Introduction 

• This is a landmark judgment discussing whether a particular clause in a contract is an arbitration clause or not.    
• This judgment was delivered by a 2-judge bench comprising of Justice RF Nariman and Justice Indu Malhotra.    

Facts

• The case involves a Memorandum of Understanding (MoU) dated 8th December 2005 for sale and purchase of shares in Mancherial Cement Company Private Limited. 
• The parties were directors of the company. 
• The main dispute was whether Clause 12 of the MoU constituted a valid arbitration clause. 
• The Appellant (Shyam Sunder Agarwal) argued that Clause 12 contained the essential elements of an arbitration clause:  
  • It used words like "decision" 
  • Mentioned "Mediators/Arbitrators" 
  • Referred to "any breaches" 
  • Stated that the decision would be final and binding 
• The Respondents argued that:  
  • The term "Mediators/Arbitrators" was used loosely 
  • The two named persons (K. Sudhakar Rao and Gone Prakash Rao) were escrow agents 
    • Escrow agents are a neutral third party that holds assets and funds involved in any transaction until the conditions are met is an escrow agent. An escrow agent protects both the buyer and seller to ensure that the transaction is smooth.   
  • Their role was to ensure successful transaction implementation, not to resolve disputes 

Issue Involved  

• Whether Clause 12 of the MoU can be considered a legitimate arbitration clause that allows for dispute resolution through arbitration? 

Observations 

• The Supreme Court unanimously held that Clause 12 is not a valid arbitration clause. 
• The "Mediators/Arbitrators" were essentially escrow agents whose purpose was to facilitate the transaction, not to resolve disputes. 
• The Court found that the language used was loose and the primary objective was to prevent disputes, not adjudicate them. 
• The Court was also critical of the Appellant's conduct, noting deliberate delays and forum shopping. 
• The appeal was hence dismissed 

Conclusion 

• The Supreme Court's judgment highlights the importance of carefully drafting arbitration clauses and ensures that mere administrative mechanisms cannot be construed as dispute resolution instruments. 
• By scrutinizing the MoU's language and intent, the Court reaffirmed the essential requirements for a valid arbitration agreement, emphasizing substance over form. 

[Original Judgment]