In the case of Shyam Sunder Agarwal v. P. Narotham Rao and Ors. (Civil Appeal no. 6872 of 2018), the Supreme Court of India scrutinized the wordings of an arbitration clause in question to decide whether the said clause treated as an arbitration clause in the light of words used such as “Mediators/Arbitrators”, “any breaches”, “decision” in it. Read the case analysis below:
The dispute arose out of MOU executed between the parties for sale and purchase of shares which all the parties are Directors. The issue before the Court was whether Clause 12 of the said MOU can be stated to be an arbitration clause.
“12. It is further agreed that any decision to be taken by said Mediators/Arbitrators during the period of entire transaction in the event of any breaches committed by either of the parties shall be final and binding on all the parties hereinabove.”
The Appellant contended that the words used in the impugned clause such as “decision”, “Mediators/Arbitrators”, and “any breaches” suffice the three essentials of an arbitration clause namely, that there must be disputes between the parties which have to be adjudicated upon by giving the parties a hearing, at the end of which there is a decision which is final and binding between the parties.
The Respondent argued that the underlying document (the MOU in this case), read as a whole, makes it clear that the expression “Mediators/Arbitrators” is used loosely. The two named arbitrators are escrow agents who have with them the custody of three sets of documents to ensure successful implementation of the MOU.
The Court analyzed the arbitration clause in light of MOU as a whole and commented that on a conspectus reading the named arbitrators though styled as Mediators/Arbitrators, are without doubt escrow agents who have been appointed to keep certain vital documents in escrow, and to ensure a successful completion of the transaction contained in the MOU.
Indeed, the very fact that they have been referred to as “Mediators/Arbitrators” and as “Mediators and Arbitrators” would show that the language used is loose – the idea really is that the two named persons do all things necessary during the implementation of the transaction between the parties to see that the transaction gets successfully completed. Therefore, when viewed as a whole, it is clear that the two escrow agents are not persons who have to decide disputes that may arise between the parties, whether before or after the transaction is completed, after hearing the parties and observing the principles of natural justice, in order to arrive at their decision.
The Court concluded that a reading of the MOU as a whole leaves no manner of doubt that the said MOU only invests the two gentlemen named therein with powers as escrow agents to smoothly implement the transaction mentioned in the MOU and not even remotely to decide the disputes between the parties as Arbitrators.
The Court cited the case of K.K. Modi v. K.N. Modi, (1998) 3 SCC 573, wherein it was held as under:
“The other factors which are relevant include, whether the agreement contemplates that the tribunal will receive evidence from both sides and hear their contentions or at least give the parties an opportunity to put them forward; whether the wording of the agreement is consistent or inconsistent with the view that the process was intended to be an arbitration, and whether the agreement requires the tribunal to decide the dispute according to law.”
The Court concluded that the wordings of MOU is clearly inconsistent with the view that it intended that disputes be decided by arbitration. Hence the said clause is not an arbitration clause.