The Supreme Court in M/S Emaar India Ltd. v. Tarun Aggrawal Projects LLP & Anr. [Civil Appeal No. 6774 of 2022 dated 30.09.2022], held that the Court must determine the arbitrability of dispute in accordance with the Agreement prior to appointment of the Arbitrators under Section 11(5) and 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”).
Tarun Aggarwal Projects LLP and another party (hereinafter referred to as the “Respondents”) entered into a Collaboration Agreement amongst themselves for development of residential property in Gurugram.
The Respondents further entered into an Addendum Agreement (hereinafter referred to as the “Agreement”) dated 19.04.2011 with M/s. Emaar India Limited (hereinafter referred to as the “Appellant”). Disputes arose between the parties as the Respondents alleged that the Appellant did not fulfil its obligations under the Agreement. Thus, the Respondents issued a Legal Notice demanding physical possession of the property and claiming damages/losses suffered by them.
The Respondents were of the view that the dispute was arbitrable in nature, and appointed a former judge of High Court as the Arbitrator. The Appellant denied the appointment of Arbitrator and hence, the Respondents approached the Delhi High Court for the appointment of Arbitrator under Section 11(5) and Section 11(6) of the Act pursuant to the Arbitration Clause of the Agreement.
The Appellant opposed the said application on the ground that the dispute fell under Clause 36 of the Agreement and not the Arbitration Clause. Clause 36 of the Agreement stated that certain disputes would be specifically enforced through the appropriate Court of Law.
The Delhi High Court appointed the Arbitrators and held that from a conjoint reading of Clauses 36 and 37 of the Agreement, the parties had the right to seek enforcement of the Agreement, but it does not bar the settlement of disputes through the Act (hereinafter referred to as the “Impugned Order”).
Aggrieved by the Impugned Order, the Appellant filed the present appeal before the Supreme Court.
ISSUE BEFORE THE SUPREME COURT
Whether the Court can appoint Arbitrators under Section 11(5) and 11(6) of the Act without determining the arbitrability of the dispute?
CONTENTIONS OF THE PARTIES
The Appellant submitted that the High Court while appointing the Arbitrators under Section 11(5) and 11(6) of the Act, had erred in not considering that the dispute falls under Clause 36 of the Agreement and not under Clause 37. According to the Appellant, Clause 36 of the Agreement specifically provides for the right of enforcement of the Agreement whereas Clause 37 provides for redressal of disputes under the Act.
Thus, the Appellant contended that the High Court had appointed the Arbitrators without inspecting the arbitrability of the dispute.
The Appellant argued that the High Court was under the obligation to inspect the arbitrability of the dispute, and as the dispute was under Clause 36 of the Agreement, the Impugned Order is liable to be quashed and set aside.
The Respondents contended that a conjoint reading of Clauses 36 and 37 of the Agreement indicated that both the parties had the intention to settle the matters through Arbitration pursuant to the Act and hence, no error was committed by the High Court.
DECISION AND FINDINGS
The Supreme Court examined Clause 36 of the Agreement and observed that in provided the parties the right of specific enforcement in case of certain disputes under the Agreement.
The Supreme Court relied on the decision in Oriental Insurance Co Ltd. v. Narbheram Power and Steel (P) Ltd., [(2018) 6 SCC 534], wherein the Supreme Court held that the Arbitration Clause should be strictly interpreted, and if a Clause clearly states that under certain circumstances there can be no Arbitration then the dispute in respect of the appointment of the Arbitrator has to be ended.
The Supreme Court further placed reliance on Rajasthan State Industrial Development and Investment Corporation v. Diamond and Gem Development Corporation Limited [(2013) 5 SCC 470], wherein the Supreme Court had held the parties cannot claim anything more than that is stated in the Agreement, and the terms of the Agreement are to be construed strictly, so that there would not be adversity of interest to any of the parties.
Reliance was also placed upon Harsha Construction v. Union of India and Ors. [(2014) 9 SCC 246], wherein the Supreme Court had held that the appointment of Arbitrator in non-arbitrable issues is bad in law.
The Supreme Court noted that in Vidya Drolia and Ors. v. Durga Trading Corporation [(2021) 2 SCC 1] and Booz Allen & Hamilton Inc. v. SBI Home Finance Limited [(2011) 5 SCC 532], it was held that the non-arbitrable disputes would not be a part of the proceedings before the Arbitral Tribunal.
The Supreme Court held that at the reference stage, the arbitrability or non-arbitrability of the disputes have to be determined by the Courts applying the prima facie test, relying on the decisions in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg.; [(2019) 9 SCC 209], United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd. [(2018) 17 SCC 607].
Thus, the Supreme Court held that as the dispute was covered under Clause 36 of the Agreement, it is not arbitrable in nature. The Supreme Court allowed the appeal, quashed the Impugned Order of the High Court and remitted the matter back to the High Court to decide the matter afresh and to pass the appropriate order after holding a preliminary inquiry/review on whether the dispute is arbitrable and whether the dispute falls under Clause 36 of the Agreement.
A prominent aspect of the law of Arbitration is that all the parties to an Agreement must expressly and mutually agree to the reference of disputes to Arbitration. Similarly, the parties may agree to refer certain disputes to Arbitration, while excluding certain disputes from the purview of Arbitration which would be enforced only through Court of Law.
In this decision, the Supreme Court emphasized the importance of determiningthe nature and arbitrability of the dispute under the Agreement, prior to the appointment of Arbitrator by theHigh Court under Sections 11(5) and 11(6) of the Act. Such determination at the stage of reference itself is of utmost importance to reduce unnecessary litigation arising from appointment of Arbitrators in a dispute which is expressly non-arbitrable as per the Agreement between the parties.
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