Rule of priority in favour of arbitrators is counterbalanced by Courts’ power to review existence and validity of arbitration agreement: Del HC

Delhi High Court: Mukta Gupta, J., expressed that the issue of whether in the absence of a third party, the refundable security deposit can be claimed would be for the Arbitrator to determine.

The petitioner sought the appointment of an Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.

It was stated that the petitioner had purchased the ground 7th, 8th, 9th, 10th, 11th and 12th floors of New Tower, Bhikaji Cama Place, R.K. Puram, Delhi along with respective car parking areas at Hyatt Complex from respondent vide four registered Sale Deeds along with perpetual right to use the car parking area.

Further, the petitioner transferred and assigned all rights and title in the premises to IndusInd Bank Limited along with the perpetual right to use the car parking area.

Thereafter, the petitioner sought a refund of the security deposit of Rs 15 crores deposited by the petitioner pursuant to the Refundable Security Deposit Agreement entered between the petitioner and the respondent.

Since, the claim of the petitioner now was in terms of the Refundable Security Deposit Agreements, Clause 7 whereof provides for arbitration, the petitioner invoked arbitration and thereafter filed the present petition.

Analysis and Decision

The petitioner sought reference to arbitration in terms of Clause 7 of the Agreements. However, Clauses 2 and 3 of the Agreements were also integral parts which provide that only on the third party providing the Refundable Security Deposit to the respondent, the petitioner can claim Refundable Security Deposit and the third party is neither a party to the agreement nor party to the present petition.

Supreme Court’s decision in Cholro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, though dealing with an international arbitration under Section 45 of the Act, held that even third parties who are not signatories to the arbitration agreement can be joined in arbitration. It laid down categories where the third parties can be impleaded to the arbitration and held that the expression “claiming through them” should be construed strictly.

High Court observed that,

“The key rationale for holding that the courts’ review of the arbitration agreement should be limited to a prima facie standard is the principle of competence-competence.”

“The rule of priority in favour of the arbitrators is counterbalanced by the courts’ power to review the existence and validity of the arbitration agreement at the end of the arbitral process.”

The Bench held that,

“Once a valid arbitration agreement exists between the parties, the issue whether the petitioner is entitled to any relief in the absence of a third party to the agreement or that third party is required to be impleaded in the proceedings, is covered by the Doctrine of Competence-Competence and it will be for the Arbitrator to decide the said issue.”

Court requested Justice Usha Mehra, a former Judge of this Court to arbitrate the disputes between the parties.

In view of the above, the petition was disposed of. [Vistrat Real Estates (P) Ltd. v. Asian Hotels North Ltd., 2022 SCC OnLine Del 1139, decided on 22-4-2022]


Advocates before the Court:

For the Petitioner: Ms Ranjana Roy Gawai, Advocate.

For the Respondent: Mr Sidhant Kumar and Ms Manyaa Chandhok, Advocates.

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