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

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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6872 OF 2018

(Arising out of SLP (Civil) No. 34591/2012)

SHYAM SUNDER AGARWAL …APPELLANT (S)

VERSUS

P. NAROTHAM RAO AND ORS. …RESPONDENT (S)

J U D G M E N T

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

clause.

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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.

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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,

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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

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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.

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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.

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Particulars of Cheque Amount

Date Ch. No. Bank   &   Branch   Holder

Name

09.12.2005 450547 Andhra   Bank,   St.   John’s

EM   High   School   Branch,

Karimnagar   of   S.

Hareender Rao

Rs.25,00,000/­

09.01.2006 450543 Andhra   Bank,   St.   John’s

EM   High School Branch,

Karimnagar   of   S.

Hareender Rao

Rs.78,12,500/­

09.01.2006 450444 HDFC   Bank,

Himayathnagar   Branch,

Hyderabad   of   Shyam

Sunder Agarwal

Rs.78,12,500/­

09.02.2006 450544 Andhra   Bank,   St.   John’s

EM   High   School   Branch,

Karimnagar   of   S.

Hareender Rao

Rs.78,12,500/­

09.02.2006 450445 HDFC   Bank,

Himayathnagar   Branch,

Hyderabad   of   Shyam

Sunder Agarwal

Rs.78,12,500/­

09.03.2006 450545 Andhra   Bank,   St.   John’s

EM   High   School   Branch,

Karimnagar   of   S.

Rs.78,12,500/­

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Hareender Rao

09.04.2006 450546 Andhra   Bank,   St.   John’s

EM   High   School   Branch,

Karimnagar   of   S.

Hareender Rao

Rs.78,12,500/­

09.04.2006 450447 HDFC   Bank,

Himayathnagar   Branch,

Hyderabad   of   Shyam

Sunder Agarwal

Rs.78,12,500/­

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

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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

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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

hereinabove.”

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

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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

completed.

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

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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

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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

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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

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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

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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

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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

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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.

.…………………………J.

(R.F. Nariman)

………………………..…..J.

(Indu Malhotra)

New Delhi;

July 23, 2018