Mere use of word arbitrator or mediators do not create arbitration agreement

SHYAM SUNDER AGARWAL v. P. NAROTHAM RAO
Supreme Court of India
Civil Appeal No. 6872 of 2018

The Apex Court held that - Dispute resolution clause in MoU used words "Mediators/Arbitrators", "any breaches" and "decision to be final" is not an Arbitration Clause /Agreement.

BRIEF FACTS

1. The present dispute arises out of a Memorandum of Understanding (MoU)/Agreement executed between the parties for sale and purchase of shares of a Company called M/s Mancherial Cement Company Private Limited of which all the parties are Directors.

2. 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 clause, as in the said clause 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.

DECISION

3. 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.

4. 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.

5. This becomes even clearer when Clauses 8 and 11 are seen minutely.

6. 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.

7. 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 completed.

8. We agree 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 protem 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 well-known latin expression, they are "functus officio" after the transaction gets completed.

9. 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.

10. 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. 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.

11. 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.