In the case of Babanrao Rajaram Pund v. M/s. Samarth Builders & Developrs & Anr. SLP (Civil) No. 15989 of 2021 dated 07.09.2022, the Supreme Court held that an Arbitration Clause not specifying the terms ‘Arbitral Award is final and binding on parties’ is a valid Arbitration Agreement if it expressly indicates that the intention of the parties at the time of entering into the contract is to mandatorily refer their disputes to Arbitration.
The Appellant owned land in Aurangabad, Maharashtra and was desirous to develop the property through construction of residential and commercial complexes. The Respondent, a developer engaged in the business of construction and development of residential and commercial buildings, approached the Appellant when it came to know of the Appellant’s wish and offered to develop the property.
Pursuant to the same, the Appellant and the Respondent entered into a ‘Development Agreement’ and the Appellant also executed a General Power of Attorney (“GPA”) in favour of the Respondent. According to the Agreement, the Respondent was required to complete the construction of an Apartment within 15 months which was extendable up to 3 months with penalty.
The parties further entered into a Deed of Declaration under Section 2 of the Maharashtra Apartment Ownership Act, 1970 for the retention of facilities, amenities, common spaces, and to specify the portions of the developed property.
The Respondent failed to complete the development work within the stipulated time period of 15 months along with the extendable period of 3 months, and the Appellant served the Respondent a Legal Notice for termination of the Development Agreement and cancellation of GPA. Subsequently, disputes and differences arose between the parties.
The Appellant also sought an Injunction under Section 9 of the Arbitration and Conciliation Act, 1996 (“the Act”) to restrain the Respondent from selling any tenements on the developed property till further orders. Thereafter, the Appellant invoked the Arbitration Clause under the Development Agreement and issued the Notice invoking Arbitration to the Respondent, specifying the name of the Sole Arbitrator to whom the dispute should be referred to.
The Notice invoking Arbitration was duly served, however, the Respondent failed to respond to it. Thus, the Appellant filed an application for appointment of Arbitrator under Section 11 of the Act. The High Court dismissed the application as not maintainable on the ground that the Arbitration Agreement between the parties was not valid as it did not mandate that the decision of the Arbitrator shall be final and binding on the parties.
Thus, the Appellant preferred the said appeal before the Supreme Court against the decision of the High Court.
ISSUE BEFORE THE HIGH COURT
Whether the Arbitration Clause in the Development Agreement is a legal and valid Arbitration Agreement to seek the appointment of Arbitrator under Section 11 of the Act?
CONTENTIONS OF THE PARTIES
The Appellant contended that the Arbitration Clause crystallized the intention of the parties to refer the dispute to Arbitration and to be bound by the decision of the Arbitrator. The Appellant argued that the Arbitration clause clearly specified all the essentials of an Arbitration Agreement, i.e., the intent of the parties to refer all disputes arising between them to Arbitration, the procedure for appointment of Arbitrator and the governing law of Arbitration.
The Appellant submitted that the Development Agreement did not provide for an alternative mode of dispute resolution, and there were no specific exclusions of any attributes of an Arbitration Agreement in the Arbitration Clause as held in Karnataka Power Transmission Corporation Ltd. and Anr. v. Deepak Cables (India) Ltd. (2014) 11 SCC 148 and Jagdish Chander v. Ramesh Chander & Ors. (2007) 5 SCC 719.
Finally, the Appellant contended that no specific format is prescribed for the drafting of an Arbitration Clause, as held by the Supreme Court time and again. Thus, the High Court was not justified in holding that the Arbitration Clause did not meet the essential criteria of a valid Arbitration Agreement.
The Respondent did not enter into appearance before the Supreme Court. However, the Respondent contended before the High Court that the Arbitration Clause lacked the express wording necessary for it to be considered a valid and binding agreement to refer the disputes to Arbitration, specifically, the terms ‘the parties agree that the decision of the Arbitral Tribunal shall be final and binding.’
The Respondent relied on the decisions in Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I) (P) Ltd. (2003) 7 SCC 418 and Karnataka Power Transmission Corporation Ltd. and Anr. v. Deepak Cables (India) Ltd. (supra), wherein it was held that an Arbitration Clause not comprising of the attributes of an Arbitration Agreement would not be considered a valid Arbitration Agreement.
DECISION AND FINDINGS
The Supreme Court noted that no specific form for Arbitration Clause is mandated under Section 7 of the Act, and the same was settled by the Supreme Court in Rukmanibai Gupta v. Collector, Jabalpur and Ors. (1980) 4 SCC 556.
The Supreme Court analysed the decisions cited by the Appellant and the Respondent before the High Court and observed that the nature of Arbitration Clause in the said decisions are substantially different from the present Arbitration Clause, as the present Clause clearly enunciated the mandatory nature of reference to Arbitration, the method of appointing Arbitrator(s) and the governing law chosen by the parties.
Thus, the Supreme Court observed that the aforesaid three parameters indicate an unambiguous intention of the parties to refer their disputes to Arbitration. Resultantly, the Supreme Court held that the High Court erred in holding that the application under Section 11 was not maintainable for want of valid Arbitration Clause.
The Supreme Court noted that the Arbitration Clause luminously disclosed the intention and obligation of the parties to be bound by the decision of the Arbitral Tribunal, even though the words ‘final and binding’ were not expressly incorporated.
The Supreme Court further observed that as the Arbitration Clause did not contain any specific exclusion of any of the attributes of an Arbitration Agreement, the Respondent’s plea of non-existence of a valid Arbitration Clause is an afterthought.
The Supreme Court relied on the decision in Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr. (2014) 5 SCC 1, and held that:
“25. The deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimize the annulment of arbitration clause.”
Further, the Supreme Court observed that:
“27. There is no gainsaying that it is the bounden duty of the parties to abide by the terms of the contract as they are sacrosanct in nature, in addition to, the agreement itself being a statement of commitment made by them at the time of signing the contract. The parties entered into the contract after knowing the full import of the arbitration clause and they cannot be permitted to deviate therefrom.”
The Supreme Court noted that the UNCITRAL Model Law on International Commercial Arbitration, 1985 envisages minimal supervisory role by Courts. Thus, the Supreme Court observed that the Courts should not “gratuitously add impediments and desist from upholding the validity of an arbitration agreement.”
Thus, the Supreme Court allowed the Appeal and set aside the Order of the High Court.
Arbitration Clause in the present case did not include the terms “the Arbitration Clause shall be final and binding on the Parties.” Resultantly, the validity of the Arbitration Agreement was challenged and the High Court dismissed the application for appointment of Arbitrator for the want of valid Arbitration Agreement.
The Supreme Court analysed the Arbitration Clause in detail, which specified that the disputes should be mandatorily referred to Arbitration, the procedure for appointment of Arbitrators, and the governing law for Arbitration. Thus, the Supreme Court concluded that the said Arbitration Clause is a valid Arbitration Agreement as it clearly indicates the intention of the parties at the time of entering into the contract to refer any disputes thereunder to Arbitration.
This decision of the Supreme Court is a step forward in the right direction, to promote a pro-Arbitration approach within the domestic Arbitration environment. The Supreme Court emphasized that the intent of the parties to mandatorily refer the disputes to Arbitration is of utmost importance in an Arbitration Agreement, and once the same is established beyond doubt, there should be no hinderance in the conduct of Arbitration according to the Arbitration Agreement and governing law.
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