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Thursday, July 26, 2018

whether Clause 9 of the memorandum of understanding constituted an arbitration agreement and whether the decision of the Chairman, IFCI constituted an award

(Arising out of SLP (Civil) No. 34591/2012)
R.F. Nariman, J.
1) Leave granted.
2) The present dispute arises out of a Memorandum of
Understanding (MoU)/Agreement executed between the parties
dated 08.12.2005 for sale and purchase of shares of a
Company called M/s Mancherial Cement Company Private
Limited of which all the parties are Directors. The bone of
contention in the present proceedings is as to whether Clause
12 of the said Agreement can be stated to be an arbitration
3) Heard the learned Senior Counsel appearing for the
parties at considerable length.
4) Mr. Guru Krishnakumar, learned Senior Advocate,
appearing on behalf of the Appellant has brought to our notice
the said MOU in which he relies, in particular, upon Clause 12.
According to him, the language of the said clause is language
that leads inevitably to the conclusion that the said clause is an
arbitration agreement. The word “decision” is used; the word
“Mediators/Arbitrators” is used; the expression “any breaches”
is used; and the “decision” is to be final and binding on all
parties to the said Agreement. Based on these words, in
particular, the learned Senior Advocate argues that the three
essentials of an arbitration clause have been met, namely, that
there must be disputes between the parties which have to be
adjudicated upon by giving the parties a hearing, at the end of
which there is a decision which is final and binding between the
parties. He also argued that the MOU read as a whole would
not militate against his argument given the words used in
Clause 12.
5) The learned Senior Advocate then relied upon a judgment
of this Court in P. Dasaratharama Reddy Complex vs.
Government of Karnataka and Another, (2014) 2 SCC 201,
and distinguished judgments cited therein by stating that in the
arbitration clause that was considered in that case, it was clear
that clauses of earlier judgments of this Court either spoke of a
preliminary decision which was then subject to a final decision
by a Court or spoke of decisions that had to be rendered only
“for the time being”. According to him, his case was entirely
different, and therefore, he would squarely fall within the
parameters laid down by the judgment in K.K. Modi vs. K.N.
Modi, (1998) 3 SCC 573.
6) Mr. Amit Sibal, learned Senior Advocate on behalf of the
Respondent Nos. 1 to 4, is at pains to point out that the MOU,
read as a whole, makes it clear that the expression
“Mediators/Arbitrators” is used loosely. In fact, the two
gentlemen said to be arbitrators, Mr. K. Sudhakar Rao and Mr.
Gone Prakash Rao, are escrow agents who have with them the
custody of three sets of documents to ensure successful
implementation of the MOU. He relied strongly upon Clauses 6,
8, 10 and 11 and stated that these must be read along with
Clause 12 so that it is clear that the expression “decision” must
be read only with “during the period of entire transaction” and
has reference to breaches that may occur under Clause 10, as
parties of the first part undertake to substitute personal
guarantees given by parties of the second part with personal
guarantees of their associates, and that if this is not done, then
a “decision” is to be taken by the escrow agents as to what to
do next.
7) Mr. Sibal also pointed out that three other purchasers of
shares, who were sailing in the same boat as the present
Appellant, had gone to the Civil Court and had filed O.S. No.
241 of 2017, which has since been dismissed in default. He
also points out that the entire exercise before us is a mala fide
exercise by the Appellant to hedge his bets by first issuing a
notice in 2007 under the said MOU as if the said MOU
contained an arbitration clause, but following it up only two and
a half years later by filing a Section 11 petition in December
2009. He also stated that while the Section 11 petition was
pending, the Appellant had filed a Company Petition No. 49 of
2011 on 16.06.2011 in which he asked for reliefs that flow
directly out of the said MOU. This Company Petition was again
withdrawn by him on 24.01.2017 in order to file a fresh
Company Petition on the same set of facts, thereby showing or
indicating willingness to continue with the remedy in company
law as against the remedy in arbitration. He also pointed out to
us that his own clients had gone in a Company Petition to the
Company Law Board, and had succeeded in the Company
Petition by getting the necessary reliefs on 16.03.2016 as the
Appellant was in no mood, from the very beginning, to
implement the terms of the MOU. We are told that an appeal is
pending before the High Court, having been filed by the
Appellant against the aforesaid order. He also argued that he
was seriously prejudiced by the fact that the Appellant continues
to hedge his bets and, in fact, filed a Special Leave Petition
against the impugned order, belatedly, with a delay of 358 days.
According to Mr. Sibal, therefore, not only is it clear that the
MOU does not contain any arbitration clause but equally, given
our discretionary jurisdiction under Article 136, we ought not
interfere in the facts of this case.
8) Having heard the learned Senior Counsel for the parties, it
is necessary to first set out some of the clauses of the MOU
executed between the parties. Clause 3 declares that the
parties have reached a settlement, as a result of which certain
shares have to be sold in the Company, so that the internal
disputes within the Company may end, in order that the
Company purchase certain assets of yet another Company.
Equally, Clauses 6, 8, 10, 11 and 12 are of importance and are
set out herein below:-
“6. The parties of 1st part hereby handed over
9 cheques favouring Sri P. Narotham Rao as
detailed below to Sri K. Sudhakar Rao S/o
Late Sri K. Madhava Rao, R/o Plot No.7, UBI
Colony, Road No.3, Banjara Hills, Hyderabad
and   Sri   Gone   Prakash   Rao   S/o   Gone
Chalapathi Rao R/o Transport Guest House,
Tarnaka, Hyderabad Mediators/Arbitrators.
Particulars of Cheque Amount
Date Ch. No. Bank   &   Branch   Holder
09.12.2005 450547 Andhra   Bank,   St.   John’s
EM   High   School   Branch,
Karimnagar   of   S.
Hareender Rao
09.01.2006 450543 Andhra   Bank,   St.   John’s
EM   High School Branch,
Karimnagar   of   S.
Hareender Rao
09.01.2006 450444 HDFC   Bank,
Himayathnagar   Branch,
Hyderabad   of   Shyam
Sunder Agarwal
09.02.2006 450544 Andhra   Bank,   St.   John’s
EM   High   School   Branch,
Karimnagar   of   S.
Hareender Rao
09.02.2006 450445 HDFC   Bank,
Himayathnagar   Branch,
Hyderabad   of   Shyam
Sunder Agarwal
09.03.2006 450545 Andhra   Bank,   St.   John’s
EM   High   School   Branch,
Karimnagar   of   S.
Hareender Rao
09.04.2006 450546 Andhra   Bank,   St.   John’s
EM   High   School   Branch,
Karimnagar   of   S.
Hareender Rao
09.04.2006 450447 HDFC   Bank,
Himayathnagar   Branch,
Hyderabad   of   Shyam
Sunder Agarwal
xxx  xxx  xxx
8. The   parties   hereinabove   declare   and
confirm that for successful completion of this
transaction   in   order   to   avoid   any   further
unforeseen   litigations,   both   the   parties
hereby mutually appointed Sri K. Sudhakar
Rao S/o Sri Late Sri K. Madhava Rao, R/o
Plot No.7, UBI Colony Road No.3, Banjara
Hills, Hyderabad and Sri Gone Prakash Rao
S/o   Gone   Chalapathi   Rao   R/o   Transport
Guest   House,   Tarnaka,   Hyderabad   as
mediators and arbitrators to whom the above
cheques   as   well   as   all   other   following
documents are handed over and the same
will be under their custody till satisfactory
completion of the entire transaction as per
the terms and conditions contained herein.
a) Above referred 9 cheques
b) The   share   certificates   along   with   the   duly
signed transfer deeds pertaining to 22,40,000 equity
shares of parties of 2nd part and their associates.
xxx  xxx  xxx
10. The parties of 1st  part further agree and
undertake   to   substitute   the   personal
guarantees given by the parties of 2nd part with
the   personal   guarantors   of   their     associates
with   M/s   Andhra   Bank   within   two   months
from the date of this document.
11. Till the total transaction is satisfactorily
completed and till entire sale consideration is
paid and till the personal guarantees of parties
of   2nd  part   are   substituted   by   the   personal
guarantees of the Associates of parties of First
Part with M/s Andhra Bank, the above named
Arbitrators/Mediators shall not hand over the
share   certificate   with   duly   signed   share
transfer deeds in respect of the shares of the
parties of 2nd part to the parties of 1st part.
12. It is further agreed that any decision to be
taken by said Mediators/Arbitrators during the
period of entire transaction in the event of any
breaches   committed   by   either   of   the   parties
shall be final and binding on all the parties
9) What emerges on a conspectus of reading of these
clauses is that Mr. Sudhakar Rao and Mr. Gone Prakash Rao,
though styled as Mediators/Arbitrators, are without doubt
escrow agents who have been appointed to keep certain vital
documents in escrow, and to ensure a successful completion of
the transaction contained in the MOU. Indeed, the very fact that
they have been referred to as “Mediators/Arbitrators” and as
“Mediators and Arbitrators” would show that the language used
is loose – the idea really is that the two named persons do all
things necessary during the implementation of the transaction
between the parties to see that the transaction gets successfully
completed. This becomes even clearer when Clauses 8 and 11
are seen minutely. Clause 8 expressly declares and confirms
“that for successful completion of this transaction in order to
avoid any further unforeseen litigations”, the two escrow agents
have been appointed. Clause 11 further makes it clear that
these two gentlemen are escrow agents but shall not handover
certain documents till the total transaction is satisfactorily
10) We agree with Mr. Sibal that Clause 12 has to be read in
the light of these Clauses of the MOU, and that, therefore, the
expression “decision” used in Clause 12 is only a pro tem
decision – namely, that the two escrow agents are to make
decisions only during the period of the transaction and not
thereafter. He has correctly contended that, to use a wellknown
latin expression, they are “functus officio” after the
transaction gets completed. Further, the “breaches” that are
referred to in Clause 12 refer, inter alia, to an undertaking given
by the party of the first part which is contained in Clause 10,
which, if breached, the escrow agents have necessarily to
decide on before going ahead with the transaction. Therefore,
when viewed as a whole, it is clear that the two escrow agents
are not persons who have to decide disputes that may arise
between the parties, whether before or after the transaction is
completed, after hearing the parties and observing the
principles of natural justice, in order to arrive at their decision. A
reading of the MOU as a whole leaves no manner of doubt that
the said MOU only invests the two gentlemen named therein
with powers as escrow agents to smoothly implement the
transaction mentioned in the MOU and not even remotely to
decide the disputes between the parties as Arbitrators.
11) This Court in P. Dasaratharama Reddy Complex (supra)
referred to a large number of decisions of this Court in order to
distinguish between clauses that were arbitration clauses and
clauses that either led to expert determinations or were
otherwise not arbitration clauses. For example, in para 17 of
the judgment, the case of State of U.P. vs. Tipper Chand,
(1980) 2 SCC 341 is referred to, in which this Court held that
the Superintending Engineer was really vested with supervision
of the execution of the work and administrative control which
would not render the clause an arbitration clause. Equally, the
Court relied extensively on K.K. Modi (supra), which again
made it clear that the Chairman of the IFCI, who is to decide all
disputes in respect of implementation of the agreement and
whose decision will be final and binding, could not be construed
to be an arbitration clause, inter alia, for the reason that the
clause does not invest the Chairman IFCI with quasi judicial
powers to decide disputes between the parties, as it was only in
respect of implementation of the agreement between the
parties. Para 22 of the judgment is important, and sets out from
K.K. Modi (supra) as to what are the valid pre-requisites for a
valid arbitration agreement.
“22. One of the questions formulated by this
Court was whether Clause 9 of the memorandum
of understanding constituted an arbitration
agreement and whether the decision of the
Chairman, IFCI constituted an award. The twoJudge
Bench first culled out the following
attributes of an arbitration agreement:
“17. … (1) The arbitration agreement must
contemplate that the decision of the tribunal will
be binding on the parties to the agreement,
(2) that the jurisdiction of the tribunal to decide the
rights of parties must derive either from the
consent of the parties or from an order of the
court or from a statute, the terms of which make it
clear that the process is to be an arbitration.
(3) the agreement must contemplate that
substantive rights of parties will be determined by
the agreed tribunal.
(4) that the tribunal will determine the rights of the
parties in an impartial and judicial manner with the
tribunal owing an equal obligation of fairness
towards both sides.
(5) that the agreement of the parties to refer their
disputes to the decision of the tribunal must be
intended to be enforceable in law and lastly,
(6) the agreement must contemplate that the
tribunal will make a decision upon a dispute which
is already formulated at the time when a reference
is made to the tribunal.
18. The other factors which are relevant include,
whether the agreement contemplates that the
tribunal will receive evidence from both sides and
hear their contentions or at least give the parties
an opportunity to put them forward; whether the
wording of the agreement is consistent or
inconsistent with the view that the process was
intended to be an arbitration, and whether the
agreement requires the tribunal to decide the
dispute according to law.”
In the present case, it is clear that the wording of the
Agreement, as has been held by us above, is clearly
inconsistent with the view that the Agreement intended that
disputes be decided by arbitration. Indeed, three of the four
purchasers did not read Clause 12 as an arbitration clause, but
approached the Civil Court instead, strengthening our
conclusion that the subsequent conduct of the parties to the
Agreement also showed that they understood that Clause 12
was not an arbitration clause in the Agreement.
12) Equally, the decision in Bihar State Mineral Development
Corporation vs. Encon Builders (I) (P) Limited, (2003) 7 SCC
418 was referred to, and what is important in that judgment is
that a clause which is inserted in an Agreement for the purpose
of prevention of a dispute will not be an arbitration agreement.
In the present case, Clause 8 of the MOU makes it clear that
the idea was to prevent disputes from occurring and to ensure
smooth implementation of the Agreement, thereby making it
clear that the object was not to adjudicate disputes but to
prevent them.
13) Mr. Sibal’s contention that the conduct of the appellant
leaves much to be desired is also correct. We are of the view
that having issued a notice for arbitration way-back on
24.05.2007, there was no reason whatsoever to delay a Section
11 application for a period of two and a half years until
December, 2009. The appellant knew that Clause 12 could not
possibly be construed as an arbitration clause, yet somehow
sought to delay the proceedings not joining his brethren in the
civil suit that was filed by them. Equally, his conduct during the
pendency of the Section 11 petition leaves a lot to be desired.
Even before judgment was pronounced in the Section 11
petition on 22.07.2011, the Appellant approached another
forum, namely, the Company Law Board on 16.06.2011, for
reliefs based upon the MOU. He, thereafter, continued with the
Company Petition which would have led us to believe that he
was abandoning any further recourse against the judgment
dated 22.07.2011, but then on second thoughts, filed a Special
Leave Petition with a delay of 358 days against the judgment
rejecting his Section 11 petition on 22.07.2011. During the
pendency of the Special Leave Petition as well, his conduct
leaves much to be desired. On 24.01.2017, he asked that his
petition that was filed before the Company Law Board be
withdrawn not with the liberty to pursue arbitration, as one
would have expected, but with the liberty to file a fresh company
petition on the same set of facts. All this leads us to observe
that, apart from the decision on merits, our discretionary
jurisdiction under Article 136 of the Constitution also should not
be exercised in favour of such a person.
14) The appeal is disposed of accordingly.
 (R.F. Nariman)

 (Indu Malhotra)
New Delhi;
July 23, 2018

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