Arbitration Clause Valid Even in the Absence of the words "Final" and "Binding"

The Supreme Court of India, vide judgement dated 07 September, 2022, held that an Arbitration clause has to be given effect irrespective of the fact that it doesn’t expressly state that decision of the Arbitrator is final and binding. The Supreme Court, in the matter of Babanrao Rajarum Pund v. M/S Samarth Builders & Developers & Anr., held that the absence of the words “final and binding”, though they intend to solidify the intention of the parties to settle their dispute through arbitration, cannot vindicate the invalidation of the arbitration clause.

The brief facts giving rise to the present dispute were that the Appellant (Babanrao Rajarum Pund) and the Respondent (M/s Samarth Builders & Developers & Anr.) entered into a Development Agreement for construction of “Amay Apartments”. According to Clause 18 of the Agreement between the parties: 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 be governed by the Arbitration and Conciliation Act, 1996 or any reenactment thereof.”

The High Court of Bombay, while dismissing an application filed under Section 11 of the Arbitration Act, held that clause doesn’t contain certain essential ingredients of a valid arbitration agreement, as it does not mandates that the decision of the arbitrator will be final and binding on the parties. Thereafter, an appeal was preferred by the Appellant (Babanrao Rajarum Pund) in the Supreme Court, raising the issue whether Arbitration Clause of the Development Agreement between the parties is valid clause for invoking Section 11 of the Arbitration and Conciliation Act.

The Supreme Court observed that there is no mandatory requirement of any specific format for the arbitration clause under Section 7 of the Arbitration and Conciliation Act. The Supreme Court further observed that the Arbitration Clause between the parties discloses the intention and obligation of the parties to be bound by the decision of the tribunal, even if the words “final” and binding” are not expressly mentioned in the clause therein. The court further held that “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”.

Therefore, the Supreme Court allowed the civil appeal and set aside the order of the High Court of Bombay and appointed a Sole Arbitrator to resolve the dispute between the parties.

By - C. George Thomas