Arbitration - Court Can Undertake Preliminary Inquiry Under Section 11 To Ascertain If Dispute Is Arbitrable : Supreme Court

The bench of Justices M.R. Shah and Krishna Murari held that if any dispute falls within the 'excepted' category provided in the contract between the parties, then it falls outside the scope of arbitration, therefore, no arbitration can happen apropos those matters.

Facts

The parties entered into a Collaboration Agreement dated 07.05.2009 for the development of a residential colony in Gurugram. Thereafter, an addendum agreement dated 19.04.2011 was executed between the parties.

A dispute arose between the parties due to the alleged breach of contract by the appellants. Accordingly, the respondent issued legal notice demanding possession of flats and certain sum of money. The respondent appointed its arbitrator and requested the appellants to appoint their arbitrator.

However, the appellant in its reply to the notice of arbitration refused to appoint the arbitrator as the alleged dispute was outside the scope of arbitration agreement. Thereafter, the High Court allowed the application filed by the respondent for the appointment of the arbitrator.

Aggrieved by the impugned order, the appellant filed the appeal before the Supreme Court

Contention Of The Parties

The appellant challenged the impugned order on the following grounds:

• The High Court erred in appointing the arbitrator as the dispute between the parties falls within the excepted category, therefore, no arbitrator could be appointed.
• The dispute between the parties falls within Clause 36 of the Addendum Agreement and the remedy for the same is specific performance of the contract by approaching the appropriate court.
• The arbitration clause i.e., Clause 37, expressly provides that save and except Clause 36, any dispute between the parties is to be referred to arbitration and the court has failed to consider the argument of the appellant to that effect.
• The High Court, without determining whether the dispute falls within Clause 36, appointed the arbitrator under Clause 37 of the agreement.
• A preliminary inquiry by the Court is permitted under Section 11 of the A&C Act to check the arbitrability of disputes.

The respondent countered the above submissions by making the following submissions:

• The issue of arbitrability of dispute is best left to be decided by the arbitrator.
• On a conjoint reading of Clauses 36 & 37, the intention of the parties to refer their dispute to arbitration becomes clear.

Analysis By The Court

The Court held that Clause 36 provides that if the dispute is related to clauses 3, 6 and 9 of the Contract, then the aggrieved party would have to take recourse to the appropriate court of law for the specific enforcement of the contract and as per Clause 37 all the disputes, save and except the ones falling under Clause 36, will have to be referred to arbitration.

The Court held that there was a specific exclusion, under Clause 37, of the disputes falling within Clause 36 from arbitration, therefore, there could be no arbitration if the dispute falls within Clause 36.

The Court held that an arbitration agreement is to be strictly construed and the intention of the parties to put certain disputes outside the arbitration clause must be given effect to. Further, it held that a party cannot claim more than what is covered by the terms of the agreement and it is not permissible for the Court to make a new contract, however reasonable, if the parties have not made it themselves.

Next, the Court answered the issue as to who decides the issue of non-arbitrability. The Court relied on its judgment in Vidya Drolia and Indian Oil Corporation Limited Vs. NCC Limited 2022 LiveLaw (SC) 616 to hold that the High Courts while appointing the arbitrator can launch a preliminary inquiry to decide the issue of 'Excepted Matters' when an objection to that effect is taken by the respondent.

The Court held that the High Court erred in appointing the arbitrator without determining whether the dispute actually falls within the scope of arbitration clause or the 'excepted' category.

Accordingly, the Court set aside the impugned order and remanded the matter back to the High Court to hold a preliminary inquiry on the aforesaid issue.

Case Title: EMAAR INDIA LTD. Vs. TARUN AGGARWAL PROJECTS LLP, CIVIL APPEAL NO. 6774 of 2022

Citation : 2022 LiveLaw (SC) 823

Counsel for the Appellant: Dhanesh Relan, Advocate. Counsel for the Respondent: Siddharth Bhatnagar, Senior Advocate.

Arbitration and Conciliation Act 1996 -Section 11 - Court can undertake preliminary inquiry to ascertain if the dispute is arbitrable or falls under the excepted category in the agreement- Para 7-referred Vidya Drolia vs Durga Trading Co, Indian Oil Corporation Limited Vs. NCC Limited 2022 LiveLaw (SC) 616

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