Arbitration Clause Contained In Incomplete Memorandum Of Understanding Cannot Form Basis For Arbitration Proceedings: Calcutta HC

The Calcutta High Court bench of Justice Shampa Sarkar has held that an arbitration clause in a memorandum of understanding that was not finalized, as indicated by the correspondences between the parties, cannot serve as the basis for initiating arbitration proceedings. Brief Facts: In October 2020, the Respondent approached the petitioner and they reached an oral agreement with respect to sale and takeover of assets, plants and machinery for Rs. 21 crores. It was further agreed that the respondent would pay an advance of Rs. 3 crores which would be forfeited if the respondent failed to perform its obligations. The parties reduced the terms and conditions of the substantive agreement into a Memorandum of Understanding (in short the said MOU) dated February 9, 2022. The said MOU contained an arbitration clause. The respondent failed to pay the balance of the agreed advance, the remaining consideration upon finalization of the MOU and the occupational charges for the interregnum. Disputes cropped up between the parties. On the appointed day, neither the respondent nor the arbitrator appointed by the respondent, attended the sitting and as such, the mandate of the arbitral tribunal stood terminated. Thereafter, the petitioner issued a demand letter on September 14, 2023. The said demand letter was replied to by the respondent. The respondent denied all the disputes and claims of the petitioner. The petitioner then issued a notice under Section 15(2) of the Arbitration Act, by appointing a substitute arbitrator, that is, a senior Advocate of the Calcutta High Court. The respondent also disputed the claims which indicated that there was a subsisting dispute between the parties and the dispute should be settled by arbitration. Accordingly, the petitioner has approached this court for appointment of an arbitrator, in terms of clause 12.3 of the MOU dated February 9, 2022. Contentions: The petitioner submitted that the MOU dated December 7, 2020, was entered into as an interim arrangement, to facilitate handing over of the physical possession and operational control to the respondent. It was further argued that exchange over email was a valid and accepted form of execution of an arbitration agreement. Clause 12.3 of the said MOU constituted a valid and binding arbitration clause between the parties, in terms of Section 7 (4) (b) of the Arbitration Act. It was also submitted that allegation that the MOU was a product of misrepresentation and fraud, was also an arbitrable dispute and this court must appoint a learned Arbitrator to arbitrate upon all issues, including the objection raised by the respondent with regard to the validity of the said MOU, in view of the termination of the arbitral proceeding. Per contra, the Respondent submitted that the said MOU had not been executed between the parties. Various blank spaces had been left in the draft MOU which were never filled up by the parties. Such omissions would indicate that the draft MOU was never finalized and the parties did not sign the same by incorporating all relevant information and details in the draft MOU. It was also submitted that as per section 11 of the Arbitration Act, the present application should have been filed before the High Court of Odisha as the respondent conducted business there and the MOU of 2020 was also executed in Odisha. The Plant was also situated at Chhattisgarh and no part of the cause of action arose within the jurisdiction of the Calcutta High Court. Lastly, it was submitted that had the petitioner believed that the draft MOU had been finalized and clause 12.3 was a binding arbitration agreement between the parties, in that event, in the demand notice dated September 14, 2023, the petitioner, would have mentioned the existence of the arbitration clause. Observations: The court observed that the MOU circulated on February 9, 2022 was incomplete with blank spaces for crucial details such as identities of the representatives, loan amount , takeover modalities, outstanding liability, asset purchase consideration, bank liability and payment phases. The court further said that the MOU remained in draft form without essential details which made it incomplete. Even if lack of response of the petitioner to the e-mail sent through which the draft MOU was communicated is accepted, there was no agreement to confer jurisdiction to the court at Calcutta as the cause of action arose in Odisha and Raipur/Chhattisgarh. The court further said that the tenor of the demand letter dated September 14, 2023, which was issued by the learned Advocate of the petitioner much after the circulation of the email, does not contain any mention or reference to the arbitration clause which further clarifies the position that the petitioner was asserting the terms and conditions of an oral agreement and the signed agreement of December 7,...

Arbitration Clause Contained In Incomplete Memorandum Of Understanding Cannot Form Basis For Arbitration Proceedings: Calcutta HC

Mohd Malik Chauhan

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