Can a housing society member initiate an arbitration against developer?

With increasing number of redevelopments in cities, co-operative housing societies and their members have been concerned about their legal rights and remedies. Arbitration, as a dispute resolution mechanism, is seen to be included in most redevelopment contracts to ensure swift settlement of disputes between co-operative societies and developers. Members of a housing society are usually individually made parties to a redevelopment agreement along with the society to avoid disputes or claims regarding the terms of the redevelopment agreement and ensure that all members have consented to the redevelopment.

Case: Ketan Champak Lal Divecha v DGS Township Pvt Ltd

The question as to whether this act being made party to redevelopment agreements, entitles a member to individually (sans society) invoke the arbitration clause in such agreements and force the developer and other members of the society into an arbitral proceeding was recently considered by the Bombay High Court in Ketan Champak Lal Divecha v DGS Township Private Limited, MANU/MHOR/0002/2024.

Bombay High Court order

In this case, the co-operative housing society entered into a redevelopment agreement with the developer and all 216 members of the society were signatories. After a unanimous resolution passed by the society, its managing committee executed a supplementary agreement with the developer to alter certain terms of the original redevelopment agreement. Despite the resolution, the petitioner, being aggrieved by certain terms of the supplementary agreement, sought to individually initiate an arbitration under the redevelopment agreement against the developer and the housing society. The petitioner filed applications before the Bombay High Court seeking appointment of an arbitrator and for interim reliefs under the Arbitration and Conciliation Act, 1996 (the Arbitration Act).

While interpreting the specific arbitration clause included in the agreement, the Bombay High Court in its order dated 2 January 2024 ruled that:

• While the arbitration clause in the redevelopment agreement made generic references to the words, ‘parties’ and ‘agreement’, the reference to ‘party’ and ‘arbitration agreement’ should be interpreted in reference to the definitions of ‘party’ provided in Section 2 (1) (h) and ‘arbitration agreement’ provided in Section 7 of the Arbitration Act.

• As the arbitration clause specifically mentioned ‘the society and the members’ as one party and ‘developer’ as the other party, it could forward a panel of names to facilitate the selection of a sole arbitrator and thereafter, a sole arbitrator could be appointed ‘jointly by the society and developer’, the eventual appointment of the arbitrator could take place when the society (not members) and the developer jointly agree to such appointment. Accordingly, for a valid invocation of arbitration, notice was required to be issued by the society with its members. As per the arbitration clause, an individual member simply did not have the capacity to invoke arbitration under the redevelopment agreement. This cleared the position that the specific arbitration clause in the agreement signified an arbitration agreement for resolution of disputes between the society with its members on the one hand and the developer on the other.

• The arbitration clause in the agreement has to be read in the backdrop of the settled position of law that when a co-operative housing society enters into a development agreement with a developer, the will of the majority members prevails. The individual desire or identity of the member is subsumed within the will of the co-operative housing society, which collectively represents the aspirations and cause of its members. Reliance was placed on the case of Daman Singh[1], wherein it is specifically laid down that the society alone can act and speak for an individual member and that the member loses his individuality, having no independent rights.

Conclusion

It is important to consider that this judgment of the Bombay High Court has been passed interpreting a specific arbitration clause, which was intended to preclude the housing society members from invoking arbitration. It may not operate as a general principle to preclude housing society members from invoking arbitration under all redevelopment agreements. As the ruling sets out and reiterates well-established legal principles, parties to a redevelopment agreement should ensure that the arbitration clause is drafted to prevent an individual member from initiating arbitration against a developer. This would prevent disputes and will ensure that a single member cannot hold up the redevelopment process by initiating arbitration.

(The author is Partner at Khaitan & Co.)