Shyam Sunder Agarwal v. P. Narotham Rao & Ors.
Background
The parties, all directors of a private company, had signed a Memorandum of Understanding (MoU) in 2005 for the sale and purchase of company shares, under which two named individuals were to hold certain cheques and share-transfer documents in escrow until the transaction was completed. A dispute arose over whether Clause 12 of the MoU, which said these two individuals' "decision" on "any breaches" would be "final and binding", amounted to an arbitration clause, which would let the appellant seek appointment of an arbitrator under Section 11 of the Arbitration Act.
Decision Breakdown
The Supreme Court held that the two named individuals were only escrow agents appointed to ensure smooth implementation of the share-transfer transaction, not arbitrators empowered to adjudicate disputes between the parties. Applying the well-established tests from K.K. Modi vs. K.N. Modi for identifying a true arbitration clause (such as a tribunal deciding rights impartially and judicially after hearing both sides), the Court found Clause 12's "decision" was only a provisional, transaction-period decision meant to prevent disputes, not resolve them through adjudication. The Court also noted the appellant's own inconsistent conduct, pursuing remedies before a Company Law Board while also claiming arbitration applied, as further reason not to exercise discretion in his favour, and dismissed the appeal.
Lesson Learnt
Not every clause that uses words like "arbitrator" or says a decision is "final and binding" is actually an arbitration clause: courts look at the substance of the role (such as whether it is to prevent disputes versus to adjudicate them impartially) rather than the labels used in the contract.