Supreme Court of India: Intention to arbitrate cannot only be deciphered from words like “Mediators/Arbitrators”, “any breaches”, “decision” in an arbitration clause

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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:

Factual Matrix

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.

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.”

Parties’ Contentions

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.

Analysis

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.”

Conclusion

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.

 

 

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