The Supreme Court of India recently dealt with the question of whether the Development Agreement stands cancelled or whether the agreement can be lawfully cancelled, would be a suit proceeding or an arbitration.

The appeal¹ was filed by the defendant in a suit filed by the respondent. The respondent-plaintiff claimed to be the owner of the suit property. There was a Development Agreement-cum-General Power of Attorney (for short, `the Development Agreement') executed by and between the appellant and the respondent. By the Development Agreement, the appellant was granted permissive possession for the purposes of carrying out development work on the property subject matter of the Development Agreement. There was a dispute between the parties, which led to the respondent cancelling the Development Agreement. The respondent issued a legal notice to the appellant calling upon him to execute a deed of cancellation of the Development Agreement. The prayer in the suit was for a decree directing the appellant to execute a deed of cancellation in respect of the Development Agreement. There was also a prayer for the delivery of possession of the suit property.

After the suit summons was served, the appellant filed an application under Rule 11 of Order VII of the Code of Civil Procedure, 1908 stating that in view of the arbitration clause in the Development Agreement, the dispute ought to be referred to arbitration. The Trial Court rejected the plaint and exercised power under section 8 of the Arbitration and Conciliation Act, 1996 directing the parties to refer their dispute to arbitration. In a revision application preferred by the respondent, the High Court had interfered and has set aside the order of the Trial Court.

The Hon’ble Supreme Court held that the dispute arises out of and in connection with the Development Agreement. Therefore, as per the arbitration clause, if the issue concerning cancellation is not mutually resolved, the same ought to be referred to arbitration. It further observed that the only ground on which the High Court has interfered is that the adjudication pursuant to invocation of Section 31 of the Specific Relief Act is an adjudication in rem.

However, in the case of Deccan Paper Mills Company Limited, the Supreme Court has categorically held that it is impossible to hold that an action instituted under Section 31 of the Specific Relief for cancellation of an instrument is an action in rem. The Supreme Court thus held that in view of the applicability of the arbitration clause to the dispute subject matter of the suit filed by the respondent, the learned Trial Judge was justified in passing an order under Section 8 of the Arbitration Act by directing that the dispute be referred to the arbitration and thus allowed the appeal.

By - Lakshmi Raman