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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  well-

known  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 two-

Judge  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