THE STATE GOVERNMENT OF TAMIL NADU & ORS. versus M/S. SAMARTH BUILDERS & DEVELOPERS & ANR. on 7 September 2022

1. Leave granted.

2. The bone of contention in the instant proceedings is whetherBClause 18 of the Development Agreement dated 29.05.2014 possessesthe necessary ingredients to constitute a legal and valid arbitrationagreement? The genesis of the dispute lies in the aforesaid agreementexecuted between the parties for construction of an apartment complexcalled “Amay Apartments”. The construction was to be carried out byRespondent No.1 partnership firm on the land owned by the Appellant.CRespondent No. 2 is the partner of Respondent No. 1 partnership firm.

Factual Background:

3. The Appellant owns and possesses the land bearing Plot Nos.13 & 14, measuring 4000 sq. ft situated in Village Deolai, DistrictDAurangabad, Maharashtra. Appellant harbored a desire to develop thesaid property through the construction of residential and commercialcomplexes. Respondent No.1 is a developer engaged in the business ofconstruction and development of residential and commercial buildings.When it came to know that the Appellant wished to develop his property,the First Respondent approached the Appellant and offered to developEthe site. The Appellant and Respondent No. 1, thus, entered into a‘Development Agreement’ and pursuant thereto the Appellant alsoexecuted a General Power of Attorney (GPA), in favour of RespondentNo. 1.

4. The Agreement stipulated that the First Respondent shallFconstruct “Amay Apartments” within a period of 15 months which wasextendable, incumbent on payment of a penalty amount. RespondentNo. 1 agreed to hand over the constructed area to the extent of 45% tothe Appellant on or before the completion of the period of 15 months,and to retain the remaining 55% of the developed portion. The Partiesalso entered into a Deed of Declaration under Section 2 of theGMaharashtra Apartment Ownership Act,1970 which was registered on20.10.2015 for the purposes of retaining the facilities, amenities, commonspaces, and to specify the portions of the developed property. RespondentNo. 1, however, failed to complete the development works within thestipulated time of 15 months. The Appellant served Respondents with aHLegal Notice on 11.07.2016, communicating his desire to terminate the Development Agreement and cancel the GPA as the period of 15 monthsalong with the extendable period of 3 months had already lapsed. Inaddition to this, the Appellant issued a publication in the newspaper dated11.07.2016 informing the general public that he had terminated theAgreement as well as the GPA. Respondents in their reply to the LegalNotice controverted the contents of the Notice. This gave rise to disputesand differences between the parties.

5. It is pertinent to mention at this juncture that Clause 18 of theDevelopment Agreement, purported to be an ‘arbitration clause’, readsas follows:

“18. All the disputes or differences arising between the partieshereto as to the interpretation of this Agreement or anycovenants or conditions thereof or as to the rights, duties, orliabilities of any part hereunder or as to any act, matter, orthing arising out of or relating to or under this Agreement(even though the Agreement may have been terminated), thesame shall be referred to arbitration of a Sole Arbitratormutually appointed, failing which, two Arbitrators, one to beappointed by each party to dispute or difference and thesetwo Arbitrators will appoint a third Arbitrator and theArbitration shall be governed by the Arbitration andConciliation Act, 1996 or any re-enactment thereof.”

6. The Appellant in the interregnum, sought an injunction undersection 9 of the Arbitration and Conciliation Act, 1996 (the Act) inM.A..R.J.I No. 285 of 2016 and the District Court at Aurangabad videorder dated 30.09.2016, restrained Respondent No. 1 from selling anytenements on the developed property till further orders.

7. Thereafter, the Appellant invoked the arbitration clause in theDevelopment Agreement on 07.11.2016 and issued a notice to this effectto the Respondents regarding referral of the dispute to Mr. Shyam Rajaleas the sole arbitrator. Though the notice was duly served, the Respondentsfailed to respond to it. This led the Appellant to file an application undersection 11 of the Act before the High Court.

8. It was contended on behalf of the Respondents before the HighCourt that the contract lacked the express wording necessary for it tobe considered a valid and binding agreement to refer the disputes toarbitration. Specifically, the absence of the term, “the parties agreeing in A

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Awriting to be bound by the decision of an arbitral tribunal”, was highlightedby Respondent No. 1 to contend that Clause 18 of the DevelopmentAgreement was not enforceable. To buttress this plea, reliance wasplaced on the decisions of this Court in Bihar State MineralDevelopment Corporation and Anr. v. Encon Builders (I) (P) Ltd.[1],and Karnataka Power Transmission Corporation Ltd. and Anr. v.BDeepak Cables (India) Ltd.[2], wherein it was held that in case ofexclusion of attributes of an arbitration agreement from a disputeresolution clause, it would not amount to a valid arbitration agreement.Respondents further urged that it was crucial that “the parties shouldhave agreed that the decision of the private tribunal in respect of theCdisputes will be binding on them.”

9. Although the High Court vide the impugned judgment dated07.07.2021, acknowledged the existence of Clause 18 in the Agreementthat provides for disputes to be referred to arbitration, it accepted thecontentions of Respondents and came to the conclusion that Clause 18Dindeed lacks certain essential ingredients of a valid arbitration agreement,as it does not mandate that the decision of the arbitrator will be final andbinding on the parties. Consequently, the High Court dismissed theapplication as not maintainable. The aggrieved Appellant is now beforethis Court.

E10. Notice was issued to the Respondents on 20.10.2021 and asper the office report dated 18.08.2022, they have been duly served buthave not entered appearance. We accordingly proceeded to hear thematter ex parte on 22.08.2022.

Submissions:

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11. Learned counsel for the Appellant vehemently urged that Clause18 crystallises the intention of the parties to refer disputes between themto arbitration and to be bound by the decision of the arbitrator. The HighCourt failed to read into the intention of the parties and erroneouslydrew an inference contrary to the spirit and object of Clause 18.GAccording to him, the clause clearly mentions that “all the disputes ordifferences arising between the parties” are to be referred to arbitrationof a Sole Arbitrator mutually appointed, failing which the dispute shall bereferred to a tribunal consisting of three arbitrators. Moreover, there is1 (2003) 7 SCC 418.H2 (2014) 11 SCC 148.

no alternative provided in the agreement other than the arbitration forthe purpose of resolution of the disputes. Even the governing law of thearbitration had been agreed upon by the parties as the Arbitration andConciliation Act, 1996, manifesting their animus to be bound by thedecision of the arbitrator. There are also no specific exclusions of anyattributes of an arbitration agreement in Clause 18 as envisaged by thisCourt in Deepak Cables which, in turn, relied upon Jagdish Chanderv. Ramesh Chander & Ors.[3].

12. Finally, it was submitted that this Court has time and againheld that an arbitration clause need not be penned down in any specificform. The High Court was thus not justified in holding that Clause 18 ofthe Development Agreement did not meet the essential criteria of avalid arbitration clause.

Analysis

13. It is a settled proposition of law that the existence of a validarbitration agreement under Section 7 of the Act is sine-qua-non for acourt to exercise its powers to appoint an arbitrator/arbitral tribunal underSection 11 of the Act. The short question that falls for our considerationis whether Clause 18 constitutes a valid arbitration clause for the purposeof invoking powers under Section 11 of the Act?

14. Section 2 (1)(b) of the Act, defines “arbitration agreement” tomean an agreement referred to in section 7, which inter-alia lays downthe following characteristics of an Arbitration Agreement:

“7. Arbitration agreement—

(1) In this Part, “arbitration agreement” means an agreementby the parties to submit to arbitration all or certain disputeswhich have arisen or which may arise between them in respectof a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of anarbitration clause in a contract or in the form of a separateagreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is containedin—

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A(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams, or other meansof telecommunication [including communication throughelectronic means] which provide a record of the agreement;or B

(c) an exchange of statements of claim and defence in whichthe existence of the agreement is alleged by one party andnot denied by the other.

(5) The reference in a contract to a document containing anarbitration clause constitutes an arbitration agreement if theCcontract is in writing and the reference is such as to makethat arbitration clause part of the contract.”

15. It may be seen that section 7 of the Act does not mandate anyparticular form for the arbitration clause. This proposition was settled bythis Court way back in Rukmanibai Gupta v. Collector, Jabalpur andDOrs.[4], while viewing erstwhile section 2(a) of the Arbitration Act, 1940which contained the definition of “arbitration agreement”. It was heldthat:

“6. ……Arbitration agreement is not required to be in anyparticular form. What is required to be ascertained is whetherEthe parties have agreed that if disputes arise between them inrespect of the subject- matter of contract such dispute shallbe referred to arbitration, then such an arrangement wouldspell out an arbitration agreement. A passage from RUSSELL ONARBITRATION, 19th Edn., p. 59, may be referred to withFadvantage:

If it appears from the terms of the agreement by which amatter is submitted to a person’s decision that the intentionof the parties was that he should hold an inquiry in thenature of a judicial inquiry and hear the respective casesof the parties and decide upon evidence laid before him,Gthen the case is one of an arbitration.”

16. This very principle was reiterated in K.K.Modi v. K.N.Modiand Ors.[5]which also dealt with section 2(a) of the 1940 Act. While 4 (1980) 4 SCC 556.H5 (1998) 3 SCC 573.

BABANRAO RAJARAM PUND v. M/S. SAMARTH BUILDERS& DEVELOPERS & ANR. [SURYA KANT, J.]

attempting to decide whether the arbitration clause embodied in aMemorandum of Understanding was a valid arbitration clause or not,this Court laid down the essential attributes of an arbitration agreementin following terms:

“17. Among the attributes which must be present for anagreement to be considered as an arbitration agreement are:

(1) The arbitration agreement must contemplate that thedecision of the tribunal will be binding on the parties tothe agreement,

(2) that the jurisdiction of the tribunal to decide the rightsof parties must derive either from the consent of the partiesor from an order of the court or from a statute, the terms ofwhich make it clear that the process is to be an arbitration,

(3) the agreement must contemplate that substantive rightsof parties will be determined by the agreed tribunal,

(4) that the tribunal will determine the rights of the partiesin an impartial and judicial manner with the tribunal owingan equal obligation of fairness towards both sides,

(5) that the agreement of the parties to refer their disputesto the decision of the tribunal must be intended to beenforceable in law and lastly,

(6) the agreement must contemplate that the tribunal willmake a decision upon a dispute which is alreadyformulated at the time when a reference is made to thetribunal.

18. The other factors which are relevant include, whether theagreement contemplates that the tribunal will receive evidencefrom both sides and hear their contentions or at least give theparties an opportunity to put them forward; whether thewording of the agreement is consistent or inconsistent withthe view that the process was intended to be an arbitration,and whether the agreement requires the tribunal to decidethe dispute according to law.”

[Emphasis applied]

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A17. In the afore-cited case, the dispute resolution clause stipulatedthat the disputes were to be referred to the Chairman, IFCI or hisnominee. This Court came to the conclusion that the clause in disputedid not constitute a valid arbitration covenant as it could not be said withclarity that the parties contemplated the disputes to be arbitrated.

B18. Encon Builders (supra) placed reliance on K.K. Modi’s caseand further condensed the essential features of an arbitration agreementinto four elements i.e.:

“13. The essential elements of an arbitration agreement areas follows:

C(1) There must be a present or a future difference inconnection with some contemplated affair.

(2) There must be the intention of the parties to settle suchdifference by a private tribunal.

D(3) The parties must agree in writing to be bound by thedecision of such tribunal.

(4) The parties must be ad idem.”

19. It is important to appreciate the nature of the arbitration clausein Encon Builders’ case, which was to the following effect:

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“In case of any dispute arising out of the agreement, the mattershall be referred to the Managing Director, Bihar State MineralDevelopment Corporation Limited, Ranchi, whose decisionshall be final and binding.”

20. The above-reproduced clause was held to be invalid primarilyFdue to the fact that the Managing Director, who was chosen to be theadjudicator-cum-arbitrator of the dispute(s) arising between the parties,was likely to be biased as he had an interest in the outcome of the case.The principle that one cannot be a judge of his own cause was thus aptlyapplied to invalidate the subject clause. It was evidently not a case of anGarbitral clause lacking essential ingredients of an arbitration agreement.In our opinion, this case renders no assistance to the Respondents.

21. In Jagdish Chander (supra), again a two-Judge bench ofthis Court dealt with a peculiar arbitration clause, stipulating that:

“(16) If during the continuance of the partnership or at anytime afterwards any dispute touching the partnership arisesbetween the partners, the same shall be mutually decided bythe partners or shall be referred for arbitration if the partiesso determine.”

[Emphasis applied]

Reference to the arbitration under the above reproduced clausewas contingent on the determination by the parties, as their explicitintention to arbitrate was conspicuously missing. This Court, therefore,held that the arbitration clause was invalid as the parties had shownmere desire or hope to have the disputes settled by arbitration. Whileinterpreting Section 7 of the 1996 Act and placing reliance on K.K.Modi(supra) as well as Encon Builders (supra), it was further held that:- “8.(i)….Where there is merely a possibility of the partiesagreeing to arbitration in future, as contrasted from anobligation to refer disputes to arbitration, there is no validand binding arbitration agreement…….

(iii) Where the clause provides that in the event of disputesarising between the parties, the disputes shall be referred toarbitration, it is an arbitration agreement.”

22. Adverting to the case in hand, it may be seen that the contentsand the nature of Clause 18 are substantially different from the disputeresolution pacts in K.K.Modi, Jagdish Chander, or Encon Builders(supra). We say so for three reasons. Firstly, apart from the fact thatClause 18 of the Development Agreement uses the terms “Arbitration”and “Arbitrator(s)”, it has clearly enunciated the mandatory nature ofreference to arbitration by using the term “shall be referred to arbitrationof a Sole Arbitrator mutually appointed, failing which, two Arbitrators,one to be appointed by each party to dispute or difference”. Secondly,the method of appointing the third arbitrator has also been clearlymentioned wherein the two selected Arbitrators are to appoint a thirdarbitrator. Finally, even the governing law was chosen by the parties tobe “the Arbitration and Conciliation Act, 1996 or any re-enactmentthereof.” These three recitals, strongly point towards an unambiguousintention of the parties at the time of formation of the contract to refertheir dispute(s) to arbitration.

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A23. We are, therefore, of the firm opinion that the High Court fellin error in holding that the Appellant’s application under section 11 wasnot maintainable for want of a valid arbitration clause. We find thatClause 18 luminously discloses the intention and obligation of the partiesto be bound by the decision of the tribunal, even though the words “finaland binding” are not expressly incorporated therein. It can be gleanedBfrom other parts of the arbitration agreement that the intention of theparties was surely to refer the disputes to arbitration. In the absence ofspecific exclusion of any of the attributes of an arbitration agreement,the Respondents’ plea of non-existence of a valid arbitration clause, isseemingly an afterthought.C

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24. Even if we were to assume that the subject-clause lacks certainessential characteristics of arbitration like “final and binding” nature ofthe award, the parties have evinced clear intention to refer the dispute toarbitration and abide by the decision of the tribunal. The party autonomyto this effect, therefore, deserves to be protected.D

25. The deficiency of words in agreement which otherwise fortifiesthe intention of the parties to arbitrate their disputes, cannot legitimisethe annulment of arbitration clause. A three-Judge Bench of this Courtin Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr.[6] dealtwith an arbitration clause that did not provide for a method of electingEthe third arbitrator. The court held that “the omission is so obviousthat the court can legitimately supply the missing line.” The line“the two arbitrators appointed by the parties shall appoint the thirdarbitrator” was read into the clause so as to give effect to it. It wasfurther held that:F“88. In our opinion, the courts have to adopt a pragmaticapproach and not a pedantic or technical approach whileinterpreting or construing an arbitration agreement orarbitration clause. Therefore, when faced with a seeminglyunworkable arbitration clause, it would be the duty of thecourt to make the same workable within the permissible limitsGof the law, without stretching it beyond the boundaries ofrecognition. In other words, a common sense approach hasto be adopted to give effect to the intention of the parties toarbitrate. In such a case, the court ought to adopt the attitudeof a reasonable business person, having business common H6 (2014) 5 SCC 1.

H6 (2014) 5 SCC 1.

sense as well as being equipped with the knowledge that maybe peculiar to the business venture. The arbitration clausecannot be construed with a purely legalistic mindset, as ifone is construing a provision in a statute….”

26. The UNCITRAL Model Law on International CommercialArbitration, 1985 from which the Arbitration and Conciliation Act, 1996originated, envisages minimal supervisory role by courts. When section7 or any other provisions of the Act do not stipulate any particular formor requirements, it would not be appropriate for a court to gratuitouslyadd impediments and desist from upholding the validity of an arbitrationagreement.

27. There is no gainsaying that it is the bounden duty of the partiesto abide by the terms of the contract as they are sacrosanct in nature, inaddition to, the agreement itself being a statement of commitment madeby them at the time of signing the contract. The parties entered into thecontract after knowing the full import of the arbitration clause and theycannot be permitted to deviate therefrom.

28. It is thus imperative upon the courts to give greater emphasisto the substance of the clause, predicated upon the evident intent andobjectives of the parties to choose a specific form of dispute resolutionto manage conflicts between them. The intention of the parties that flowsfrom the substance of the Agreement to resolve their dispute by arbitrationare to be given due weightage. It is crystal clear to us that Clause 18, inthis case, contemplates a binding reference to arbitration between theparties and it ought to have been given full effect by the High Court.

Conclusion:

29. In light of the above discussion, the Civil Appeal stands allowed.Clause 18 of the Development Agreement is held to be a valid arbitrationclause. Consequently, the impugned judgment and order dated 07.07.2021passed by the High Court of Judicature of Bombay at Aurangabad is setaside.

30. Since the Appellant has already invoked the arbitration clause,without any further ado, this Court appoints Mr. Justice P.V. Hardas(Contact number: [REDACTED]), former Judge of the Bombay HighCourt, as the Sole Arbitrator to resolve all disputes/differences betweenthe parties. The learned Arbitrator shall be entitled to a fee as per the A

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AFourth Schedule of the Act, as amended from time to time. The Registryis directed to send a copy of this order to the learned Sole Arbitrator.

31. The issues on merits that may be raised by the parties arekept open and shall be determined by the learned Arbitrator in accordancewith law.

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Devika Gujral

Appeal allowed.

(Assisted by : Shubhanshu Das, LCRA)

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