When Party Questions Validity Of Draft Agreement Containing Arbitration Clause, Reference Can't Be Sought Based On It: Telangana High Court

The Telangana High Court bench of Sri Justice P. Sam Koshy and Sri Justice N. Tukaramji has held that when a party, in its reply to a Section 8 petition under the Arbitration Act, has expressly denied the existence or validity of the agreements containing the arbitration clause by terming them null and void, such agreements cannot subsequently be relied upon by the same party as the basis to seek reference of the disputes to arbitration. Brief Facts: The instant appeal has been filed under Section 37 of the Arbitration and Conciliation Act, 1996 (the 'A&C Act'). The challenge is to the order dated 06.11.2023, in I.A.No.134 of 2022 in O.S.No.603 of 2022, passed by the IX Additional District Judge, R.R. District at L.B. Nagar. Vide the impugned order, the Trial Court dismissed a petition filed by the appellants herein under Section 8 of the A & C Act read with Order VII Rule 11 of Civil Procedure Code, 1908 (for short, 'CPC') seeking to refer the parties to resolve the dispute by resorting to arbitration clause. The respondents filed O.S. No. 603 of 2022 seeking specific performance, requesting the appellants to execute and register a sale deed for the suit schedule 'B' property upon receiving the balance sale consideration of ₹1.12 crore. They claimed an agreement was reached for ₹1.85 crore (inclusive of all charges), part of which was paid in advance. As the appellants allegedly failed to proceed with registration, the suit was filed. In response, the appellants filed an application under Section 8 of the A&C Act read with Order VII Rule 11 CPC, seeking reference to arbitration. The Trial Court held that unless the existence of a valid agreement with an arbitration clause is established through evidence, the matter could not be referred to arbitration. This order is under challenge in the present appeal. The Appellants submitted that the respondents' claim for specific performance was primarily based on a series of draft agreements exchanged via email between the parties. These drafts consistently included a dispute resolution clause providing for arbitration. Given this, it must be inferred that a valid agreement existed between the parties, including an arbitration clause. Therefore, the Trial Court ought to have allowed the Section 8 application and referred the dispute to arbitration. In reply, the Respondent submitted that there was no valid agreement between the parties—let alone an arbitration agreement—since no final written contract was executed or signed by both sides. In the absence of mutual acceptance and signatures on a binding agreement, the essential requirements under the Arbitration Act were not fulfilled. Therefore, the Section 8 petition was rightly dismissed at the threshold. Observations: The court at the outset noted that Section 8 of the Arbitration Act mandates that a judicial authority must refer parties to arbitration if there exists a valid arbitration agreement and one of the parties applies for reference before submitting their first substantive statement. To determine the existence of such an agreement, Section 7 becomes relevant. It defines an arbitration agreement as a written agreement to submit disputes to arbitration, either as a clause in a contract or a separate agreement. It further added that the agreement must be in writing and can be established through signed documents, exchange of communications (including electronic means), or through pleadings where the agreement is alleged by one party and not denied by the other. It held that a reference to an external document containing an arbitration clause also constitutes a valid agreement if the main contract is in writing and the reference incorporates the arbitration clause. Thus, whether an arbitration agreement exists must be determined from the nature and content of the agreement between the parties. The court further observed that in the present case, the Section 8 petition filed by the appellants was based on draft agreements exchanged between the parties concerning the sale of the suit schedule property. However, these drafts never culminated in a final, concluded agreement. In the absence of such finality, it cannot be presumed that the parties entered into a binding agreement containing an arbitration clause. Therefore, without a concluded contract, the existence of a valid arbitration agreement remains unsubstantiated. It held that a plain reading of the affidavit filed in support of the Section 8 petition reveals that the appellants themselves have categorically denied the existence of any concluded agreement with the respondents. They have stated under oath that the draft agreements relied upon are invalid and null and void. This admission clearly negates the existence of any binding agreement, let alone one containing an arbitration clause. The court concluded that given this position, the...

When Party Questions Validity Of Draft Agreement Containing Arbitration Clause, Reference Can't Be Sought Based On It: Telangana High Court

Mohd Malik Chauhan

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