Arbitrability of Trust Disputes

Trusts and Dispute Resolution: An Overview

A person may make a charitable transfer of property either for the benefit of the society at large (Public Trusts) or for his own family or for some specific person (Private Trusts). In such cases, to ensure that the benefits are appropriately passed on to the intended beneficiary, he may depute a person to carry on the task, thereby creating a ‘trust’. By doing so, he sets in motion an instrument of trust[1], governed by the Indian Trust Act, 1882 or the Public Trust law, as the case may be, and himself becomes the ‘author of the trust’, whereby, the person in whom the faith is reposed becomes the ‘trustee’ and the person for whom he intends to pass on the benefits being the ‘beneficiary’ as defined under Section 3 of the Indian Trust Act, 1882.

Due to their nature, there are disputes that arise out of relations created by trusts, often between the parties themselves. To further understand how disputes emerge, the case of Vimal Shah & Ors. v Jayesh Shah & Ors.[2] can be analyzed. In this case, Mr. Dwarkadas Modi, set up a family trust deed for his six minor children and appointed Mr. Dinesh Shah and Mr. Saryu Shah as the two managing trustees. The dispute arose when the beneficiaries were dissatisfied with the way the trust was managed and they questioned the provision pertaining to alternate dispute resolution in the contract, and declared it to be inapplicable to them. The matter was eventually referred to the Supreme Court.

To Arbitrate or Not to Arbitrate

Under the Arbitration and Conciliation Act, 1996, (“Act”) as per section 8, only persons who are parties to an ‘arbitration agreement’ can approach the court for the appointment of an arbitrator to settle a dispute. An arbitration clause can constitute an arbitration agreement, however, it needs to be in writing and has to be signed by the parties in accordance with Section 7 of the Act. In the case of Vimal Shah[3] the appeal to the Supreme Court arose against the judgment of the Bombay High Court which had appointed an arbitrator to settle the disputes between the parties as per Section 11 of the Act. Having failed to appoint an arbitrator to settle their dispute as per the trust deed, the parties had approached the court to appoint an arbitrator under Section 11 of the Act. Section 11 provides for the appointment of an arbitrator, wherein, pursuant to an arbitration agreement, the parties are required to refer their dispute to an arbitrator, but fail to do so.

The question before the Bombay High Court was whether there was an arbitration agreement and whether its insertion in a trust deed could be deemed to be an arbitration agreement as per the requirements of Section 7 of the Act. Here, it was argued that as the beneficiaries were minors at the time of the agreement, they did not sign the agreement and therefore the requirements of Section 7 were not fulfilled. The argument of the Appellants before the Supreme Court in the Vimal Shah[4] case was that the Respondents (beneficiaries) were not parties or signatories to the contract as they were minors when the deed was formed. Therefore, the Respondents claimed that neither was there an ‘agreement’ in general nor there could be any arbitration agreement amongst the parties as per Sections 2(1)(b) and 2(1)(h) read with Section 7 of the Act. The Bombay High Court differed from this view. Applying the benefit theory or the conditional transfer theory, the court reasoned that even though the beneficiaries were not signatories to the agreement, by accepting the benefits under the trust deed, the beneficiaries were bound to accept all obligations that came along with it, including the obligation to arbitrate. Further the court stated, “beneficiaries under the said Trust Deed are not only claiming through the Trustees when they were minor, but are claiming independently under the Trust Deed after attaining the age of majority and are thus, entitled to initiate the dispute having arisen between the applicants, beneficiaries and the Trustees as well as beneficiaries inter se by invoking the arbitration clause recorded in the Trust Deed.”

The Supreme Court, however, rejected the benefit theory applied by the Bombay High Court and instead held that when a settler executes a trust in the favour of the beneficiaries, it is signed by the settler alone and is akin to a will (being a unilateral declaration). The beneficiaries do not sign the agreement and therefore the Supreme Court held that the beneficiaries cannot be said to be parties to the agreement. It went on to conclude that insertion of arbitration clause into a trust deed cannot be construed as an arbitration agreement. The Supreme Court reasoned that while it was tempting to argue that a beneficiary accepts all obligations under a trust deed as was accepted by the Bombay High Court, it cannot be so as the situation is different from the beneficiaries signing the agreement. An argument for determination of an arbitration agreement by an arbitration tribunal exists, wherein there is a lack of clarity regarding the existence of an arbitration agreement. In such cases, the ‘arbitrator’ shall have the power to determine whether there exists an arbitration agreement under Section 16 as Section 11 no longer applies due to it being administrative in nature. Section 16 allows for an arbitral tribunal to rule on its own jurisdiction including the existence of an arbitration clause.

The Supreme Court, in the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd ^[5], remarked that all disputes relating to rights in personam are considered to be capable of resolution by arbitration while disputes relating to rights in rem are usually required to be adjudicated by courts, being ‘unsuited’ for private arbitration. All the six categories of non-arbitrable disputes identified in this case relate to rights in rem. In the Vimal Shah[6] case, the Supreme Court, has not provided adequate reason why a dispute relating to right of beneficiaries (right in personam) is unqualified to be resolved by arbitration.

The Principle of Implied Bar

The Supreme Court in the Vimal Shah[7] case also considered the question as to whether the Trust Act was a code in itself and whether it excluded the applicability of the Act under the principle of implied bar. The Court referred to the decision in Dhulabai v. State of M.P.[8] which laid down seven conditions to decide the issue of express/implied bar with regards to remedies available in law and deemed that the present circumstances satisfied Condition 2 of the test wherein though there was no express bar, there existed an implied bar on the applicability of Act for deciding disputes relating to the trust. The Supreme Court reasoned that the principal Civil Court of original jurisdiction has been given sufficient authority throughout the Trusts Act, 1882 and therefore there cannot be a clause which excludes the authority of the Civil Court despite the provisions of the Act. The Court came upon this view by applying the principle of ‘implied bar’ whereby if a specific provision is given it denies the person asking for a remedy the right to ask for any other remedy apart from that which is granted by statute. This is however contrary to the decision in UP Sugar Factories Federation Ltd. v. P.S. Mishra[9] where it was held that an arbitration clause providing for a particular court to deal with the arbitration issues does not exclude the jurisdictions of other courts which might deal with the matter either by inference or by intention or the specific words of the parties. The Supreme Court added the disputes arising out of trust deeds to the category of the cases which cannot be decided by arbitration as listed in the case of Booz Allen and Hamilton Inc[10]. The Supreme Court opined that insertion of an arbitration clause to the trust deed cannot be said to constitute an arbitration agreement as per Sections 2(1) (b), 2 (1) (h) read with Section 7 of the Act and even if such an agreement exits, it cannot be referred to private arbitration for its adjudication.

Deemed Acceptance Theory

The Arbitration and Conciliation (Amendment) Act, 2015 has amended Section 8 to incorporate the principle of deemed acceptance. It has now been allowed for a person “claiming through or under” a party to the arbitration agreement to seek reference of disputes to arbitration provided a valid arbitration agreement exists between the parties. Keeping in mind this theory, it can be argued that a beneficiary can claim through or under the settlor of the trust deed under Section 8. Thus, acknowledging the existence of arbitration agreement between beneficiary and trustee. However, in the Vimal Shah case[11], the Supreme Court has refused to discuss the deemed acceptance theory, by simply limiting all Trust disputes within the provisions of the Trust Act.

Meeting Contract Basics: Proposal and Acceptance

One of the rulings on the matter was passed by the Calcutta high Court in the case of Bijoy Ballav Kundu[12] wherein the Court held that there is a proposal and an acceptance which constitutes every agreement but which does not exist in the creation of a trust and therefore, the arbitration clause cannot be said to have been accepted by the beneficiaries. Mere acceptance by the beneficiaries cannot be said to be an agreement between the beneficiaries and therefore there exists no valid arbitration agreement. Addressing the issue as to whether the lack of signatures of the parties in a trust deed can be said to invalidate the arbitration clause as per Section 7 of the Arbitration and Conciliation Act, 1996, the court compared the trust deed to testamentary documents, the court referred to the case of Vijay Kumar Sharma[13] where it was held that as the legatees were not signatories of the Will, the arbitration clause contained in the testamentary document was not a valid arbitration agreement.  The Supreme Court, however, did not take into consideration its own judgment in the case of Jugal Kishore Rameshwardas v. Goolbai Hormusji[14] where the Supreme Court held that to constitute an arbitration agreement, it was not necessary for the parties to have signed the agreement and it would be sufficient if the agreement was in writing and thus the agreement of the parties would be established.

Conclusion

The Supreme Court has reasoned that, just as a will cannot be held to be an arbitration agreement, a trust deed cannot be held to be an arbitration agreement. Thus, the Supreme Court also added disputes relating to trust, trustees and beneficiaries arising out of the trust deed and the Trust Act to the categories of non arbitral disputes already identified in the case of Booz Allen and Hamilton Inc[15]. By reading, the Supreme Court judgement, with the amended Section 8 of the Arbitration Act, there may be inferences that the judgement and the amended Section 8 do not synchronize. However, this is not the case, as the argument to refer the dispute to arbitration is rendered invalid by the Supreme Court’s finding that, “there exists an implied bar of exclusion of applicability of the Arbitration Act for deciding the disputes relating to Trust, trustees and beneficiaries through private arbitration. When the Trust Act exhaustively deals with the Trust, trustees and beneficiaries and provides for adequate and sufficient remedies to all aggrieved persons by giving them a right to approach the Civil Court of principal original jurisdiction for redressal of their disputes arising out of Trust Deed and the Trust Act then, any such dispute pertaining to affairs of the Trust including the dispute inter se Trustee and beneficiary in relation to their right, duties, obligations, removal etc. cannot be decided by arbitration by taking recourse to the provisions of the Act.”[16] It can be concluded that, even though the amended Arbitration and Conciliation Act, facilitates persons claiming through a party to refer a dispute to arbitration, this will not apply to Trust disputes, as stated by the Supreme Court, the Trust Act excludes the applicability of the Arbitration and Conciliation Act by providing adequate remedies for dispute resolution. Also, should one bifurcate trusts basis their purpose and reason for constitution to determine whether or not disputes are arbitrable? For instance, trusts formed for the welfare of employees or trusts for giving effect to ESOP / ESPS schemes of companies – should these be on a separate footing.

For now of course, the law on arbitrability of trust disputes is very clear. Disputes inter se trustees, beneficiaries and matters governing trust matters are non-arbitrable in nature. However commercial disputes between the trust and other entities where there exists a valid arbitration agreement continue to be arbitrable.

– Karan Narvekar

[1] Section 3 of the Indian Trusts Act, 1882.

[2] (2016) 8 SCC 788.

[3] Ibid.

[4]Ibid.,

[5] (2011) 5 SCC 532.

[6] Supra note 2, 1.

[7] Ibid.,

[8] AIR 1967 SC 78.

[9] 8 CLA-BL Supp (Snr) 7 (All).

[10] Supra note 4, 2.

[11] Ibid.

[12] AIR 1965 Calcutta 628.

[13] (2010) 2 SCC 486.

[14] AI 195 SC 812.

[15] Supra note 4, 2.

[16] Ibid