DISPUTES ARISING OUT OF TRUSTS | NON ARBITRAL IN INDIA
The Indian Trusts Act, 1882 Act ("Trust Act"), which is a
comprehensive code broadly, lays down inter alia the manner of creation
of trust, the rights, powers and duties of the Trustees, provisions
relating to breach of trusts, remedies for seeking redressal of
grievances arising out of the Trust Deed etc.
In a recent case of Vimal Shah & Ors V/s Jayesh Shah and Ors ("Vimal Case"), the Supreme Court of India ("Supreme Court") has held that the disputes relating to Trusts, Trustees, and beneficiaries arising out of the Trust Deed and/ or Trust Act are not capable of being adjudicated by an arbitrator despite existence of an arbitration agreement between the parties.
Brief Facts of Vimal Case:
In a recent case of Vimal Shah & Ors V/s Jayesh Shah and Ors ("Vimal Case"), the Supreme Court of India ("Supreme Court") has held that the disputes relating to Trusts, Trustees, and beneficiaries arising out of the Trust Deed and/ or Trust Act are not capable of being adjudicated by an arbitrator despite existence of an arbitration agreement between the parties.
Brief Facts of Vimal Case:
- 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.
- Since 1990, certain differences arose amongst the beneficiaries. The arbitration clause in the Trust Deed was invoked by them and subsequently, an application for appointment of Arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") was preferred by some of the beneficiaries ("Section 11- Application").
- The said Section 11- Application was contested inter alia 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 and nor can such Trust Deed be termed as an arbitration agreement within the meaning of Section 2(b), 2(h) and Section 7 of the Arbitration Act.
- The Bombay High Court allowed the Section 11- Application and appointed a sole arbitrator for adjudication of disputes. Aggrieved by the order one of the parties preferred an appeal before Supreme Court.
Issues for Determination: The following issues cropped up before the Supreme Court for its determination:
- Whether an arbitration clause in a Trust Deed constitutes a valid arbitration agreement under provisions of the Arbitration Act?
- Whether disputes relating to the management of Trust are capable of being settled through arbitration?
Judgement and Analysis:
Trust Deed and Arbitration
With regards 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 SC placed reliance on its own judgment in Vijay Kumar Sharma case (2010 (2) SCC 486, 2010 (1) SCR 582) ("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 or valid arbitration Clause. 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 the Trust Deeds with Will of the Testator, the Supreme Court opined that principles laid down in Vijay's case must be made applicable to an arbitration clause in a Trust Deed, in the light, that, in both the cases it is the Settlor / Testator who signs the document alone 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 Honorable Calcutta High Court in Bijoy Ballav Kundu’s case (AIR 1965 Calcutta 628) ("Bijoy Case"). In this case, an Arbitration clause in a Trust Deed was invoked and an award was passed. The legality of Award was challenged in the Civil Court. The same was set aside by the Civil Court. An appeal was preferred to the Calcutta High Court. The Calcutta High Court analysed 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
Supreme court held that the disputes relating to trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by an arbitrator despites existence of arbitration agreement to that effect between the parties. The Supreme Court placed reliance on another of its own judgement in the Booz Allen case (2011) 5 SCC 532 ("Booz Case") wherein, the following six categories of disputes were held to be non-arbitral 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-arbitral namely, cases arising out of Trust Deed and Trusts Act.
Trust Deed and Arbitration
With regards 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 SC placed reliance on its own judgment in Vijay Kumar Sharma case (2010 (2) SCC 486, 2010 (1) SCR 582) ("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 or valid arbitration Clause. 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 the Trust Deeds with Will of the Testator, the Supreme Court opined that principles laid down in Vijay's case must be made applicable to an arbitration clause in a Trust Deed, in the light, that, in both the cases it is the Settlor / Testator who signs the document alone 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 Honorable Calcutta High Court in Bijoy Ballav Kundu’s case (AIR 1965 Calcutta 628) ("Bijoy Case"). In this case, an Arbitration clause in a Trust Deed was invoked and an award was passed. The legality of Award was challenged in the Civil Court. The same was set aside by the Civil Court. An appeal was preferred to the Calcutta High Court. The Calcutta High Court analysed 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
Supreme court held that the disputes relating to trust, trustees and beneficiaries arising out of the Trust Deed and the Trust Act are not capable of being decided by an arbitrator despites existence of arbitration agreement to that effect between the parties. The Supreme Court placed reliance on another of its own judgement in the Booz Allen case (2011) 5 SCC 532 ("Booz Case") wherein, the following six categories of disputes were held to be non-arbitral 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-arbitral namely, cases arising out of Trust Deed and Trusts Act.
MHCO COMMENT
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, however, a liberal approach and modification must be
followed in the sense that benefiting 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-arbitral in
India.
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