A Memorandum of Understanding (MoU) was entered into between the Parties in January, 2020 to promote business interests and profitability. The MoU provided, inter alia, that the Parties shall not attempt to solicit or contact employees of the other. Disputes arose between the Parties as MSD Telematics Pvt. Ltd. (“MSD”) allegedly breached the non-solicitation clause. It also indulged in other criminal activities like tampering with servers of IMZ Corporate Pvt. Ltd. (“IMZ”). Hence, IMZ invoked arbitration. The arbitration clause stated that “all disputes and differences arising out of or in connection with the MoU shall be attempted to be resolved mutually through negotiations between Parties, failing which the same shall be referred and decided by a sole Arbitrator…”. IMZ initiated arbitration at the Delhi International Arbitration Centre. MSD did not respond to the Notice of arbitration, therefore, IMZ approached Delhi HC for appointment of Arbitrator. MSD argued that 1) the subject matter of the disputes were not arbitrable on account of fraud (questioning the existence and validity of the MoU itself) 2) non-compliance with the pre-arbitration procedure wherein the parties should attempt to resolve the disputes through mutual negotiations and 3) the MoU being an unstamped document was not a contract enforceable by law.

Decision of the Court:

The Delhi High Court, in appointing an arbitrator under section 11 of the Arbitration and Conciliation Act, 1996 held that it only needed to examine the existence of the arbitration agreement and arbitral disputes. It observed that the allegations of fraud were not conclusive to question the veracity of the MoU, and that such claims could be argued on merits before the arbitrator. Relying on a Supreme Court decision, the Court followed the principle, “when in doubt, do refer the matter to arbitration”. With regards to non- compliance with the pre-arbitration procedure, the Court observed that MSD could not initiate criminal proceedings against IMZ on one front and try to resolve the disputes through negotiation on the other. In this context, the Court found that mandatory negotiation would be an “empty formality” and should not preclude parties from pursuing the dispute resolution process that was agreed upon. Finally, on the ground of non-payment of stamp duty on a commercial contract, the Court opined that “the plea of agreement being unstamped [would] not prevent the Court in appointing an arbitrator.” (relying on N N Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., 2021 SCC Online SC 13). The Appeal was allowed on the above grounds.

Aarna Law Comment:

The Court reaffirmed the position of its limited interference in the appointment of arbitrators. Since criminal proceedings had been initiated, the Court found it irreconcilable in this case, that parties be expected to pursue meaningful negotiations simultaneously. Further, on the issue of non-payment of stamp duty, the Court relied on Supreme Court’s decision in NN Global, which held that non-payment of stamp duty would not invalidate the arbitration agreement. The decision in NN Global has been referred to a constitutional bench due to a conflicting view taken in Vidya Drolia v. Durga Trading Corporation, 2020 SCC Online SC 1018.