Can arbitration clause under a terminated memorandum of understanding (MOU) be enforced?

Can arbitration clause under a terminated memorandum of understanding (MOU) be enforced?

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I had entered into a Memorandum of Understanding (MOU) with a builder for development of my plot. There was an arbitration clause in this MOU which required that any unresolved dispute between the two parties relating to implementation or breach of the MOU would be referred to arbitration under the provisions of the Arbitration and Conciliation Act, 1996. However, ultimately, our MOU could not be converted into a final agreement for developing my plot, and it was terminated since there were certain serious differences between the two parties. At this stage, both parties have incurred certain expenses. Now, the builder wants to refer the dispute to arbitration on the basis of the above arbitration clause in the MOU. But, this MOU has already been terminated and is no more valid. Is it possible for the builder to force arbitration on the basis of the said MOU which is no more valid and which has already been terminated?

Answer: Unfortunately for you, the answer is “yes”. The arbitration clause in the MOU can be enforced even though the MOU in which it was contained has been terminated or is no more valid. In fact, the facts of your case are covered directly under some Supreme Court judgments, as mentioned below.

In the case of Everest Holding Ltd. v. Shyam Kumar Shrivastava, (2008) 16 SCC 774, in respect of an arbitration clause in a Joint Venture Agreement (JVA) which had already been terminated, the Supreme Court observed as under:

“Though the JVA may have been terminated and cancelled as stated but it was a valid JVA containing a valid arbitration agreement for settlement of disputes arising out of or in relation to the subject-matter of the JVA. The argument of the respondent that the disputes cannot be referred to the arbitration as the agreement is not in existence as of today is therefore devoid of merit.”

Likewise, in the case of Reva Electric Car Co. (P) Ltd. v. Green Mobil, (2012) 2 SCC 93, holding that the above principle laid down in the case of Everest Holding Ltd. would be applicable to the similar facts of the present case, the Supreme Court further held that Section 16(1)(a) of the Arbitration and Conciliation Act, 1996 provides that an arbitration clause which forms part of the contract shall be treated as an agreement independent of the other terms of the contract, and that the plain meaning of the aforesaid clause would tend to show that even on the termination of the agreement/contract, the arbitration agreement would still survive.

Section 16(1) of the Arbitration and Conciliation Act, 1996, is reproduced as under:

16. Competence of arbitral tribunal to rule on its jurisdiction.—(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

In the above case of Reva Electric Car Co. (P) Ltd., the Supreme Court further held that above provision in Section 16(1) has been enacted by the Parliament keeping in mind the provisions contained in Article 16 of the UNCITRAL Model Law, which is reproduced as under:

16. Competence of Arbitral Tribunal to rule on its jurisdiction.—(1) The Arbitral Tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

The Supreme Court further held as under:

54. Under Section 16(1), the legislature makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, the arbitration clause which formed part of the contract, has to be treated as an agreement independent of the other terms of the contract. To ensure that there is no misunderstanding, Section 16(1)(b) further provides that even if the Arbitral Tribunal concludes that the contract is null and void, it should not result, as a matter of law, in an automatic invalidation of the arbitration clause. Section 16(1)(a) presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b), it continues to be enforceable notwithstanding a declaration of the contract being null and void. In view of the provisions contained in Section 16(1) of the Arbitration and Conciliation Act, 1996, it would not be possible to accept the submission of Ms Ahmadi that with the termination of the MoU on 31-12-2007, the arbitration clause would also cease to exist.”

Thus, it should be clear from this judgment that even if the MOU came to be terminated, the arbitration clause under it may still be enforced.

Similarly, in the recent case of Ashapura Mine-Chem Ltd. v. Gujarat Mineral Development Corpn., (2015) 8 SCC 193, the appellant and the respondent entered into a memorandum of understanding (MoU) on 17-8-2007, under which the appellant proposed to constitute a joint venture along with a Chinese company, namely, M/s Qing TongXia Aluminium Group Co. Ltd. Ningxia of China (“QTX”) as well as the respondent for setting up an alumina plant of appropriate capacity in the Kutch District of Gujarat. Under Clause 19, it was stipulated that the MoU was subject to approval of the Board of Directors of the appellant as well as the respondent, that the equity investment and decisions of the respondent should be subject to the concurrence of the Government of Gujarat, while the investment of the appellant should be subject to approval of its shareholders. It was specifically mentioned that on getting necessary approval by both sides, the MoU would be converted into an agreement between the appellant and the respondent. Clause 26 of the MoU laid down that in the event of difference/disputes arising between the parties in respect of any matter arising out of and relating to this MoU, such dispute/difference shall, in the first instance, be resolved amicably by mutual consultation within 45 days of the reference of disputes by either party. Clause 27 of the MoU further provided that if amicable settlement is not reached between the parties then such unresolved dispute or difference of opinion concerning or arising from the MoU and its implementation, breach or termination whatsoever, including any difference or dispute as to the interpretation of any of the terms of the MoU, shall be referred to the arbitration of a sole arbitrator appointed by GMDC and AML. Subsequent to the signing of the MoU, the respondent cancelled the MoU alleging failure on the part of the appellant in complying with various terms and conditions of the MoU. The question before the Supreme Court was whether the arbitration clause contained in the MoU is a stand-alone agreement and whether it can be enforced in spite of the fact that the MoU had been terminated.

The Supreme Court held that the above Clause 27 is a valid arbitration agreement contained in the MoU dated 17-8-2007, and that the appellant was fully entitled to invoke the said arbitration agreement and seek for a reference to the arbitrator. It was further held that the high court having failed to appreciate the legal position as regards the existence of an arbitration agreement in the MoU irrespective of the failure of the parties to reach a full-fledged agreement with respect to the various terms and conditions contained in the MoU for a joint venture, the conclusion and judgment of the high court was liable to be set aside and was accordingly set aside.

From the above judgments of the Supreme Court, it is thus clear that an arbitration clause in an MoU can be invoked and enforced for resolving the dispute while implementing the MoU, in spite of the fact that the MoU has been terminated.

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