Clause Ensuring Effective Implementation of Agreement and Preventing Disputes Are Not Arbitration Agreements Rules Supreme Court

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Supreme Court of India a few days back declared that a clause in the agreement which prevents disputes between the parties and ensures smooth execution of the agreement will not be considered as an arbitration agreement.

Facts, Issues, and Contentions

Parties were directors of a company called M/s Mancherial Cement Company. A dispute arose between them over the execution of the Memorandum of Understanding/Agreement for sale and purchase of shares of the company. The major issue before the bench was whether Clause 12 of the said agreement can be stated to be an arbitration clause. Advocate for the appellant argued that clause in question uses words and expressions such as “decision”, “arbitrators/mediators”, “any breach” all these words cover the essential ingredients of an arbitration agreement and hence, the agreement is an arbitration agreement.  Counsel for respondents argued that words “mediators/arbitrators” are used loosely if we read the clause in question with other clauses of the agreement it will give a very clear picture that gentlemen mentioned as arbitrator are nothing but escrow agents. Counsel for the respondent also submitted that the entire exercise was a malafide exercise as appellant had issued a notice for appointment of arbitrator back in 2007 and followed it only two and half years later by filing a Section 11 petition in December 2009. Appellant had also filed a Company Petition back in 2011 only to withdraw it in 2017 and refile it on the same set of facts. The decision in the Company Petition was not in favour of appellant against which he preferred a Special Leave Petition before the Supreme Court and also filed an appeal against the impugned order in Delhi High Court. The actions of the appellant indicate that appellant was more interested in remedy available in company law rather than the one in arbitration and he himself was not convinced that the agreement was an arbitration agreement.

The decision of the Case

Division Bench of the Supreme Court after hearing both the sides and examining the relevant clause agreed with counsel for respondents and held that on a conspectus reading of the clauses of the agreement it is crystal clear that gentlemen mentioned in the agreement are not mediators/ arbitrators but escrow agents. Furthermore, keeping in mind the actions of the appellant of filling, refilling numerous petition in front of various tribunals makes it clear that the appellant is trying to delay the proceedings.

Moreover, the court while relying on few precedents clarified that clause which ensures easy and hassle-free execution of the agreement or prevents disputes is not an arbitration agreement. Court also discussed the essentials of an arbitration agreement in this case

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