Babanrao Rajaram Pund VERSUS M/s. Samarth Builders & Developers & Anr.

Babanrao Rajaram Pund VERSUS M/s. Samarth Builders & Developers & Anr.

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले


REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. ____ OF 2022
[ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.15989 OF 2021]
Babanrao Rajaram Pund                                            …. Appellant
VERSUS
M/s. Samarth Builders & Developers & Anr.                ... Respondents
JUDGMENT
Surya Kant, J.
1. Leave granted.
2. The bone of contention in the instant proceedings is whether
Clause 18 of the Development Agreement dated 29.05.2014 possesses
the necessary ingredients to constitute a legal and valid arbitration
agreement? The genesis of the dispute lies in the aforesaid agreement
executed   between   the   parties   for   construction   of   an   apartment
complex   called   “Amay   Apartments”.   The   construction   was   to   be
Page 1 of 16
carried out by Respondent No.1 partnership firm on the land owned
by the Appellant. Respondent No. 2 is the partner of Respondent No. 1
partnership firm. 
Factual Background:
3. The Appellant owns and possesses the land bearing Plot Nos. 13
&   14,   measuring   4000   sq.   ft   situated   in   Village   Deolai,   District
Aurangabad, Maharashtra. Appellant harbored a desire to develop the
said property through the construction of residential and commercial
complexes. Respondent No.1 is a developer engaged in the business of
construction   and   development   of   residential   and   commercial
buildings. When it came to know that the Appellant wished to develop
his   property,   the   First   Respondent   approached   the   Appellant   and
offered to develop the site. The Appellant and Respondent No. 1, thus,
entered into a ‘Development Agreement’ and pursuant thereto the
Appellant also executed a General Power of Attorney (GPA), in favour
of Respondent No. 1. 
4. The   Agreement   stipulated   that   the   First   Respondent   shall
construct “Amay Apartments” within a period of 15 months which was
extendable, incumbent on payment of a penalty amount. Respondent
No. 1 agreed to hand over the constructed area to the extent of 45% to
the Appellant on or before the completion of the period of 15 months,
and to retain the remaining 55% of the developed portion. The Parties
also   entered   into   a   Deed   of   Declaration   under   Section   2   of   the
Maharashtra Apartment Ownership Act,1970 which was registered on
Page 2 of 16
20.10.2015   for   the   purposes   of   retaining   the   facilities,   amenities,
common spaces, and to specify the portions of the developed property.
Respondent No. 1, however, failed to complete the development works
within   the   stipulated   time   of   15   months.   The   Appellant   served
Respondents with a Legal Notice on 11.07.2016, communicating his
desire to terminate the Development Agreement and cancel the GPA
as the period of 15 months along with the extendable period of 3
months had already lapsed. In addition to this, the Appellant issued a
publication in the newspaper dated 11.07.2016 informing the general
public that he had terminated the Agreement as well as the GPA.
Respondents   in   their   reply   to   the   Legal   Notice   controverted   the
contents of the Notice. This gave  rise to disputes and differences
between the parties. 
5. It is pertinent to mention at this juncture that Clause 18 of the
Development Agreement, purported to be an ‘arbitration clause’, reads
as follows: 
“18. All the disputes or differences arising between
the   parties   hereto  as   to   the   interpretation   of   this
Agreement or any covenants or conditions thereof or
as   to   the   rights,   duties,   or   liabilities   of   any   part
hereunder or as to any act, matter, or thing arising
out of or relating  to  or under this Agreement  (even
though   the   Agreement  may   have   been   terminated),
the  same  shall  be   referred  to  arbitration  of  a  Sole
Arbitrator   mutually   appointed,   failing   which,   two
Arbitrators,   one   to   be   appointed   by   each   party   to
dispute or difference and these two Arbitrators will
appoint a third Arbitrator and the Arbitration shall
Page 3 of 16
be governed by the Arbitration and Conciliation Act,
1996 or any re­enactment thereof.”
6. The Appellant in the interregnum, sought an injunction under
section 9 of the Arbitration and Conciliation Act, 1996 (the Act) in
M.A..R.J.I No. 285 of 2016 and the District Court at Aurangabad vide
order dated 30.09.2016, restrained Respondent No. 1 from selling any
tenements on the developed property till further orders. 
7. Thereafter, the Appellant invoked the arbitration clause in the
Development Agreement on 07.11.2016 and issued a notice to this
effect to the Respondents regarding referral  of the dispute to Mr.
Shyam Rajale as the sole arbitrator. Though the notice was duly
served, the Respondents failed to respond to it. This led the Appellant
to file an application under section 11 of the Act before the High
Court. 
8. It was contended on behalf of the Respondents before the High
Court that the contract lacked the express wording necessary for it to
be considered a valid and binding agreement to refer the disputes to
arbitration. Specifically, the absence of the term, “the parties agreeing
in writing to be bound by the decision of an arbitral tribunal”, was
highlighted by Respondent No. 1 to contend that Clause 18 of the
Development Agreement was not enforceable. To buttress this plea,
reliance was placed on the decisions of this Court in  Bihar  State
Mineral Development Corporation and Anr. v. Encon Builders (I)
Page 4 of 16
(P)  Ltd.1
, and  Karnataka  Power   Transmission  Corporation  Ltd.
and Anr. v. Deepak Cables (India) Ltd.2
, wherein it was held that in
case of exclusion of attributes of an arbitration agreement from a
dispute resolution clause, it would not amount to a valid arbitration
agreement. Respondents further urged that it was crucial that “the
parties should have agreed that the decision of the private tribunal in
respect of the disputes will be binding on them.” 
9. Although the High Court vide the impugned  judgment dated
07.07.2021,   acknowledged   the   existence   of   Clause   18   in   the
Agreement that provides for disputes to be referred to arbitration, it
accepted the contentions of Respondents and came to the conclusion
that Clause 18 indeed lacks certain essential ingredients of a valid
arbitration agreement, as it does not mandate that the decision of the
arbitrator will be final and binding on the parties. Consequently, the
High   Court   dismissed   the   application   as   not   maintainable.   The
aggrieved Appellant is now before this Court. 
10. Notice was issued to the Respondents on 20.10.2021 and as per
the office report dated 18.08.2022, they have been duly served but
have not entered appearance. We accordingly proceeded to hear the
matter ex parte on 22.08.2022. 
1 (2003) 7 SCC 418.
2 (2014) 11 SCC 148.
Page 5 of 16
Submissions: 
11. Learned counsel for the Appellant vehemently urged that Clause
18 crystallises the intention of the parties to refer disputes between
them to arbitration and to be bound by the decision of the arbitrator.
The High Court failed to read into the intention of the parties and
erroneously drew an inference contrary to the spirit and object of
Clause 18.  According to him, the clause clearly mentions that “all the
disputes or differences arising between the parties” are to be referred
to arbitration of a Sole Arbitrator mutually appointed, failing which
the   dispute   shall   be   referred   to   a   tribunal   consisting   of   three
arbitrators.   Moreover,   there   is   no   alternative   provided   in   the
agreement other than the arbitration for the purpose of resolution of
the disputes. Even the governing law of the arbitration  had been
agreed upon by the parties as the Arbitration and Conciliation Act,
1996, manifesting their animus to be bound by the decision of the
arbitrator. There are also no specific exclusions of any attributes of an
arbitration agreement in Clause 18 as envisaged by this Court in
Deepak   Cables  which, in turn, relied upon  Jagdish   Chander   v.
Ramesh Chander & Ors.3
12. Finally, it was submitted that this Court has time and again held
that an arbitration clause need not be penned down in any specific
form. The High Court was thus not justified in holding that Clause 18
3 (2007) 5 SCC 719. 
Page 6 of 16
of the Development Agreement did not meet the essential criteria of a
valid arbitration clause. 
Analysis
13. It is a settled proposition of law that the existence of a valid
arbitration agreement under Section 7 of the Act is sine­qua­non for a
court to exercise its powers to appoint an arbitrator/arbitral tribunal
under Section 11 of the Act. The short question that falls for our
consideration is whether Clause 18 constitutes a valid arbitration
clause for the purpose of invoking powers under Section 11 of the
Act? 
14. Section 2 (1)(b) of the Act,  defines  “arbitration agreement” to
mean an agreement referred to in section 7, which inter­alia lays
down the following characteristics of an Arbitration Agreement:
“7. Arbitration agreement— 
(1)   In   this   Part,   “arbitration   agreement”   means   an
agreement by the parties to submit to arbitration all or
certain disputes which have arisen or which may arise
between them in respect of a defined legal relationship,
whether contractual or not. 
(2) An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate
agreement. 
(3) An arbitration agreement shall be in writing. 
(4) An arbitration agreement is in writing if it is contained
in— 
(a) a document signed by the parties; 
(b)  an exchange  of letters, telex, telegrams, or
other   means   of   telecommunication   [including
communication through electronic means] which
provide a record of the agreement; or
(c)   an   exchange   of   statements   of   claim   and
defence in which the existence of the agreement
Page 7 of 16
is alleged by one party and not denied by the
other. 
(5)   The   reference   in   a   contract   to   a   document
containing   an   arbitration   clause   constitutes   an
arbitration agreement if the contract is in writing and
the   reference   is   such   as   to   make   that   arbitration
clause part of the contract.”
15. It may be seen that section 7 of the Act does not mandate any
particular form for the arbitration clause. This proposition was settled
by   this   Court   way   back   in  Rukmanibai   Gupta   v.   Collector,
Jabalpur   and   Ors.4
,   while   viewing   erstwhile   section   2(a)   of   the
Arbitration Act, 1940 which contained the definition of “arbitration
agreement”. It was held that:  
“6. ……Arbitration agreement is not required to be in any
particular   form.   What   is   required   to   be   ascertained   is
whether  the  parties  have  agreed   that   if   disputes  arise
between them in respect of the subject­ matter of contract
such dispute shall be referred to arbitration, then such an
arrangement would spell out an arbitration agreement. A
passage from RUSSELL ON  ARBITRATION, 19th Edn., p. 59,
may be referred to with advantage:
If it appears from the terms of the agreement
by which a matter is submitted to a person’s
decision  that   the   intention   of  the  parties   was
that he should hold an inquiry in the nature of a
judicial inquiry and hear the respective cases of
the parties and decide upon evidence laid before
him, then the case is one of an arbitration.”
16. This very principle was reiterated in K.K.Modi v. K.N.Modi and
Ors.5 which   also   dealt   with   section   2(a)   of   the   1940   Act.   While
4 (1980) 4 SCC 556.
5 (1998) 3 SCC 573. 
Page 8 of 16
attempting to decide whether the arbitration clause embodied in a
Memorandum of Understanding was a valid arbitration clause or not,
this   Court   laid   down   the   essential   attributes   of   an   arbitration
agreement in following terms:
“17. Among the attributes which must be present for an
agreement to be considered as an arbitration agreement
are:
(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 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
Page 9 of 16
to be an arbitration, and whether the agreement requires
the tribunal to decide the dispute according to law.”
[Emphasis applied]
17. In the afore­cited case, the dispute resolution clause stipulated
that the disputes were to be referred to the Chairman, IFCI or his
nominee. This Court came to the conclusion that the clause in dispute
did not constitute a valid arbitration covenant as it could not be said
with   clarity   that   the   parties   contemplated   the   disputes   to   be
arbitrated. 
18. Encon Builders (supra) placed reliance on K.K. Modi’s case and
further condensed the essential features of an arbitration agreement
into four elements i.e.:
“13.   The   essential   elements   of   an   arbitration
agreement are as follows: 
(1) There must be a present or a future difference in
connection with some contemplated affair.
(2)   There   must   be   the   intention   of   the   parties   to
settle such difference by a private tribunal.
(3) The parties must agree in writing to be bound by
the decision of such tribunal.
(4) The parties must be ad idem.”
19. It is important to appreciate the nature of the arbitration clause
in Encon Builders’ case, which was to the following effect:
 “In case of any dispute arising out of the agreement, the
matter shall be referred to the Managing Director, Bihar
State Mineral  Development Corporation Limited, Ranchi,
whose decision shall be final and binding.” 
Page 10 of 16
20. The above­reproduced clause was held to be invalid primarily
due to the fact that the Managing Director, who was chosen to be the
adjudicator­cum­arbitrator   of   the   dispute(s)   arising   between   the
parties, was likely to be biased as he had an interest in the outcome of
the case. The principle that one cannot be a judge of his own cause
was   thus   aptly   applied   to   invalidate   the   subject   clause.   It   was
evidently not a case of an arbitral clause lacking essential ingredients
of an arbitration agreement. In our opinion, this case renders no
assistance to the Respondents.  
21.    In  Jagdish  Chander  (supra),  again a two­Judge bench of this
Court dealt with a peculiar arbitration clause, stipulating that: 
“(16) If during the continuance of the partnership or at any
time   afterwards   any   dispute   touching   the   partnership
arises between the partners, the same shall be mutually
decided by the partners or shall be referred for arbitration
if the parties so determine.” 
[Emphasis applied]
Reference to the arbitration under the above reproduced clause
was contingent on the determination by the parties, as their explicit
intention   to   arbitrate   was   conspicuously   missing.   This   Court,
therefore, held that the arbitration clause was invalid as the parties
had   shown   mere   desire   or   hope   to   have   the   disputes   settled   by
arbitration.  While interpreting Section 7 of the 1996 Act and placing
Page 11 of 16
reliance on  K.K.Modi  (supra) as well as  Encon  Builders  (supra), it
was further held that:­ 
“8.(i)….Where there is merely a possibility of the parties
agreeing to arbitration in future, as contrasted from an
obligation to refer disputes to arbitration, there is no valid
and binding arbitration agreement…….
(iii) Where the clause provides that in the event of disputes
arising between the parties, the disputes shall be referred
to arbitration, it is an arbitration agreement.” 
22. Adverting to the case in hand, it may be seen that the contents
and   the   nature   of   Clause   18   are   substantially   different   from   the
dispute resolution pacts in  K.K.Modi,  Jagdish  Chander,  or  Encon
Builders (supra). We say so for three reasons. Firstly, apart from the
fact that Clause 18 of the Development Agreement uses the terms
“Arbitration”   and   “Arbitrator(s)”,   it   has   clearly   enunciated   the
mandatory nature of reference to arbitration by using the term “shall
be  referred to arbitration of a Sole Arbitrator mutually appointed,
failing which, two Arbitrators, one to be appointed by each party to
dispute or difference”.  Secondly, the method of appointing the third
arbitrator has also been clearly mentioned wherein the two selected
Arbitrators   are   to   appoint   a   third   arbitrator.  Finally,   even   the
governing law was chosen by the parties to be “the Arbitration and
Conciliation   Act,   1996   or   any   re­enactment   thereof.”   These   three
recitals,   strongly   point   towards   an   unambiguous   intention   of   the
Page 12 of 16
parties at the time of formation of the contract to refer their dispute(s)
to arbitration. 
23. We are, therefore, of the firm opinion that the High Court fell in
error in holding that the Appellant’s application under section 11 was
not maintainable for want of a valid arbitration clause. We find that
Clause 18 luminously discloses the intention and obligation of the
parties to be bound by the decision of the tribunal, even though the
words “final and binding” are not expressly incorporated therein. It
can be gleaned from other parts of the arbitration agreement that the
intention of the parties was surely to refer the disputes to arbitration.
In the absence of specific exclusion of any of the attributes of an
arbitration agreement, the Respondents’ plea of non­ existence of a
valid arbitration clause, is seemingly an afterthought. 
24. Even if we were to assume that the subject­clause lacks certain
essential characteristics of arbitration like “final and binding” nature
of the award, the parties have evinced clear intention to refer the
dispute to arbitration and abide by the decision of the tribunal. The
party autonomy to this effect, therefore, deserves to be protected.
25. The deficiency of words in agreement which otherwise fortifies
the   intention   of   the   parties   to   arbitrate   their   disputes,   cannot
legitimise the annulment of arbitration clause. A three­Judge Bench of
this Court in Enercon (India) Ltd. and Ors. v. Enercon Gmbh and
Page 13 of 16
Anr.6
  dealt   with   an   arbitration   clause   that   did   not   provide   for   a
method   of   electing   the   third   arbitrator.   The   court   held   that  “the
omission is so obvious that the court can legitimately supply the
missing line.” The line “the two arbitrators appointed by the parties
shall appoint the third arbitrator” was read into the clause so as to
give effect to it. It was further held that: 
“88. In our opinion, the courts have to adopt a pragmatic
approach and not a pedantic or technical approach while
interpreting   or   construing   an   arbitration   agreement   or
arbitration clause. Therefore, when faced with a seemingly
unworkable arbitration clause, it would be the duty of the
court to make the same workable within the permissible
limits   of   the   law,   without   stretching   it   beyond   the
boundaries of recognition. In other words, a common sense
approach has to be adopted to give effect to the intention
of the parties to arbitrate. In such a case, the court ought
to adopt  the attitude  of  a reasonable business  person,
having business common sense as well as being equipped
with the knowledge that may be peculiar to the business
venture. The arbitration clause cannot be construed with a
purely   legalistic   mindset,   as   if   one   is   construing   a
provision in a statute….”
26. The   UNCITRAL   Model   Law   on   International   Commercial
Arbitration, 1985 from which the Arbitration and Conciliation Act,
1996 originated, envisages minimal supervisory role by courts. When
section 7 or any other provisions of the Act do not stipulate any
particular form or requirements, it would not be appropriate for a
court to gratuitously add impediments and desist from upholding the
validity of an arbitration agreement. 
6 (2014) 5 SCC 1.
Page 14 of 16
27. There is no gainsaying that it is the bounden duty of the parties
to abide by the terms of the contract as they are sacrosanct in nature,
in addition to, the agreement itself being a statement of commitment
made by them at the time of signing the contract. The parties entered
into the contract after knowing the full import of the arbitration clause
and they cannot be permitted to deviate therefrom. 
28. It is thus imperative upon the courts to give greater emphasis to
the substance of the clause, predicated upon the evident intent and
objectives of the parties to choose a specific form of dispute resolution
to manage conflicts between them. The intention of the parties that
flows from the substance of the Agreement to resolve their dispute by
arbitration are to be given due weightage. It is crystal clear to us that
Clause   18,   in   this   case,   contemplates   a   binding   reference   to
arbitration between the parties and it ought to have been given full
effect by the High Court.
Conclusion: 
29. In light of the above discussion, the Civil Appeal stands allowed.
Clause   18   of   the   Development   Agreement   is   held   to   be   a   valid
arbitration clause. Consequently, the impugned judgment and order
dated 07.07.2021 passed by the High Court of Judicature of Bombay
at Aurangabad is set aside. 
Page 15 of 16
30. Since the Appellant has already invoked the arbitration clause,
without any further ado, this Court appoints Mr. Justice P.V. Hardas
(Contact   number:   +91­9834933135),   former   Judge   of   the   Bombay
High Court, as the Sole Arbitrator to resolve all disputes/differences
between the parties.  The learned Arbitrator shall be entitled to a fee
as per  the Fourth Schedule of the Act, as amended from time to time.
The  Registry is directed to send a copy of this order to the learned
Sole Arbitrator. 
31. The issues on merits that may be raised by the parties are kept
open and shall be determined by the learned Arbitrator in accordance
with law. 
………….……………..J.
(SURYA KANT)
………….……………..J.
(ABHAY S. OKA)
NEW DELHI:
SEPTEMBER 07, 2022
Page 16 of 16

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