Scope of Enquiry Under Section 11 of the Arbitration and Conciliation Act, 1996

In the recent case of M/S. Emaar India Ltd v. Tarun Aggarwal Projects LLP & Anr[1]., the Hon’ble Supreme Court has held and reaffirmed its earlier view that under a Section 11 petition in the Arbitration and Conciliation Act, 1996, the Court can determine whether or not a dispute is arbitrable by conducting a preliminary inquiry.

Brief Facts

 

The case concerns Tarun Aggarwal Projects LLP & ANR (Respondents) who entered into a collaboration agreement with Emaar India Ltd. (Appellant) for the development of residential colonies located in Gurugram, Sector 62 and 65. Both parties entered into an agreement on May 7, 2009. After this, both parties signed an Addendum Agreement on April 19, 2011. Soon a dispute arose between the parties and the Respondents stated that the Appellant had not followed the obligation specified under the Addendum Agreement. Thereafter, a legal notice was issued on behalf of the Respondents on December 11, 2019, demanding the physical possession of 5 plots measuring 2160 sq. yds. and claiming a sum of Rs. 10 crores for the losses/damages suffered by them. The Respondents contended that the dispute is arbitrable in nature as mentioned under clause 37 of the Addendum Agreement. Hence, they appointed an arbitrator who was a former judge of the Hon’ble High Court. The Appellant refused the appointment of the arbitrator following which a petition under Section 11 was filed by the Respondents before the Hon’ble High Court of Delhi.

At this stage, it would be important to refer to Clauses 36 and 37 of the Addendum Agreement, which read as follows:

Dispute Resolution & Jurisdiction

  1. “In case of any conflict or difference arising between the parties or in case the either party refused or neglects to perform its part of the obligations under this Addendum Collaboration Agreement, inter­alia as mentioned in Clauses 3, 6 & 9 hereinabove, then the other party shall have every right to get this agreement specifically enforced through the appropriate court of law”.
  2. Save & except clause 36 hereinabove mentioned, all or any dispute arising out of or touching upon or in relation to the terms of this Agreement including the interpretation and validity thereof, and the respective rights and obligations of the parties, shall be settled through under the provisions of Arbitration & Conciliation Act, 1996 wherein both the parties shall be entitled to appoint one Arbitrator each and the Arbitrators so appoint shall appoint a third Arbitrator or rank of Retired Judge of any High Court. The arbitration proceedings shall be governed by the provisions of Arbitration and Conciliation Act, 1996 or any statutory amendments/modification thereto for the time being in force. The arbitration proceedings shall be held at Delhi.”

Before the Hon’ble High Court, it was contended by the Appellant that the dispute relates to the breach of clauses 3, 6 and 9.  Therefore, it is only the Court which has the jurisdiction to entertain the dispute as per the terms of Clause 36 of the Addendum Agreement. The invocation of arbitration by the Respondents which was contended by the Appellant was thus not in alignment with the agreed terms. Alternatively, in the prayer, the Appellant suggested the nomination of their arbitrator. The Hon’ble High Court examined clauses 36 and 37 of the Addendum Agreement and held that conjoint reading of both the Clauses makes it clear that a party does have a right to seek enforcement of agreement before the Court of law, but it does not bar settlement of disputes through Arbitration and Conciliation Act, 1996. Moreover, Clause 37 also suggests how arbitration proceedings shall be conducted. On this ground, the Hon’ble High Court proceeded with the appointment of the third arbitrator. Aggrieved by the order of the Hon’ble High Court, the Appellant approached the Hon’ble Supreme Court.

 

Observations of the Supreme Court 

 

The seminal issue before the Hon’ble Supreme Court was whether the Hon’ble High Court has made a justified decision to appoint an arbitrator under Sec. 11(5) and 11(6) of the Arbitration Act without having a preliminary inquiry under Sec. 11 to decide the arbitrability of the dispute.

The Hon’ble Supreme Court looked at both clauses and determined that on a bare reading of Clause 36 of the Agreement, it is apparent that in the event of any dispute as mentioned in Clauses 3, 6 and 9, the other party shall have a right to get the Agreement specifically enforced through the appropriate court of law. As per Clause 37, save and except Clause 36, all or any dispute arising out of or touching upon or in relation to the terms of the addendum agreement shall be settled under the provisions of the Arbitration and Conciliation Act, 1996. Thus, with respect to any dispute as mentioned in Clauses 3, 6 & 9, such disputes are not arbitrable at all.

The Hon’ble Supreme court also cited Vidya Drolia and Ors. v. Durga Trading Corporation[2] and held that it is incumbent upon Courts to hold a preliminary enquiry under a Section 11 petition filed under the Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court noted that the Hon’ble High Court had erred in its decision and the matter was remitted back to the Hon’ble High Court to decide the petition and pass an appropriate order after having the preliminary inquiry on arbitrability of the dispute. The Hon’ble Supreme Court held that the objective of prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage.

 

Conclusion

 

It is important to note that under Section 11 of the Arbitration and Conciliation Act, 1996, the Courts will do a preliminary enquiry as to the arbitrability of the disputes. The law in this regard has been settled by the Hon’ble Supreme Court. The purpose of such an enquiry is limited to pruning of matters which would not fall in the category of arbitrable matters. The Supreme Court had in the case of Vidya Drolia and Others v Durga Trading Corporation  laid down a four-pronged test to determine when the subject matter of a dispute in an arbitration agreement is not arbitrable:

  • When the cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam arising from rights in rem.
  • When the cause of action and subject matter of the dispute affects third party rights; has erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
  • When the cause of action and subject matter of the dispute relates to an inalienable sovereign and public interest functions of the State, hence mutual adjudication would be unenforceable;
  • When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s)

References:

[1] 2022 SCC OnLine SC 1328.

[2] (2021) 2 SCC 1.

Image Credit: Photo by EKATERINA BOLOVTSOVA

The Hon’ble Supreme Court held that the objective of prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage.

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Validity of an Arbitration Clause: No Strait-Jacket Formula

On September 7, 2022, the Hon’ble Supreme Court issued a significant ruling in the case of Babanrao Rajaram Pund v. Samarth Builders & Developers[1], holding that no strait jacket formula can be made under the Arbitration and Conciliation Act, 1996, to determine the particulars of an arbitration clause. It further held that an arbitration clause must be treated as final and binding even if specific words like “final” or “binding” are not used in such a clause.

Babanrao Rajaram Pund v. Samarth Builders & Developers

The case related to one Babanrao (the Appellant), who was the owner of a property situated in Aurangabad. The Appellant intended to build residential and commercial complexes on this property. Samarth Builders & Developers (Respondent No. 1), a company specialising in the building of homes and commercial buildings, learned of the Appellant’s intention to build such a residential and commercial complex and approached him. A “Development Agreement” (DA) was subsequently signed by the Appellant and Respondent No.1. The Appellant, thereafter, signed a General Power of Attorney (GPA) in favour of Respondent No. 1.  Respondent No. 2, in the civil appeal was the partner of Respondent No. 1.

According to the DA, Respondent No.1 had to build “Amay Apartments” on the property within 15 months. However, this deadline could have been extended with the payment of a penalty. Respondent No. 1 accepted the conditions of the DA and stated that he would build 45 percent of the constructed space before or on the deadline of the 15-month period, retaining the other 55 percent of the developed section for himself.

Respondent No.1 was, however, unable to finish the work within the allotted time. Aggrieved by this act, the Appellant gave notice to terminate the DA and to cancel the GPA. On 11.07.2016 the cancellation of the agreement and GPA were also publicised in a newspaper by the Appellant. Since, Respondent No.1 did not respond to the notice of the Appellant issued under Clause 18 of the DA, which carried an arbitration clause, the Appellant was constrained to approach the High Court.

Clause 18 of the DA reads as follows:

“18. All the disputes or differences arising between the parties hereto as to the interpretation of this Agreement or any covenants or conditions thereof or as to the rights, duties, or liabilities of any part hereunder or as to any act, matter, or thing arising out of or relating to or under this Agreement (even though the Agreement may have been terminated), the same shall be referred to arbitration by a sole arbitrator mutually appointed, failing which, two arbitrators, one to be appointed by each party to the dispute or difference, and these two Arbitrators will appoint a third Arbitrator and the Arbitration shall be governed by the Arbitration and Conciliation Act, 1996 or any re-enactment thereof.”

The Arbitration Clause

Before the Hon’ble High Court of Bombay, the Appellant had filed an application pursuant to Section 11 of the Arbitration Act, 1996, after receiving no response from the Respondents. The Respondents claimed that clause 18 of the DA could not be enforced because it lacked the precise phrase “to be bound by the decision of the Arbitral Tribunal.” The Hon’ble High Court ruled in favour of the Respondents and determined that the clause lacked necessary components of a legitimate arbitration agreement and did not expressly specify that the arbitrator’s ruling would be binding. Aggrieved by the order of the High Court, a Special Leave Petition was filed by the Appellant before the Hon’ble Supreme Court.

The Issue Before the Hon’ble Supreme Court

If an arbitration clause lacks specific language like “binding” or “final,” should it still be considered a valid agreement for the purpose of invoking powers under Sec. 11 of the Arbitration and Conciliation Act, 1996?

While analysing the issue, the Hon’ble Supreme Court made it clear that there is no precise form of an arbitration clause, and that Section 7 of the Arbitration Act of 1996 does not provide a specific form of arbitration agreement. The Hon’ble Supreme Court critically analysed Clause 18 of the DA and concluded that the terms of the agreement were clear. It made it clear that the term “disputes shall be” referred to arbitration, meant that the reference to arbitration was clear in the DA. Additionally, it was also observed that the contract contained clear instructions for choosing a third arbitrator and that the parties would be subject to the Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court further opined that the requirement and purpose of the parties to be bound by the arbitral tribunal are mandated by Clause 18 of the DA. The arbitral clause was held to be not invalidated by the omission of the phrases “final” and “binding.” The decision of the Hon’ble High Court of Judicature of Bombay was thus set aside by the Hon’ble Supreme Court and a sole arbitrator was appointed to resolve the dispute.

Key Takeaway

Though, the decision by the Hon’ble Supreme Court gives considerable breathing room for an arbitration clause, it is imperative to consider that an insufficiently written arbitration clause does hinder the process of arbitration. The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. This will also ensure that the parties will not be forced to approach the courts to determine the validity of the clause.

References: 

[1] 2022 SCC OnLine SC 1165.

The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. 

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