Supreme Court clarifies arbitrability of disputes under specific contract clauses: Emaar India Ltd. vs. Tarun Aggarwal Projects LLP (2022)

Date of the Judgment: 30 September 2022

Citation: Civil Appeal No. 6774 of 2022

Judges: M.R. Shah, J. and Krishna Murari, J.

Can a court appoint arbitrators without first determining if a dispute is arbitrable under the contract? The Supreme Court of India addressed this question in a recent case involving a real estate development agreement. The core issue revolved around whether a specific dispute should be resolved through arbitration or through a court of law, based on the interpretation of clauses within the agreement. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice Krishna Murari.

Case Background

The case involves a dispute between M/s. Emaar India Ltd. (the appellant) and Tarun Aggarwal Projects LLP (the respondents). The dispute arose from a Collaboration Agreement dated 07 May 2009, for the development of a residential colony in Gurugram. A subsequent Addendum Agreement was executed on 19 April 2011. The respondents claimed that the appellant did not fulfill its obligations under the Addendum Agreement. Consequently, on 20 November 2019, the respondents issued a legal notice demanding possession of 5 plots and claiming damages of Rs. 10 crores.

The respondents initiated arbitration proceedings by appointing an arbitrator. The appellant denied the appointment, leading the respondents to approach the High Court of Delhi for the appointment of arbitrators under Section 11(5) & (6) of the Arbitration and Conciliation Act, 1996.

Timeline:

Course of Proceedings

The appellant opposed the arbitration petition in the High Court, arguing that the dispute fell under Clause 36 of the Addendum Agreement, which stipulates that disputes related to Clauses 3, 6, and 9 should be resolved through a court of law, not arbitration. Clause 37 of the agreement contains the arbitration clause. The High Court, however, appointed arbitrators, stating that a conjoint reading of Clauses 36 and 37 indicated that while a party could seek enforcement of the agreement in a court of law, it did not bar settlement of disputes through arbitration. The High Court allowed the application under Section 11(5) & (6) of the Arbitration Act and appointed arbitrators.

Legal Framework

The core of the legal framework in this case lies in the interpretation of Clauses 36 and 37 of the Addendum Agreement:

• Clause 36: “In case of any conflict or difference arising between the parties or in case the either party refused or neglects to perform its part of the obligations under this Addendum Collaboration Agreement, inter­alia as mentioned in Clauses 3, 6 & 9 hereinabove, then the other party shall have every right to get this agreement specifically enforced through the appropriate court of law.” This clause specifies that disputes related to obligations under Clauses 3, 6, and 9 should be resolved through a court of law.
• Clause 37: “Save & except clause 36 hereinabove mentioned, all or any dispute arising out of or touching upon or in relation to the terms of this Agreement including the interpretation and validity thereof, and the respective rights and obligations of the parties, shall be settled through under the provisions of Arbitration & Conciliation Act, 1996…” This clause provides for arbitration for all disputes except those covered under Clause 36.

The Arbitration and Conciliation Act, 1996, provides the legal framework for arbitration in India, including the appointment of arbitrators by the court under Section 11.

Arguments

Appellant’s Arguments:

• The appellant argued that the High Court failed to consider that the dispute falls under Clause 36 of the Addendum Agreement, not Clause 37.
• According to Clause 36, disputes related to Clauses 3, 6, and 9 are to be resolved through a court of law and are not arbitrable.
• The High Court should have conducted a preliminary inquiry to determine if the dispute falls within Clause 36 before appointing arbitrators.
• The appellant cited Uttarakhand Purv Sainik Kalyan Nigam Limited Vs. Northern Coal Field Limited; (2020) 2 SCC 455, arguing that the appointment of an arbitrator can be refused if the dispute is beyond the scope of the arbitration agreement.
• The appellant also relied on Vidya Drolia and Ors. Vs. Durga Trading Corporation; (2021) 2 SCC 1, stating that a court may interfere at the Section 8 or 11 stage if the arbitration agreement is non-existent, invalid, or the disputes are non-arbitrable.
• Further, the appellant cited Indian Oil Corporation Limited Vs. NCC Limited; 2022 SCC OnLine SC 896, which held that a preliminary inquiry is permissible under Section 11 of the Arbitration Act if a dispute is raised regarding arbitrability.

Respondents’ Arguments:

• The respondents contended that the issue of arbitrability should be decided by the arbitrator under Section 16 of the Arbitration Act.
• They argued that a conjoint reading of Clauses 36 and 37 indicates the parties’ intention to resolve disputes through arbitration under the Arbitration Act.
• The respondents relied on Vidya Drolia (supra), arguing that the question of whether a dispute is arbitrable should be left to the arbitrator.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court was justified in appointing arbitrators under Section 11(5) and (6) of the Arbitration Act without holding a preliminary inquiry on whether the dispute was arbitrable?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Uttarakhand Purv Sainik Kalyan Nigam Limited Vs. Northern Coal Field Limited; (2020) 2 SCC 455*: The Court used this case to support the principle that an arbitrator’s appointment can be refused if the dispute falls outside the arbitration agreement.
• Vidya Drolia and Ors. Vs. Durga Trading Corporation; (2021) 2 SCC 1*: The Court relied on this case to emphasize that a court can intervene at the Section 8 or 11 stage if the arbitration agreement is clearly invalid or the dispute is non-arbitrable.
• Indian Oil Corporation Limited Vs. NCC Limited; 2022 SCC OnLine SC 896*: The Court used this case to justify the need for a preliminary inquiry under Section 11 of the Arbitration Act when arbitrability is questioned.
• Oriental Insurance Co Ltd. Vs. Narbheram Power and Steel (P) Ltd., (2018) 6 SCC 534*: The Court cited this case to reinforce that contract clauses, including arbitration clauses, must be strictly interpreted.
• Rajasthan State Industrial Development and Investment Corporation Vs. Diamond and Gem Development Corporation Ltd.; (2013) 5 SCC 470*: The Court used this case to support the view that contract terms must be interpreted literally, and courts cannot create new contracts for the parties.
• Harsha Construction Vs. Union of India and Ors.; (2014) 9 SCC 246*: This case was cited to emphasize that arbitration must stem from a written contract and that disputes excluded from arbitration cannot be arbitrated.
• Booz Allen & Hamiltan Inc. Vs. SBI Home Finance Ltd. [(2011) 5 SCC 532*: The Court referred to this case to explain the different aspects of non-arbitrability.
• Garware Wall Ropes Ltd. Vs. Coastal Marine Constructions & Engg.; (2019) 9 SCC 209*: This case was used to support the view that courts can examine non-arbitrability at the reference stage.
• United India Insurance Co. Ltd. Vs. Hyundai Engg. & Construction Co. Ltd.; (2018) 17 SCC 607*: This case was cited to further support the view that courts can examine non-arbitrability at the reference stage.
• Olympus Superstructures (P) Ltd. Vs. Meena Vijay Khetan and Ors.; (1999) 5 SCC 651*: This case was used to illustrate the types of disputes that cannot be referred to arbitration.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was heavily influenced by the need to adhere to the contractual terms agreed upon by the parties. The Court emphasized that when a contract clearly specifies which disputes are arbitrable and which are not, those terms must be strictly followed. The Court also highlighted the importance of a preliminary inquiry by the High Court to determine if a dispute falls under an exception clause, like Clause 36 in this case, before appointing arbitrators. The Court’s reasoning was also guided by the principle that courts should not force parties into arbitration when the matter is demonstrably non-arbitrable.

Fact:Law Ratio

The court’s decision was more influenced by the legal interpretation of the contract and the relevant provisions of the Arbitration Act than the factual aspects of the case.

Key Takeaways

• Courts must conduct a preliminary inquiry to determine if a dispute is arbitrable, especially when a contract has specific exception clauses.
• Arbitration clauses must be strictly construed, and parties are bound by the terms of their contracts.
• Courts should not force parties into arbitration if the dispute is demonstrably non-arbitrable.
• The Supreme Court has clarified that while arbitrators have primary jurisdiction, courts have a role in ensuring that non-arbitrable disputes are not referred to arbitration.
• This judgment reinforces the importance of clear and unambiguous drafting of arbitration clauses and exception clauses in contracts.

Directions

The Supreme Court quashed the High Court’s order appointing arbitrators and remitted the matter back to the High Court. The High Court was directed to conduct a preliminary inquiry to determine whether the dispute was arbitrable and whether it fell under Clause 36 of the Addendum Agreement before passing a fresh order on the application under Section 11(5) and (6) of the Arbitration Act.

Development of Law

The ratio decidendi of this case is that courts must conduct a preliminary inquiry to ascertain whether a dispute falls under an exception clause in a contract, making it non-arbitrable, before appointing arbitrators. This judgment clarifies the scope of judicial intervention at the stage of appointing arbitrators under Section 11 of the Arbitration Act. It reinforces the principle that while arbitrators have the primary jurisdiction to decide on their jurisdiction, courts have a role in preventing manifestly non-arbitrable disputes from being referred to arbitration. This decision reinforces the principles laid down in Vidya Drolia (supra) and Indian Oil Corporation Limited (supra), emphasizing the need for a preliminary inquiry by the court when arbitrability is disputed.

Conclusion

The Supreme Court’s judgment in M/s. Emaar India Ltd. vs. Tarun Aggarwal Projects LLP & Anr. clarifies that courts must conduct a preliminary inquiry to determine if a dispute is arbitrable before appointing arbitrators, especially when the contract contains specific exception clauses. The Court emphasized the importance of adhering to the contractual terms agreed upon by the parties and reinforced the principle that courts should not force parties into arbitration when the matter is demonstrably non-arbitrable. The matter was remitted to the High Court for a fresh decision after conducting the necessary preliminary inquiry.