Arbitration Clause Invoked: Supreme Court Appoints Arbitrator in Dispute Between Nirmal Software and Dr. Babasaheb Ambedkar Marathwada University (2019)

Introduction

Date of the Judgment: July 9, 2019

Citation: (2019) INSC 728

Judges: Justice Abhay Manohar Sapre and Justice Indu Malhotra

When a dispute arises from a contract containing an arbitration clause, should the parties be compelled to resolve their differences through arbitration? The Supreme Court of India addressed this question in a case involving a software company and a university, ultimately appointing an arbitrator to resolve their dispute. This case highlights the importance of arbitration clauses in contracts and the judiciary’s role in enforcing them.

The Supreme Court bench comprised of Justice Abhay Manohar Sapre and Justice Indu Malhotra. The judgment was authored by Justice Indu Malhotra.

Case Background

On October 20, 2012, Nirmal Software Services Pvt. Ltd. (the Petitioner) and Dr. Babasaheb Ambedkar Marathwada University (the Respondent) entered into a Memorandum of Understanding (MoU). Under the MoU, the University entrusted the work of ‘Web Enabling’ and providing necessary web services to the Petitioner.

The MoU was amended on April 7, 2016, with the insertion of Clause 3.5, which stated:

“3.5 Dr. Bamu & NSSPL shall mutually decide, finalize and agree upon the Terms & Conditions including financial terms to handover the Intellectual Property Rights, Ownership Transfer to DR. BAMU as and when required and decided upon.”

The MoU also contained an arbitration clause, Clause 12, which outlined the process for resolving disputes. It stipulated that disputes should first be discussed in good faith by nominated officers from each party. If such discussions failed to resolve the dispute, the matter would be submitted to arbitration at Aurangabad. The clause further specified that a joint request would be made to an eligible and competent person to act as an Arbitrator, and the arbitration proceedings would be subject to the Arbitration and Conciliation Act, 1996.

A dispute arose between the parties regarding certain communications issued by the University, which kept a purchase order in favor of the Petitioner in abeyance.

Timeline

Course of Proceedings

The Petitioner filed Writ Petition No. 1413 of 2017 before the High Court of Judicature at Bombay, Aurangabad Bench, seeking a Writ of Mandamus to direct the University to make payment under the purchase order and to declare the University’s action of keeping the purchase order in abeyance as illegal.

The High Court dismissed the Writ Petition on September 18, 2018, citing the presence of an arbitration clause in the MoU, which the court held should be given effect to.

The Petitioner then filed a Special Leave Petition (SLP) before the Supreme Court. During the hearing on April 8, 2019, the Petitioner’s counsel submitted that the issue should be referred to arbitration as per the MoU. Consequently, the Supreme Court issued notice to the Respondent.

Legal Framework

The legal framework relevant to this case is primarily the Arbitration and Conciliation Act, 1996. The Act provides a mechanism for resolving disputes through arbitration, an alternative to traditional litigation. The Act recognizes the validity of arbitration agreements and provides for the enforcement of arbitral awards.

The relevant provision, as mentioned in the judgment, is Section 12 of the Arbitration and Conciliation Act, 1996, which deals with the grounds for challenging the appointment of an arbitrator, specifically concerning their independence and impartiality.

The arbitration clause present in the MoU between the parties is also a critical part of the legal framework, as it represents the agreement between the parties to resolve disputes through arbitration rather than through the courts.

Arguments

The Petitioner, Nirmal Software Services Pvt. Ltd., argued that the University should be directed to make the payment under the purchase order and that the University’s decision to keep the purchase order in abeyance was illegal. The Petitioner initially approached the High Court seeking a writ of mandamus for payment, but later, during the proceedings before the Supreme Court, agreed to refer the matter to arbitration.

The Respondent, Dr. Babasaheb Ambedkar Marathwada University, contended that the dispute should be resolved through the arbitration mechanism as agreed upon in the MoU. The University relied on the arbitration clause in the MoU to argue that the High Court was correct in dismissing the writ petition and that the matter should be referred to arbitration.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues in this order. However, the core issue before the court was whether to refer the parties to arbitration, given the existence of an arbitration clause in their MoU and the subsequent agreement of the parties to resolve the dispute through arbitration.

Treatment of the Issue by the Court

The Supreme Court, noting the arbitration clause in the MoU and the mutual consent of the parties, decided to appoint an arbitrator.

Authorities

The Supreme Court did not explicitly rely on any specific case laws or legal provisions other than Section 12 of the Arbitration and Conciliation Act, 1996. However, the court implicitly relied on the principle of party autonomy in arbitration, which allows parties to choose arbitration as a means of dispute resolution and obligates courts to respect such agreements.

Judgment

The Supreme Court appointed Mr. Justice Pratap Hardas (Retd.) as the Sole Arbitrator, subject to declarations under Section 12 of the Arbitration and Conciliation Act, 1996, regarding independence, impartiality, and the ability to complete the arbitration within 12 months.

The Court also specified that the parties would pay fees to the Arbitrator as per the Fourth Schedule of the Arbitration and Conciliation Act, 1996 and that the seat of arbitration would be Aurangabad, as per the MoU.

What weighed in the mind of the Court?

The primary consideration for the Supreme Court was the presence of an arbitration clause in the MoU and the subsequent agreement of both parties to resolve their dispute through arbitration. The Court’s decision was driven by a commitment to upholding the contractual agreements between parties and promoting alternative dispute resolution mechanisms. The court emphasized the mutual consent of the parties to refer the matter to arbitration.

Key Takeaways

• Enforceability of Arbitration Clauses: The Supreme Court’s decision reinforces the importance and enforceability of arbitration clauses in contracts. When parties agree to resolve disputes through arbitration, courts will generally uphold such agreements.
• Party Autonomy: The judgment underscores the principle of party autonomy in arbitration, where parties have the freedom to choose arbitration as their preferred method of dispute resolution.
• Alternative Dispute Resolution: The case promotes the use of alternative dispute resolution mechanisms, such as arbitration, which can often be more efficient and cost-effective than traditional litigation.
• Appointment of Arbitrator: The Supreme Court’s appointment of an arbitrator demonstrates the judiciary’s role in facilitating arbitration and ensuring that disputes are resolved in accordance with the parties’ agreements.

Directions

The Supreme Court directed that a copy of the order be dispatched to Mr. Justice Pratap Hardas (Retd.) and disposed of the matter accordingly.

Development of Law

The ratio decidendi of this case is that when parties have agreed to an arbitration clause in their contract and subsequently agree to refer their dispute to arbitration, the courts will respect and enforce this agreement by appointing an arbitrator to resolve the dispute. There is no change in the previous position of law.

Conclusion

In the case of Nirmal Software Services Pvt. Ltd. vs. Dr. Babasaheb Ambedkar Marathwada University & Ors., the Supreme Court of India upheld the arbitration clause present in the MoU between the parties. By appointing Mr. Justice Pratap Hardas (Retd.) as the Sole Arbitrator, the court facilitated the resolution of the dispute through arbitration, reinforcing the significance of arbitration as a valid and enforceable method of dispute resolution.

Category

• Arbitration Law
  • Arbitration and Conciliation Act, 1996
  • Section 12, Arbitration and Conciliation Act, 1996
  • Arbitration Clause
  • Appointment of Arbitrator
  • Alternative Dispute Resolution
• Contract Law
  • Memorandum of Understanding (MoU)
  • Contractual Agreements

FAQ

Q: What is an arbitration clause?

A: An arbitration clause is a provision in a contract that specifies that any disputes arising from the contract will be resolved through arbitration, a private dispute resolution process, rather than through traditional court litigation.

Q: What is the significance of an arbitration clause?

A: An arbitration clause is significant because it indicates the parties’ agreement to resolve disputes outside of the court system, often leading to faster and more cost-effective resolutions. It also allows parties to choose an arbitrator with specific expertise relevant to the dispute.

Q: What is the role of the court in cases involving arbitration clauses?

A: The court’s role is to uphold the arbitration agreement. If a dispute arises and one party seeks to litigate in court despite an arbitration clause, the court will typically refer the matter to arbitration, as was done in this case.

Q: What does it mean to appoint an arbitrator?

A: Appointing an arbitrator means selecting a neutral third party who will hear the arguments of both sides in a dispute and make a binding decision. The arbitrator’s decision is known as an arbitral award, which is enforceable in the same way as a court judgment.

Q: What is Section 12 of the Arbitration and Conciliation Act, 1996?

A: Section 12 of the Arbitration and Conciliation Act, 1996, deals with the grounds for challenging the appointment of an arbitrator, specifically concerning their independence and impartiality. It requires arbitrators to disclose any circumstances that might give rise to justifiable doubts about their impartiality.