Supreme Court Upholds Arbitration Clause Despite Missing “Final and Binding” Wording in Development Agreement: Babanrao Rajaram Pund vs. M/s. Samarth Builders & Developers (2022)

Date of the Judgment: September 7, 2022

Citation: Civil Appeal No. ____ of 2022 [Arising out of Special Leave Petition (Civil) No. 15989 of 2021]

Judges: Surya Kant, J., Abhay S. Oka, J.

Can a dispute resolution clause in a contract be considered a valid arbitration agreement if it doesn’t explicitly state that the arbitrator’s decision is “final and binding”? The Supreme Court of India recently addressed this question in a case concerning a development agreement, clarifying the essential requirements for a valid arbitration clause. The court held that the absence of the words “final and binding” does not invalidate an arbitration clause if the intention of the parties to resolve disputes through arbitration is clear.

The judgment was delivered by a two-judge bench comprising Justice Surya Kant and Justice Abhay S. Oka. Justice Surya Kant authored the judgment.

Case Background

The case involves a dispute arising from a Development Agreement dated May 29, 2014, between the Appellant, Babanrao Rajaram Pund, and the Respondents, M/s. Samarth Builders & Developers, for the construction of an apartment complex named “Amay Apartments.” The Appellant owned the land in Aurangabad, Maharashtra, and the Respondents were to develop it.

The agreement stipulated that the Respondents would construct the apartments within 15 months, with a possible extension subject to a penalty. The Appellant was entitled to 45% of the constructed area, while the Respondents would retain 55%. A Deed of Declaration was also registered on October 20, 2015, under Section 2 of the Maharashtra Apartment Ownership Act, 1970, to delineate the ownership of facilities, amenities, and common spaces.

The Respondents failed to complete the construction within the stipulated time. Consequently, the Appellant issued a legal notice on July 11, 2016, to terminate the agreement and cancel the General Power of Attorney (GPA) given to the Respondents. The Appellant also published a notice in the newspaper on the same date, informing the public about the termination. The Respondents disputed the termination, leading to a conflict.

Timeline:

Course of Proceedings

The Appellant initially sought an injunction under Section 9 of the Arbitration and Conciliation Act, 1996, in M.A.R.J.I No. 285 of 2016. The District Court at Aurangabad granted the injunction on September 30, 2016, restraining the Respondents from selling any tenements on the developed property.

Subsequently, the Appellant invoked the arbitration clause on November 7, 2016, and sent a notice to the Respondents, proposing Mr. Shyam Rajale as the sole arbitrator. When the Respondents failed to respond, the Appellant filed an application under Section 11 of the Act before the High Court.

The High Court, in its judgment dated July 7, 2021, acknowledged the presence of an arbitration clause but dismissed the application, holding that the clause lacked the essential ingredient that the arbitrator’s decision would be final and binding on the parties.

Aggrieved by the High Court’s decision, the Appellant approached the Supreme Court.

Legal Framework

The primary legal framework in this case is the Arbitration and Conciliation Act, 1996. Section 2(1)(b) of the Act defines an “arbitration agreement” as an agreement referred to in Section 7. Section 7 of the Arbitration and Conciliation Act, 1996, lays down the characteristics of an arbitration agreement:

“7. Arbitration agreement — (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing. (4) An arbitration agreement is in writing if it is contained in— (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams, or other means of telecommunication [including communication through electronic means] which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”

The Act does not prescribe a specific format for an arbitration clause. It requires that the agreement be in writing and demonstrate the parties’ intention to submit disputes to arbitration.

Arguments

Appellant’s Submissions:

• The Appellant argued that Clause 18 of the Development Agreement clearly demonstrates the parties’ intention to refer disputes to arbitration and to be bound by the arbitrator’s decision.
• The clause explicitly states that “all the disputes or differences arising between the parties” are to be referred to arbitration.
• The clause provides for the appointment of a sole arbitrator or, failing that, a tribunal of three arbitrators.
• The governing law for the arbitration is specified as the Arbitration and Conciliation Act, 1996, which indicates the parties’ intention to be bound by the arbitrator’s decision.
• The Appellant contended that the High Court failed to consider the intention of the parties and erroneously inferred that Clause 18 was not a valid arbitration clause.
• The Appellant argued that there were no specific exclusions of any attributes of an arbitration agreement in Clause 18.
• The Appellant relied on the principle that an arbitration clause need not be in any specific form.

Respondents’ Submissions (as argued in the High Court):

• The Respondents argued that Clause 18 lacked the express wording required for a valid arbitration agreement.
• They emphasized the absence of the phrase “the parties agreeing in writing to be bound by the decision of an arbitral tribunal.”
• The Respondents contended that it was crucial for the parties to agree that the decision of the private tribunal would be binding on them.
• The Respondents relied on the decisions of the Supreme Court in Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I) (P) Ltd. [2003] 7 SCC 418 and Karnataka Power Transmission Corporation Ltd. and Anr. v. Deepak Cables (India) Ltd. [2014] 11 SCC 148, which held that the exclusion of essential attributes of an arbitration agreement would render the dispute resolution clause invalid.

Innovation of the Argument: The Appellant’s argument was innovative in emphasizing the substance and intent of the arbitration clause, rather than focusing on the absence of specific words. The Appellant argued that the presence of the term “arbitration” and the detailed procedure for appointing arbitrators, along with the choice of the Arbitration and Conciliation Act, 1996 as the governing law, should be sufficient to establish a valid arbitration agreement.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

✓ Whether Clause 18 of the Development Agreement constitutes a valid arbitration clause for the purpose of invoking powers under Section 11 of the Arbitration and Conciliation Act, 1996?

Treatment of the Issue by the Court

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

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?

• The Supreme Court followed Rukmanibai Gupta v. Collector, Jabalpur and Ors. [1980] 4 SCC 556, stating that an arbitration agreement need not be in any particular form.
• The Supreme Court followed K.K. Modi v. K.N. Modi and Ors. [1998] 3 SCC 573, which laid down the essential attributes of an arbitration agreement.
• The Supreme Court distinguished Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I) (P) Ltd. [2003] 7 SCC 418, noting that the adjudicator in that case was likely to be biased.
• The Supreme Court distinguished Jagdish Chander v. Ramesh Chander & Ors. [2007] 5 SCC 719, stating that the arbitration clause in that case was contingent on the determination of the parties.
• The Supreme Court distinguished Karnataka Power Transmission Corporation Ltd. and Anr. v. Deepak Cables (India) Ltd. [2014] 11 SCC 148, stating that the exclusion of essential attributes of an arbitration agreement would render the dispute resolution clause invalid.
• The Supreme Court followed Enercon (India) Ltd. and Ors. v. Enercon Gmbh and Anr. [2014] 5 SCC 1, emphasizing that courts should adopt a pragmatic approach to interpret arbitration clauses.

The Supreme Court allowed the appeal, setting aside the High Court’s judgment. The Court held that Clause 18 of the Development Agreement constitutes a valid arbitration clause. The Court appointed Mr. Justice P.V. Hardas, a former Judge of the Bombay High Court, as the sole arbitrator to resolve the disputes between the parties.

The Court emphasized that the intention of the parties to arbitrate their disputes should be given due weightage. The Court also noted that the absence of the words “final and binding” does not invalidate an arbitration clause if the intention to arbitrate is clear from the substance of the agreement.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by the following factors:

• Intention of the Parties: The Court emphasized that the primary consideration was the intention of the parties to resolve their disputes through arbitration. The language of Clause 18, particularly the use of “shall be referred to arbitration,” clearly indicated this intention.
• Substance over Form: The Court adopted a pragmatic approach, focusing on the substance of the arbitration clause rather than its form. The absence of the words “final and binding” was not considered fatal, as the overall context of the clause indicated an intention to be bound by the decision of the arbitrator.
• Party Autonomy: The Court highlighted the principle of party autonomy, stating that the parties should be held to their agreement to arbitrate. The Court noted that the parties had entered into the contract knowing the full import of the arbitration clause and should not be permitted to deviate from it.
• Pragmatic Interpretation: The Court reiterated that arbitration clauses should be interpreted pragmatically and not with a purely legalistic mindset. The Court emphasized the need to give effect to the intention of the parties to arbitrate.
• Minimal Court Intervention: The Court noted that the UNCITRAL Model Law, from which the Arbitration and Conciliation Act, 1996, originated, envisages minimal supervisory role by courts. Therefore, courts should not add impediments to upholding the validity of an arbitration agreement.

Fact:Law Ratio

The court’s reasoning was primarily based on legal principles and interpretation of the arbitration clause, with a lesser emphasis on the specific facts of the case. The court focused on the legal framework and the principles of arbitration law to determine the validity of the arbitration clause.

The Supreme Court’s decision was based on a step-by-step logical analysis of the arbitration clause, focusing on the intention of the parties and the substance of the agreement. The court rejected a purely legalistic interpretation and instead adopted a pragmatic approach.

The Court considered alternative interpretations, such as the argument that the absence of the words “final and binding” invalidated the clause. However, it rejected this interpretation, emphasizing that the substance of the clause and the clear intention of the parties to arbitrate should prevail over a formalistic reading.

The court concluded that even if the clause lacked certain essential characteristics of arbitration, the clear intent of the parties to refer the dispute to arbitration should be upheld. The court emphasized that the parties had evinced a clear intention to be bound by the decision of the tribunal, and this intention should be protected. The court also noted that the deficiency of words in the agreement cannot legitimize the annulment of the arbitration clause.

“We find that Clause 18 luminously discloses the intention and obligation of the parties to be bound by the decision of the tribunal, even though the words “final and binding” are not expressly incorporated therein.”

“The deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.”

“It is thus imperative upon the courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them.”

The Supreme Court’s decision was unanimous, with both judges concurring on the reasoning and the conclusion.

The decision has potential implications for future cases involving arbitration clauses. It clarifies that the absence of specific words like “final and binding” does not necessarily invalidate an arbitration clause if the intention to arbitrate is clear from the substance of the agreement. This decision reinforces the principle of party autonomy and the need to uphold agreements to arbitrate.

The Supreme Court did not introduce any new doctrines or legal principles in this case. Instead, it reaffirmed existing principles of arbitration law, such as the principle that arbitration agreements should be interpreted pragmatically and that the intention of the parties should be given due weightage. The court clarified the application of these principles in the context of an arbitration clause that did not explicitly state that the arbitrator’s decision would be final and binding.

Key Takeaways

• An arbitration clause does not need to be in a specific form.
• The absence of the words “final and binding” does not invalidate an arbitration clause if the intention to arbitrate is clear from the substance of the agreement.
• Courts should adopt a pragmatic approach when interpreting arbitration clauses, focusing on the substance rather than the form.
• The intention of the parties to arbitrate their disputes should be given due weightage.
• Courts should not add unnecessary impediments to upholding the validity of arbitration agreements.
• The principle of party autonomy is paramount in arbitration agreements.

Directions

The Supreme Court appointed Mr. Justice P.V. Hardas (Contact number: +91-9834933135), a former Judge of the Bombay High Court, as the sole arbitrator to resolve all disputes/differences between the parties.

The learned Arbitrator shall be entitled to a fee as per the Fourth Schedule of the Arbitration and Conciliation Act, 1996, as amended from time to time.

The Registry was directed to send a copy of the order to the learned Sole Arbitrator.

Development of Law

The ratio decidendi of this case is that an arbitration clause is valid even if it does not explicitly state that the arbitrator’s decision will be “final and binding,” provided that the intention of the parties to arbitrate their disputes is clearly evident. The Supreme Court held that the absence of the words “final and binding” is not fatal if the intention to arbitrate is clear from the substance of the agreement.

This ruling reinforces the principle of party autonomy and the need for courts to adopt a pragmatic approach when interpreting arbitration clauses, moving away from a purely formalistic approach. It emphasizes that the substance of the clause and the intention of the parties should prevail over a strict interpretation of the language used.

This case does not change the previous legal position but clarifies and emphasizes the importance of substance over form in arbitration agreements. It reaffirms the principle that arbitration agreements should be interpreted to give effect to the intention of the parties to arbitrate their disputes.

Conclusion

In conclusion, the Supreme Court’s judgment in Babanrao Rajaram Pund vs. M/s. Samarth Builders & Developers (2022) provides significant clarification on the interpretation of arbitration clauses. It establishes that the absence of the words “final and binding” does not invalidate an arbitration clause if the intention to arbitrate is clear from the substance of the agreement. The judgment reinforces the principle of party autonomy and the need for courts to adopt a pragmatic approach, focusing on the substance of the agreement rather than its form.

This ruling is crucial for promoting arbitration as an effective means of dispute resolution and ensuring that the intent of the parties to arbitrate is upheld. It reinforces the idea that arbitration clauses should be interpreted in a way that gives effect to the parties’ intentions, rather than being subjected to a strict, formalistic reading. The decision encourages a more practical and intention-based approach to the interpretation of arbitration agreements, which is in line with the spirit of the Arbitration and Conciliation Act, 1996.