Reference to Arbitration in the dispute resolution clause in any agreement is a pre-requisite to initiating arbitral proceedings. Even a mere reference is sufficient enough to constitute an arbitration agreement as opined by the Supreme Court in various precedents. However, when a clause stating prevention of disputes from occurring and ensuring smooth implementation of the agreement shall not constitute as an arbitration agreement as concluded by the Supreme Court in Shyam Sunder Agarwal vs. P Narotham Rao. The facts of the case are that in an agreement about handing over nine cheques favouring one person to two other persons, those two persons are termed as ‘mediators/arbitrators’. It was further stated that the cheque will be under their custody till satisfactory completion of the entire transaction. It also adds ‘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’.

The question came up before the bench of Justice RF Nariman and Justice Indu Malhotra whether simple terms like ‘decision’ and ‘mediators/arbitrators’ in certain clauses of an agreement would constitute an arbitration agreement. After referring to the entire contents of the MOU, the court observed that the two escrow agents mentioned in the MOU are not persons who are capable to decide disputes arising out of the MOU and stated that:


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.”

Further the Court referred to the decision of the Apex Court in Bihar State Mineral Development Corporation vs. Encon Builders (I) (P) Limited, (2003) 7 SCC 418 in which the judgment stated that a clause which is inserted in an Agreement for the purpose of prevention of a dispute will not be an arbitration agreement.

Regarding the filing of the civil suit by the other purchasers in the agreement, the Bench observed that the conduct of the purchasers to approach the civil court made it evident that the purchasers were aware of Clause 12 of the MOU not being an arbitration clause.


Image Link:

Judgment: Shyam Sunder Agarwal Versus P Narotham Rao and Ors