person  

who is not a party to the arbitration agreement is impleaded as a party to the  

petition under section 11 of the Act, the court should either delete such party  

from the array of parties, or when appointing an Arbitrator make it clear that  

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the Arbitrator is appointed only to decide the disputes between the parties to  

the arbitration agreement.  

14. The arbitration agreement relied upon by the first respondent to seek  

appointment of arbitrator, is clause (7) of the construction agreement dated  

21.2.2008. The appellant was not a party to the said construction agreement  

dated 21.2.2008 containing the arbitration agreement. It is no doubt true that  

the  loan  agreement  dated  21.12.2006  between  the  first  respondent  as  

borrower,  and  the  appellant  as  the  creditor,  also  contains  an  arbitration  

clause (vide Article 11) providing for resolution of disputes in regard to the  

said loan agreement by arbitration. But the developer was not a party to the  

loan agreement.  There is  no arbitration agreement between the developer  

and  the  appellant.  The  disputes  between  the  first  respondent  and  the  

developer cannot be arbitrated under Article 11 of the Loan Agreement. The  

first respondent invoked the arbitration agreement contained in clause 7 of  

the construction agreement (between first respondent and developer) and not  

the  arbitration  agreement  contained  in  clause  11  of  the  loan  agreement  

(between appellant  and first  respondent).   The existence of an arbitration  

agreement  in  a  contract  between  appellant  and  first  respondent,  will  not  

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enable  the  first  respondent  to  implead  the  appellant  as  a  party  to  an  

arbitration in regard to his disputes with the developer.  

15. The first respondent obviously cannot involve the appellant as a party  

to an arbitration in regard to his disputes arising out of the claims made by  

him  against  the  developer  which  are  covered  by  clause  (7)  of  the  

construction  agreement.  The  disputes  referred  to  in  the  petition  under  

section 11 of the Act relate to the claims of the first respondent against the  

developer.  It  is  however  true  that  there  is  reference  to  the  appellant  in  

disputes (b), (e) and (f) and reference to collusion between the developer and  

the appellant in those ‘disputes’. The first respondent has also alleged that  

the appellant by releasing the payments to the developer without verifying  

the  ground  realities  about  the  progress  and  construction  and  without  

intimation to him, had committed breach of trust and therefore liable to pay  

compensation for the financial and mental suffering of the first respondent as  

also the legal and other expenses. No such claim was ever been made against  

the appellant before filing the petition under section 11 of the Act, nor did  

the first  respondent at  any time seek arbitration in regard to such claims  

against  the  appellant.  The  said  claims  against  the  appellant  cannot  be  

arbitrated in an arbitration in pursuance of  clause (7)  of  the construction  

agreement between the first respondent and the developer.  

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16. The first respondent did not issue any notice or demand making any  

claim against  the appellant  nor did he issue any notice claiming that  the  

appellant  is  liable  for  the  consequences  of  non-performance  by  the  

developer, of its obligations. Nor did the first respondent issue any notice to  

the appellant seeking reference of any disputes to arbitration.  Therefore it  

could not be said that any dispute existed between the first respondent and  

appellant, when the petition under section 11 of the Act was filed. Even in  

the application under section 11 of the Act, there is no reference to clause  

No.(11) of the loan agreement which contains the arbitration agreement in  

regard to disputes that may arise between the appellant as lender and the first  

respondent as the borrower. There is no claim or dispute in regard to the loan  

agreement.  The  first  respondent  has  not  invoked  clause  (11)  of  the  loan  

agreement for deciding any dispute with the appellant.  

17. If  there  had  been  an  arbitration  clause  in  the  tripartite  agreement  

among the  first  respondent,  developer  and the  appellant,  and if  the  first  

respondent had made claims or raised disputes against both the developer  

and the appellant with reference to such tripartite agreement,  the position  

would have been different. But that is not so. The petition under section 11  

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of the Act against the appellant was therefore misconceived as the appellant  

was not a party to the construction agreement dated 21.2.2008.

18. In view of the above, we allow this appeal and set aside the order  

dated 12.4.2010 of the designate of the Chief Justice, in part, in so far as the  

appellant is concerned. We make it clear that the appointment of arbitrator  

under the impugned order shall remain undisturbed in so far as the disputes  

between  first  respondent  and  the  second  respondent  (developer)  are  

concerned. We further make it clear that this order will not come in the way  

of  first  respondent  making  any  claim  or  raising  a  dispute  against  the  

appellant or appellant making any claim or raising a dispute against the first  

respondent and either of them seeking recourse to arbitration in regard to  

such disputes.  

___________________J. (R. V. Raveendran)

New Delhi; ___________________J. March 29, 2011. (A. K. Patnaik)

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