Supreme Court Orders Arbitration Despite Previous Settlement Claim in Property Dispute

Date of the Judgment: April 08, 2021

Citation: 2021 INSC 193

Judges: S. A. Bobde, CJI., A.S. Bopanna, J., V. Ramasubramanian, J.

Can a court deny arbitration if a previous order mentions a settlement, but the settlement was never formalized? The Supreme Court of India recently addressed this question in a case involving a property sale agreement. The core issue was whether a dispute still existed for arbitration after a lower court had recorded a settlement between the parties, even though no formal settlement agreement was documented. The Supreme Court bench, consisting of Chief Justice S. A. Bobde and Justices A.S. Bopanna and V. Ramasubramanian, delivered the judgment, with the opinion authored by Justice V. Ramasubramanian.

Case Background

The case revolves around a property sale agreement dated 23.03.2006, between V. Sreenivasa Reddy (the appellant) and B.L. Rathnamma (the respondent). Reddy agreed to purchase land from Rathnamma for ₹5,53,90,000, paying ₹1,50,00,000 as an initial deposit. Clause 11 of the agreement included an arbitration clause for dispute resolution.

On 09.02.2007, Rathnamma asked Reddy to pay the remaining amount and register the sale. Reddy responded on 21.02.2007, raising concerns. Subsequently, on 17.04.2008, Rathnamma cancelled the agreement, forfeiting the deposit. Reddy disputed this on 05.05.2008, leading to a dispute.

Reddy then filed a petition in the High Court of Karnataka at Bangalore under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator. During the pendency of the petition, the parties submitted that the matter had been settled out of court, and the petition was disposed of on 05.07.2011.

Later, Reddy filed an application on 27.06.2014 to recall the order dated 05.07.2011, which was rejected on 13.10.2014 due to non-compliance of office objections and because the main order merely recorded the settlement.

Reddy then filed another petition under Section 11(6) of the Act in CMP No.228/2015, which was withdrawn on 02.03.2016 with liberty to file a fresh petition before the appropriate court. Finally, Reddy filed Arbitration Application No.52/2016 before the High Court of Judicature at Hyderabad, which was dismissed.

Timeline:

Course of Proceedings

The High Court of Karnataka initially disposed of CMP No.297/2009, recording a settlement between the parties. However, this settlement was not formalized, leading to further disputes. The High Court rejected Reddy’s application to recall the order. Reddy then withdrew CMP No.228/2015 with liberty to file before the appropriate court, which was the High Court of Judicature at Hyderabad. The High Court of Judicature at Hyderabad dismissed the application for appointment of an arbitrator, stating that the matter had already been settled, as noted in the order of the Karnataka High Court. This led to the appeal before the Supreme Court.

Legal Framework

The case primarily involves Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators by the High Court when parties fail to agree on an arbitrator. The relevant provisions are:

• Section 11(5) of the Arbitration and Conciliation Act, 1996:
  “Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court.”

• Section 11(6) of the Arbitration and Conciliation Act, 1996:
  “Where, under an appointment procedure agreed upon by the parties,— (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.”

The Supreme Court also considered the principles of res judicata and Order II Rule 2 of the Code of Civil Procedure (CPC), in the context of whether the previous settlement and court orders barred the current arbitration proceedings. The court also touched upon the concept of Novation of contract.

Arguments

Appellant’s Arguments:

• The appellant argued that the settlement recorded by the High Court of Karnataka was not a concluded settlement. The proposed settlement did not materialize and the non-settlement gave rise to a fresh dispute, requiring resolution through arbitration. The appellant submitted that the original dispute regarding the sale agreement still subsisted and thus, the arbitration clause was still valid.

• The appellant contended that the High Court of Judicature at Hyderabad erred in dismissing the application for appointment of an arbitrator based on the previous order of the High Court of Karnataka. The appellant argued that the previous order merely recorded a submission of settlement, but did not record the terms of settlement, and therefore, did not erase the original dispute.

• The appellant also pointed out that the withdrawal of CMP No.228/2015 was with the liberty to file a fresh petition before the appropriate court, and the respondent did not object to this liberty, implying that the dispute was still alive.

• The appellant submitted that the failure to settle amicably revives the original dispute, which is referable to arbitration as per the arbitration clause in the agreement.

Respondent’s Arguments:

• The respondent argued that the High Court of Karnataka had already recorded the settlement between the parties, and therefore, the dispute was resolved. The respondent contended that the subsequent application for appointment of an arbitrator was not maintainable.

• The respondent argued that the withdrawal of CMP No.228/2015 was not with the consent of the respondent and therefore, the liberty granted by the High Court of Karnataka to file a fresh petition was invalid.

• The respondent contended that the application was barred by Order II Rule 2 of the CPC and the principles of res judicata, as the matter had already been decided by the High Court of Karnataka.

[TABLE] of Submissions:

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether there was a concluded settlement between the parties after the application in CMP No.297/2009 was filed.
2. Whether the dispute between the parties should be deemed as not subsisting for resolution through arbitration.
3. Whether there is a settlement in the nature of Novation of the agreement of sale dated 23.11.2006.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court did not cite any specific cases or books in this judgment. However, the court considered the following legal provisions:

• Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996: These provisions deal with the appointment of arbitrators by the High Court when parties fail to agree on an arbitrator. The court analyzed these provisions to determine whether the appellant was entitled to the appointment of an arbitrator.

• Order II Rule 2 of the Code of Civil Procedure (CPC): This provision deals with the bar on subsequent suits based on the same cause of action. The court examined whether the present application was barred by this rule, given the earlier proceedings.

• Principles of res judicata: The court considered whether the previous orders of the High Court of Karnataka acted as res judicata, barring the present application. Res judicata is a doctrine that prevents the re-litigation of issues that have already been decided by a competent court.

[TABLE] of Authorities:

Judgment

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

How each authority was viewed by the Court?

• The Court applied Section 11(5) and (6) of the Arbitration and Conciliation Act, 1996* to determine that the requirements for the appointment of an arbitrator were met, since the parties had failed to agree on an arbitrator, and there was a valid arbitration clause.
• The Court found that Order II Rule 2 of the Code of Civil Procedure (CPC)* did not bar the application, as there was no abandonment of any claim by the appellant.
• The Court held that the principles of res judicata* did not apply, as there was no conclusive adjudication of the dispute on merits in the previous proceedings.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the lack of a formal, concluded settlement between the parties. The Court emphasized that the mere recording of a settlement in a court order, without a detailed agreement or any evidence of actual resolution, was insufficient to extinguish the original dispute and invalidate the arbitration clause. The Court also noted that the non-adherence to the proposed settlement itself constituted a dispute. The Court also considered the fact that the respondent did not object to the withdrawal of the previous petition with liberty to file a fresh petition, implying that the dispute was still alive. The Court was also wary of denying a party access to a forum for dispute resolution based on a hyper-technical view of the matter.

[TABLE] of Sentiment Analysis of Reasons:

Fact:Law Ratio:

Logical Reasoning:

The Court considered alternative interpretations, such as whether the previous order of the Karnataka High Court amounted to a conclusive settlement that extinguished the dispute. However, the Court rejected this interpretation because there was no formal settlement agreement on record. The Court also considered whether the application was barred by Order II Rule 2 of CPC and res judicata, but rejected these arguments as there was no conclusive adjudication of the dispute on merits.

The Supreme Court held that the High Court of Judicature at Hyderabad was not justified in rejecting the application for appointment of an arbitrator. The Court found that the original dispute remained unresolved and that the arbitration clause in the agreement was still valid. The Court emphasized that the mere recording of a settlement without a formal agreement did not extinguish the dispute. The Court also noted that the non-adherence to the proposed settlement itself constituted a dispute. The Court, therefore, set aside the order of the High Court of Judicature at Hyderabad and appointed Mr. Justice Ramesh Ranganathan as the sole arbitrator.

The Court’s reasoning can be summarized as follows:

• The previous order of the Karnataka High Court merely recorded a submission of settlement, but did not record the terms of the settlement.
• There was no material on record to indicate that a concluded settlement was reached between the parties.
• The non-adherence to the proposed settlement itself constituted a dispute.
• The respondent did not object to the withdrawal of the previous petition with liberty to file a fresh petition.
• The application was not barred by Order II Rule 2 of CPC or the principles of res judicata.

The Supreme Court quoted the following from the judgment:

• “Both the aforestated orders do not throw light on the nature of the settlement or the conclusiveness of the same so as to bind the parties to the same.”
• “On the other hand the settlement proposed itself not being finalized, not just the original dispute had remained unresolved but the non-settlement of the matter as proposed had given rise to a fresh dispute in relation to the same agreement which required resolution through arbitration.”
• “In any event, whether the dispute which had arisen at the first instance has been settled; if the dispute subsisted, whether the claim is within the period of limitation, the nature of relief if any and all other contention on merits are to be considered in the arbitral proceedings.”

There were no dissenting opinions in this case. The judgment was delivered by a bench of three judges, all of whom concurred with the decision.

The implications for future cases are that courts should not deny arbitration based on a mere recording of settlement without a formal agreement. The judgment clarifies that a dispute is not extinguished unless there is a clear and conclusive settlement between the parties. This will ensure that parties are not denied their right to arbitration based on technicalities.

The Supreme Court did not introduce any new doctrines or legal principles. The Court applied existing legal provisions and principles to the facts of the case. The Court emphasized the importance of a clear and conclusive settlement to extinguish a dispute and the right to arbitration.

Key Takeaways

• A mere recording of a settlement in a court order, without a formal agreement, is not sufficient to extinguish a dispute and invalidate an arbitration clause.
• If a proposed settlement fails, the original dispute remains unresolved and can be referred to arbitration.
• Courts should not deny parties access to arbitration based on technicalities, especially when there is no clear evidence of a concluded settlement.
• The non-adherence to a proposed settlement can itself constitute a new dispute arising out of the original agreement.

Directions

The Supreme Court set aside the order of the High Court of Judicature at Hyderabad and appointed Mr. Justice Ramesh Ranganathan, Former Chief Justice of the High Court of Uttarakhand, as the sole arbitrator to resolve the dispute between the parties.

Development of Law

The ratio decidendi of this case is that a mere recording of a settlement in a court order, without a formal settlement agreement, does not extinguish the dispute and the right to arbitration under an arbitration clause. This judgment reinforces the importance of a clear and conclusive settlement to resolve disputes and ensures that parties are not denied their right to arbitration based on technicalities. There is no change in the previous position of law, but it clarifies the interpretation of previous orders recording settlements.

Conclusion

The Supreme Court’s decision in V. Sreenivasa Reddy vs. B.L. Rathnamma clarifies that a dispute is not extinguished merely by a court recording a settlement. A formal, concluded settlement agreement is necessary to prevent arbitration. This judgment ensures that parties are not denied their right to arbitration based on technicalities and reinforces the importance of clear and conclusive settlements in resolving disputes.