Arbitration Clause In Sale Agreement Cannot Be Invoked If Subject Matter Involves Third-Party Title Disputes: Madhya Pradesh High Court

"The rights in personam have not been crystallized by the agreement to give further cause of action to file an application for arbitration on the basis of agreement to sale, for which a valid conveyance deed of transfer is required. In absence of such, the matter cannot be said to be arbitrable when no rights in personam have been accrued in favour of the parties." Madhya Pradesh High Court, in a latest ruling, held that a dispute arising from an agreement to sell cannot be referred to arbitration under Section 11(6) of the Arbitration and Conciliation Act, 1996, if the subject matter involves unresolved questions of title involving third parties who are not signatories to the arbitration agreement.

A single bench of Justice Deepak Khot observed that while contractual disputes are generally arbitrable, the Court must satisfy itself that the dispute does not affect third-party rights or require a centralized adjudication that an arbitrator is not equipped to handle.

The applicant sought the appointment of an arbitrator following a dispute over a sale agreement dated 04.12.2023, concerning multiple parcels of land. The applicant alleged that the non-applicants failed to perform necessary obligations such as demarcation, sub-division, and clearing existing bank mortgages on the properties. Although the agreement contained an arbitration clause, the respondents contested the application on several grounds, including the lack of signature by certain title holders and the inclusion of properties not owned by the signatories of the agreement.

The primary issue before the Court was whether a dispute involving specific performance of a contract and complex title claims could be referred to arbitration when the property ownership is contested and involves third parties. The Court further examined whether such a referral would infringe upon the substantive requirements of the Transfer of Property Act, 1882, and the Specific Relief Act, 1963.

Scope of Arbitrability and Third-Party Rights

The Court emphasized that while the Supreme Court in Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan and Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties recognized that specific performance of a contract is generally an action in personam and thus arbitrable, this is not an absolute rule. The court noted that the fourfold test laid down in Vidya Drolia v. Durga Trading Corpn. dictates that disputes affecting third-party rights or those requiring centralized adjudication cannot be settled through private arbitration.

Need for Valid Title Conveyance

The bench pointed out that the agreement in question sought to transfer land that had not yet been conveyed to the respondents by the original owners, Mukulchand Viswas and Usha Viswas. Because these third parties were not signatories to the arbitration agreement, any arbitral award would lack the legal capacity to bind them or effectively resolve the title dispute.

"When the dispute relates to a third party who has not been made a party to the agreement, the subject matter of the dispute involves rights in rem and requires centralized adjudication, making mutual arbitration inappropriate and unenforceable," the Court observed.

Limits of Party Autonomy

The Court underscored that while the Arbitration and Conciliation Act prioritizes party autonomy, it does not permit parties to circumvent substantive laws. The adjudicatory process, especially when it involves crystallizing title to immovable property, cannot be delegated to an arbitrator if the foundational rights have not yet accrued in favor of the contracting parties.

"The Arbitration and Conciliation Act, though provides party autonomy, will not oust the application of the Evidence Act, the Transfer of Property Act, and the Specific Relief Act," the Court noted.

Concluding that the dispute regarding title and the involvement of third parties rendered the matter non-arbitrable, the Court dismissed the application. The bench granted the applicant the liberty to pursue the matter before a competent civil court, where the substantive issues regarding title and specific performance can be addressed through the appropriate procedural code.

Date of Decision: 31 August 2026