Arbitration and Conciliation Act, 1996 – Memorandum of Understanding (MoU)/Agreement executed between the parties for sale and purchase of shares of a Company – Issue as to whether Clause 12 of the said Agreement can be stated to be an arbitration clause – Held: On reading of various clauses it is clear that two persons though, styled as Mediators/Arbitrators, are escrow agents who were appointed to keep certain vital documents in escrow, and to ensure a successful completion of the transaction contained in the MOU – The very fact that they were referred to as “Mediators/Arbitrators” and as “Mediators and Arbitrators” would show that the language used is loose – The idea really was 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 – Clause 8 makes it clear that the idea was to prevent disputes from occurring and to ensure smooth implementation of the Agreement – Object was not to adjudicate disputes but to prevent them – Clause 12 has to be read in the light of Clauses 8 and 11 of the MOU, and therefore, the expression “decision” used in Clause 12 is only a pro tem decision, namely, that the two escrow agents were to make decisions only during the period of the transaction and not thereafter – They were “functus officio” after the transaction got completed – Wording of the Agreement, is clearly inconsistent with the view that the Agreement intended that disputes be decided by arbitration – Further, indeed, three of the four purchasers of shares did not read Clause 12 as an arbitration clause, but approached the Civil Court instead – Discretionary jurisdiction u/Art.136 not exercised – Constitution of India – Art.136.
Disposing of the appeal, the Court
HELD: 1.1 On a conspectus of reading of Clauses 6, 8, 10,
11 and 12 it emerges that Mr. SR and Mr. GPR, though styled as Mediators/Arbitrators, were without doubt escrow agents who were 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 were referred to as “Mediators/Arbitrators” and as “Mediators and Arbitrators” would show that the language used was loose – the idea really was 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. Clause 8 expressly declared and confirmed “that for successful completion of this transaction in order to avoid any further unforeseen litigations”, the two escrow agents were appointed. Clause 11 further made it clear that these two gentlemen were escrow agents but shall not handover certain documents till the total transaction is satisfactorily completed. Clause 12 has to be read in the light of these Clauses of the MOU, and that, therefore, the expression “decision” used in Clause 12 is only a pro tem decision – namely, that the two escrow agents were to make decisions only during the period of the transaction and not thereafter. They were “functus officio” after the transaction got completed. Further, the “breaches” that were referred to in Clause 12 refer, inter alia, to an undertaking given by the party of the first part which was contained in Clause 10, which, if breached, the escrow agents have necessarily to decide on before going ahead with the transaction. Therefore, when viewed as a whole, it is clear that the two escrow agents were not persons who were 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. [Paras 9, 10] [1142-H; 1143-A-F]
1.2 In the present case, it is clear that the wording of the Agreement was clearly inconsistent with the view that the Agreement intended that disputes be decided by arbitration. Indeed, three of the four purchasers did not read Clause 12 as an AND ORS.
arbitration clause, but approached the Civil Court instead, strengthening the 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. Clause
8 of the MOU made it clear that the idea was to prevent disputes from occurring and to ensure smooth implementation of the Agreement, thereby making it clear that the object was not to adjudicate disputes but to prevent them.[Paras 11, 12] [1145-C, E]
1.3 The conduct of the appellant leaves much to be desired. Having issued a notice for arbitration way-back on 24.05.2007, there was no reason whatsoever to delay a Section 11, Arbitration and Conciliation Act, 1996 application for a period of two and a half years until December, 2009. 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. Equally, his conduct during the pendency of the Section 11 petition leaves a lot to be desired. Even before judgment was pronounced in the Section 11 petition on 22.07.2011, the Appellant approached another forum, namely, the Company Law Board on 16.06.2011, for reliefs based upon the MOU. He, thereafter, continued with the Company Petition which would have led this Court to believe that he was abandoning any further recourse against the judgment dated 22.07.2011, but then on second thoughts, filed a Special Leave Petition with a delay of 358 days against the judgment rejecting his Section 11 petition on 22.07.2011. During the pendency of the Special Leave Petition as well, his conduct leaves much to be desired. On 24.01.2017, he asked that his petition that was filed before the Company Law Board be withdrawn not with the liberty to pursue arbitration, as one would have expected, but with the liberty to file a fresh company petition on the same set of facts. Thus, apart from decision on merits, discretionary jurisdiction under Article
136 of the Constitution also not exercised. [Para 13] [1145-F-H; 1146-A-B]
Bihar State Mineral Development Corporation v. Encon Builders (I) (P) Limited (2003) 7 SCC 418 : [2003] 2 Suppl. SCR 812 – relied on.
P. Dasaratharama Reddy Complex v. Government of Karnataka and Another (2014) 2 SCC 201 : [2013] 14 SCR 579 ; K.K. Modi v. K.N. Modi (1998) 3 SCC
573 : [1998] 1 SCR 601 ; State of U.P. v. Tipper Chand (1980) 2 SCC 341 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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