Clauses To Prevent Disputes And To Ensure Smooth Implementation Of Agreement Will Not Be An Arbitration Agreement: SC [Read Judgment]

The Supreme Court in Shyam Sunder Agarwal vs. P Narotham Rao has held that clauses inserted in the agreements to prevent disputes from occurring and to ensure smooth implementation of the agreement will not be an arbitration agreement.

The agreement in question states about handing over nine cheques favouring one Narotham Rao to two persons Sudhakar Rao and Gone Prakash Rao. These persons are termed as ‘mediators/arbitrators’. The agreement also said it will be under their custody till satisfactory completion of the entire transaction. It also adds ‘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 question before the bench of Justice RF Nariman and Justice Indu Malhotra was whether the terms ‘decision’ and ‘mediators/arbitrators’ appearing in these clauses would make these clauses an arbitration agreement.

The bench, referring to clauses, observed: “What emerges on a conspectus of reading of these clauses is that Mr. Sudhakar Rao and Mr. Gone Prakash Rao, 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. This becomes even clearer when Clauses 8 and 11 are seen minutely. Clause 8 expressly declares and confirms “that for successful completion of this transaction in order to avoid any further unforeseen litigations”, the two escrow agents have been appointed. Clause 11 further makes it clear that these two gentlemen are escrow agents but shall not handover certain documents till the total transaction is satisfactorily completed.”

The court further observed 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. “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,” it said.

The court also took note that there was a delay of two and a half years in preferring Section 11 application after issue of notice of arbitration. The bench said: “The appellant knew that Clause 12 could not possibly be construed as an arbitration clause, yet somehow sought to delay the proceedings not joining his brethren in the civil suit that was filed by them.”

“Indeed, three of the four purchasers did not read Clause 12 as an arbitration clause, but approached the Civil Court instead, strengthening our conclusion that the subsequent conduct of the parties to the Agreement also showed that they understood that Clause 12 was not an arbitration clause in the Agreement,” the court added.