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Synopsis

The Supreme Court on Wednesday while deciphering whether a clause given in an agreement between the parties for construction of an apartment complex would constitute a valid arbitration agreement, relied on three recitals in the said clause which strongly pointed toward an unambiguous intention of the parties at the time of formation of the contract to refer their dispute(s) to arbitration.

They were:

1. Firstly, apart from the usage of terms 'Arbitration' and 'Arbitrator(s)', the clause clearly enunciated the mandatory nature of reference to arbitration by using the term 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.
2. Secondly, the method of appointing the third arbitrator had also been clearly mentioned wherein the two selected arbitrators were to appoint a third arbitrator.
3. Finally, even the governing law was chosen by the parties to be the Arbitration and Conciliation Act, 1996 or any re-enactment thereof.

The bone of contention in the case before the court was whether clause 18 of the Development Agreement executed between the parties possessed the necessary ingredients to constitute a legal and valid arbitration agreement.

Clause 18 of the Development Agreement, purported to be an arbitration clause, read as follows:

"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."

Court noted that Section 2 (1)(b) of the Act of 1996 defined an arbitration agreement to mean an agreement referred to in Section 7, which inter alia laid down the characteristics of an arbitration agreement.

A bench of Justices Surya Kant and Abhay S Oka further noted that Section 7 of the Act of 1996 did not mandate any particular form for the arbitration clause.

Accordingly, the bench found that Clause 18 luminously disclosed the intention and obligation of the parties to be bound by the decision of the arbitral tribunal, even though the words "final and binding" were not expressly incorporated therein.

"It can be gleaned from other parts of the arbitration agreement that the intention of the parties was surely to refer the disputes to arbitration. In the absence of specific exclusion of any of the attributes of an arbitration agreement, the respondents plea of non-existence of a valid arbitration clause, is seemingly an afterthought", the bench observed.

Moreover, it was acknowledged by the court that even if the subject clause lacked certain essential characteristics of arbitration like 'final and binding' nature of the award, the parties had evinced clear intention to refer the dispute to arbitration and abide by the decision of the tribunal. The party autonomy to this effect, therefore, deserves to be protected, said the court.

"The deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause", held the division bench while upholding the validity of the agreement to arbitrate.

Case Title: Babanrao Rajaram Pund vs. M/s. Samarth Builders & Developers & Anr.