Supreme Court Upholds Arbitration in Development Agreement Dispute: Asian Avenues vs. Syed Shoukat Hussain (2023)

Introduction

Date of the Judgment: April 28, 2023

Citation: Civil Appeal No. 2927 of 2023

Judges: Hon’ble Mr. Justice Abhay S. Oka and Hon’ble Mr. Justice Rajesh Bindal

Can a dispute over the cancellation of a development agreement be resolved through arbitration, or must it be settled in a civil court? The Supreme Court of India recently addressed this question in a case involving a property development agreement. The core issue was whether an arbitration clause in a development agreement could be invoked when one party sought cancellation of the agreement. The Supreme Court, in this judgment, held that such disputes are arbitrable.

The judgment was delivered by a two-judge bench comprising Hon’ble Mr. Justice Abhay S. Oka and Hon’ble Mr. Justice Rajesh Bindal. The judgment was authored by Hon’ble Mr. Justice Abhay S. Oka.

Case Background

The case revolves around a dispute between M/S. Asian Avenues Pvt Ltd. (the appellant), and Sri Syed Shoukat Hussain (the respondent). The respondent claimed ownership of a property and had entered into a Development Agreement with the appellant on October 23, 2008. This agreement granted the appellant permissive possession of the property to carry out development work.

A dispute arose between the parties, leading the respondent to cancel the Development Agreement. The respondent then issued a legal notice to the appellant, requesting them to execute a deed of cancellation of the agreement. Subsequently, the respondent filed a suit seeking a decree to compel the appellant to execute the cancellation deed and to hand over possession of the property.

Timeline:

Course of Proceedings

After being served with the suit summons, the appellant filed an application under Rule 11 of Order VII of the Code of Civil Procedure, 1908 (CPC). The appellant argued that the dispute should be referred to arbitration due to the presence of an arbitration clause in the Development Agreement. The Trial Court agreed with the appellant, rejected the plaint, and directed the parties to refer their dispute to arbitration, exercising its power under Section 8 of the Arbitration and Conciliation Act, 1996.

The respondent then filed a revision application before the High Court. The High Court interfered with the Trial Court’s order and set it aside, holding that the issue of cancellation of the Development Agreement was an action in rem and therefore, not arbitrable. This led to the appellant filing an appeal before the Supreme Court.

Legal Framework

The case primarily involves the interpretation and application of the following legal provisions:

• Section 8 of the Arbitration and Conciliation Act, 1996: This section deals with the power of a judicial authority to refer parties to arbitration when there is an arbitration agreement.
  
  “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.”
• Section 31 of the Specific Relief Act, 1963: This section deals with the cancellation of instruments.
  
  “Any person against whom a written instrument is void or voidable, and who has reasonable apprehension that such instrument, if left outstanding may cause him serious injury, may sue to have it adjudged void or voidable; and the court may, in its discretion, so adjudge it and order it to be delivered up and cancelled.”
• Rule 11 of Order VII of the Code of Civil Procedure, 1908: This rule deals with the rejection of a plaint.

Arguments

The appellant argued that the High Court erred in relying on a previous decision that held that the adjudication of cancellation of a Development Agreement operates in rem, thus making it non-arbitrable. The appellant contended that the Supreme Court, in Deccan Paper Mills Company Limited v. Regency Mahavir Properties and Ors. [(2021) 4 SCC 786], had held that an action under Section 31 of the Specific Relief Act is not an action in rem. Therefore, the dispute should be referred to arbitration as per the arbitration clause in the agreement.

The respondent argued that the arbitration clause would not apply because the suit sought cancellation of the agreement under Section 31 of the Specific Relief Act. The respondent submitted that issues arising under Section 31 of the Specific Relief Act can only be adjudicated by a competent Civil Court.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether a dispute regarding the cancellation of a Development Agreement, which contains an arbitration clause, can be referred to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, or if it must be adjudicated by a civil court.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Section 8 of the Arbitration and Conciliation Act, 1996: This provision allows a judicial authority to refer parties to arbitration if there is an arbitration agreement.
• Section 31 of the Specific Relief Act, 1963: This provision deals with the cancellation of instruments.

Judgment

The Supreme Court relied on the authority of Deccan Paper Mills Company Limited v. Regency Mahavir Properties and Ors. [(2021) 4 SCC 786]. The Court held that the High Court erred in holding that the adjudication of cancellation of a Development Agreement is an action in rem. The Court reiterated that an action under Section 31 of the Specific Relief Act is not an action in rem and therefore, the arbitration clause in the Development Agreement applies.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the presence of an arbitration clause in the Development Agreement and the legal precedent set in Deccan Paper Mills Company Limited v. Regency Mahavir Properties and Ors. [(2021) 4 SCC 786]. The Court emphasized that disputes arising out of or in connection with the agreement, including those related to its cancellation, should be referred to arbitration as agreed by the parties.

The Court’s reasoning was based on a combination of contractual interpretation and legal precedent. The Court emphasized the importance of respecting the parties’ agreement to arbitrate disputes. The Court also clarified that actions under Section 31 of the Specific Relief Act are not actions in rem.

The Court considered the argument that disputes under Section 31 of the Specific Relief Act can only be adjudicated by a Civil Court. However, the Court clarified that an action under Section 31 of the Specific Relief Act is not an action in rem, and therefore, the arbitration clause applies.

The Court’s decision was unanimous, with both judges agreeing on the outcome.

The Supreme Court quoted the arbitration clause from the Development Agreement:

“All the disputes arising out of or in connection with this agreement shall be initially resolved by mutual discussions among the developer and landowner or the nominated representatives of both the parties. In case of disputes not resolved by mutual discussions, the same shall be referred to the arbitration in accordance with the provisions of the Arbitration and Conciliation Act 1996. The disputes shall be referred to the mutually agreed arbitrator within from the cause of action. The award of the arbitrator shall be binding and final on both the parties.”

The Court also quoted its observation in Deccan Paper Mills Company Limited v. Regency Mahavir Properties and Ors. [(2021) 4 SCC 786]:

“it is impossible to hold that an action instituted under Section 31 of the Specific Relief for cancellation of an instrument is an action in rem.”

Key Takeaways

• ✓ Disputes related to the cancellation of a development agreement can be referred to arbitration if the agreement contains an arbitration clause.
• ✓ An action under Section 31 of the Specific Relief Act is not an action in rem and therefore can be a subject matter of arbitration.
• ✓ The Supreme Court has upheld the importance of respecting arbitration agreements, reinforcing the principle that parties should be held to their contractual obligations.
• ✓ This decision clarifies the scope of arbitrability in disputes involving the cancellation of instruments and provides guidance for similar cases in the future.

Directions

The Supreme Court directed the parties to act in accordance with Section 8 of the Arbitration and Conciliation Act, 1996, meaning the dispute must be referred to arbitration.

Specific Amendments Analysis

There were no specific amendments discussed in the judgment.

Development of Law

The ratio decidendi of this case is that disputes regarding the cancellation of a development agreement are arbitrable if there is an arbitration clause in the agreement, and that an action under Section 31 of the Specific Relief Act is not an action in rem. This clarifies the position of law and reinforces the principle that parties should be held to their contractual obligations to arbitrate disputes.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s order and restoring the Trial Court’s order. The Court held that the dispute regarding the cancellation of the Development Agreement was arbitrable and should be referred to arbitration as per the arbitration clause in the agreement. This decision reinforces the importance of arbitration clauses in contracts and clarifies that disputes under Section 31 of the Specific Relief Act can be subject to arbitration.