Court: The Supreme Court of India.
Coram: Mukesh R Shah, J.
Date: 30th September 2022
Tarun Aggarwal Projects LLP (“Petitioner”) entered into a collaboration agreement dated 07.05.2009 (“the Agreement”) for the development of a residential colony with Emaar India Limited (“Defendant”). Subsequently, they entered into an addendum agreement dated 19.04.2011 (“Addendum”). Clause 36 of the Addendum stipulated that in case of any disputes which are related to Clauses 3, 6 and 9, the other party had the right to approach the Court seeking specific performance of the Agreement.
Clause 37 of the same expressly stated that except for the disputes that are mentioned in Clause 36, disputes arising out of the Addendum shall be referred to arbitration.
A dispute arose between the parties where the Petitioner claimed that Defendant did not comply with the obligations under the Addendum. In pursuance of this, they issued a legal notice dated 20.11.2019 which raised a demand for physical possession of 5 plots and demanded a sum of Rs. 10 crores for losses. Petitioner invoked Clause 37 of the Addendum to state that the dispute is arbitrable and accordingly appointed their Arbitrator while requesting Defendant to appoint theirs. Defendant denied the appointment of the Arbitrator. Aggrieved, Petitioner approached the High Court for appointment of arbitrators under Section 11(5) & (6) of the Arbitration and Conciliation Act 1996 (The Act) in terms of Clause 37 of the Addendum.
The High Court ruled in favour of the Petitioner. The Court reasoned the decision on a conjoint reading of Clause 36 & 37 which according to them meant that although a right to seek specific performance does exist, it does not bar settlement of disputes through the Act. The impugned order was challenged by Emaar consequently.
Whether the Court can appoint an Arbitrator under Section 11(5) & (6) of the Act without holding an inquiry on the arbitrability of the dispute?
The Court noted that Clause 37 of the Addendum stated that all disputes apart from the ones in Clause 36 have to be referred to arbitration which clearly makes the disputes in Clause 36 i.e., concerning Clause 3, 6 and 9 non-arbitrable.
The Court relied on previous judgments to establish that contracts have to be read literally unless there exists ambiguity to acknowledge the intention of the parties to exclude a matter from arbitrability. Further, the Court relied on Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 to explain the law on arbitrability, and elaborated that the Court has the authority to hold the inquiry with respect to arbitrability.
This interference is entered into at the stage of section 8 and section 11 of the Act when it is ex-facie certain that the arbitration agreement is non-existent, invalid or the disputes are non arbitrable. But the level of judicial scrutiny would depend upon the nature and level of non arbitrability as recognized. The Court emphasized that this is only a limited and restricted review to protect parties from forcefully participating in unwanted arbitration and not an attempt to usurp jurisdiction from the arbitral tribunal.
Based on precedent, it was observed that the High Court was at the very least required to hold a prima facie inquiry to decide upon the arbitrability of the dispute.
The Supreme Court concluded that there may be judicial interference at the stage of Section 8 or section 11 of the Act when ex-facie the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable. However, the level of judicial scrutiny would depend upon the nature and level of non-arbitrability.