On September 7, 2022, the Supreme Court in, Babanrao Rajaram Pund v. Samarth Builders & Developers, [Arising out of Special Leave Petition (Civil) No. 15989 of 2021], reiterated that deficiency of words in an agreement, which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.  

Brief Facts:

Babanrao Rajaram Pund (“Appellant”), desired to develop his property by constructing residential and commercial complexes. Samarth Builders & Developers (“Respondent No. 1”), a developer engaged in the business of construction and development approached the Appellant for developing his property. The parties accordingly entered into an agreement dated May 29, 2014 (“Development Agreement”).

A dispute arose between the parties with respect to the timelines of construction. The Appellant invoked the arbitration clause in the Development Agreement i.e., Clause 18, which is reproduced herein below:

“Clause 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 of a Sole Arbitrator mutually appointed, failing which, two Arbitrators, one to be appointed by each party to 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 Respondent No. 1 failed to respond to Appellant’s invocation notice, which led the Appellant to file an application under section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”). The Respondent’s contention was that the purported arbitration clause lacked the express wording necessary for it to be considered a valid and binding contract and thus, Clause 18 of the Development Agreement was unenforceable. The Respondent No.1 referred to and relied upon the decision of the Supreme Court in, Bihar State Mineral Development Corporation v. Encon Builders (I) (P) Limited, [(2003) 7 SCC 418] and Karnataka Power Transmission Corporation Limited v. Deepak Cables (India) Limited, [(2014) 11 SCC 148], wherein it was held that in case of exclusion of attributes of an arbitration agreement from a dispute resolution clause, it would not amount to a valid arbitration agreement. The contentions of the Respondent No.1 were accepted by the Bombay High Court and the Section 11 application was held to be non-maintainable. The Bombay High Court, though recognized the existence of Clause 18 in the Development Agreement, it was of the view that Clause 18 lacks certain essential ingredients of a valid arbitration agreement as it does not mandate that the decision of the arbitrator will be final and binding on the parties. This order of the Bombay High Court was challenged before the Supreme Court.

Question before the Supreme Court:

Whether Clause 18 of the Development Agreement constitutes a valid arbitration clause for the purpose of invoking Section 11 of the Act, since the existence of a valid agreement is sine-qua-non for a court to exercise its powers to appoint an arbitrator under the Act?

Analysis:

The Supreme Court observed that section 7 of the Act does not mandate any particular form for an arbitral clause. The Supreme Court referred to and relied upon its earlier judgment in Rukmanibai Gupta v. Collector, Jabalpur, [(1980) 4 SCC 556], wherein in was held that the court is only required to ascertain whether the parties have agreed that if disputes arise between them in respect of the subject matter of contract, such dispute shall be referred to arbitration, and such an arrangement would spell out an arbitration agreement. The Supreme Court also referred to and relied upon its judgment in K.K. Modi v. K.N Modi, [(1998) 3 SCC 573], wherein the Supreme Court reiterated the principle in Rukmanibai (supra).

The Supreme Court was of the view that the Bombay High Court erred in holding that the section 11 application was not maintainable for want of a valid arbitration clause and Clause 18 discloses the intention and the obligation of the parties to be bound by the decision of the tribunal, even though the words “final and binding” are not expressly incorporated therein. The Supreme Court also observed that the intention of the parties was to refer the disputes to arbitration which can be gleaned through the other parts of the Development Agreement.

The Supreme Court also relied on the three-Judge Bench decision in Enercon (India) Limited v. Enercon Gmbh, [(2014) 5 SCC 1], wherein it was held that the courts have to adopt a pragmatic approach and not a pedantic or technical approach while interpreting or construing an arbitration agreement or clause.

Conclusion:

The Supreme Court held that Clause 18 of the Development Agreement is a valid arbitration clause. The decision passed by the Bombay High Court was set aside.

 Please find a copy of the judgment, here.

This update has been contributed by Ranjit Shetty (Senior Partner) and  Priyanka Shetty (Principal Associate).

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