Dispute Between Parties Under A "Non-Binding Term Sheet" Can Be Referred To Arbitration: Delhi High Court

The bench of Justice Navin Chawla observed that though the nomenclature of the agreement was "Non-Binding Term Sheet", the Arbitration Clause contained in the agreement was specifically made binding on the parties. It held that whether the other covenants of the Term Sheet were non-enforceable, is not to be considered by the Court at the stage of considering an application under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act).

The High Court reiterated that the Arbitration Agreement is a separate agreement distinct from the main contract, even though it may appear as one of the Clauses of the main agreement. The bench ruled that the Court can refuse to refer the parties to arbitration only where on a prima facie study, the Arbitration Agreement itself, and as distinct to the main agreement, is shown to be void or voidable. It added that even while determining the validity of the Arbitration Agreement, the Court cannot carry out an extensive study of facts.

After some disputes arose between the petitioner- Welspun One Logistics Parks Fund I, and the respondent- Mohit Verma, under a 'Non-Binding Term Sheet' executed between them, the petitioner invoked the Arbitration Clause and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Delhi High Court seeking appointment of an Arbitrator.

Disputing the maintainability of the petition, the respondent Mohit Verma submitted before the High Court that the agreement relied upon by the petitioner itself stated that it was a "Non-Binding Term Sheet". Thus, it argued that even though the agreement specially provided that the Arbitration Clause contained in the said agreement would bind the parties, however, since the other terms of the agreement were non-binding, the dispute cannot be referred to arbitration in a vacuum.

The respondent added that the Term Sheet was executed between the parties for transfer of land in favour of the petitioner. Referring to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), the respondent submitted that in terms of Clause 17 of the AIF Regulations, a Category II Alternative Investment Fund (AIF) can invest only in un-listed investee companies or in the units of Category I or other Category II AIFs.

The respondent argued that the petitioner being a Category II AIF, it cannot invest directly in the purchase of land. Therefore, it contended that the consideration under the said Term Sheet was illegal and thus, the Term Sheet was not enforceable in law. It averred that since the agreement between the parties was unenforceable, the Arbitration Agreement contained in the Term Sheet was void and unenforceable.

The respondent submitted that the Court, while exercising jurisdiction under Section 11 of the A&C Act, must consider, at least prima facie, the invalidity of the underlying agreement. In case, the underlying agreement is void, the Court cannot refer the parties to arbitration, the respondent contended.

The respondent further averred that the Section 11 application was filed by "Welspun One Logistics Parks Fund I", which is only a "Scheme" floated by a registered Trust, namely- "Welspun One Warehousing Opportunities Fund". It argued that since the "Scheme" itself had no legal status, the application filed by it was not maintainable.

To this, the petitioner- Welspun One Logistics Parks Fund, submitted that it is for the Arbitrator to adjudicate whether the said Term Sheet is enforceable in law or not. It argued that the Court, while exercising powers under Section 11 of the A&C Act, cannot enter into the dispute and adjudicate upon the issue as to whether the Agreement between the parties was enforceable or not.

Referring to the judgment of the Supreme Court in Vidya Drolia versus Durga Trading Corporation, (2020) and N.N. Global Mercantile (P) Ltd. versus Indo Unique Flame Ltd., (2021), the High Court reiterated that the Arbitration Agreement is a separate agreement distinct from the main contract, even though it may appear as one of the Clauses of the main agreement. It added that the Court can refuse to refer the parties to arbitration only where, on a prima facie study, the Arbitration Agreement itself, and as distinct to the main agreement, has been shown to be void or voidable.

The High Court ruled that even for determining the validity of the Arbitration Agreement, the Court cannot carry out an extensive study of facts, holding that the scope of judicial review and the jurisdiction of the Court under Section 11 is extremely restricted and limited.

"The Court, while exercising powers under Section 11 of the Act, can refuse to refer the parties to arbitration only where "it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny." The Court, by default, would refer the matter to arbitration when contentions relating to non-arbitrability are plainly arguable. The Court must act on the principle "when in doubt, do refer"", the Court said.

Referring to the Term Sheet executed between the parties, the Court observed that though the title of the Term Sheet is "Non-Binding Term Sheet", the Arbitration Agreement is specifically made binding on the parties. Further, it noted that the Term Sheet expressly stated that notwithstanding its title, the Dispute Resolution Clause was binding on the parties.

The Court ruled that whether the petitioner would succeed in the arbitration proceedings on the ground that the other covenants of the Term Sheet were non-enforceable, is not to be considered by the Court at the stage of considering a Section 11 application.

"Similarly, whether the other covenants of the Term Sheet are enforceable or illegal/void in terms of the Regulations, also does not at least prima facie affect the Arbitration Agreement, which, as observed hereinabove, is a severable contract between the parties. Such alleged illegality, at least prima facie, does not tag with the arbitration agreement. In any case, to reach a conclusion one way or the other, this Court would have to conduct a detailed examination of not only the Term Sheet, but also of the Regulations, the Trust Deed, the terms of the Scheme, etcetera. The Supreme Court in Vidya Drolia (supra) expressly warns the Courts not to fall in this trap", the Court said.

Regarding the issue raised by the respondent disputing the locus of the petitioner to file the application, the Court referred to the order of a Coordinate Bench of the Delhi High Court, in a Section 9 petition filed by the petitioner against the respondent. Noting that there was some ambiguity in the description of the contracting entity to the Term Sheet, the Coordinate Bench had ruled that if the petitioner is ruled as a 'non-entity', it would imply that the signatory to Term Sheet would have no recourse to any legal remedy, which cannot be accepted. The Coordinate Bench had thus concluded that it was not necessary, at least at the stage of considering the Section 9 application, to decide whether the said Scheme was a 'legal entity' or not, and thus, the application filed by the petitioner was maintainable.

The High Court noted that the said order of the Coordinate Bench was challenged by the respondents by way of a Special Leave Petition, which was dismissed by the Supreme Court.

The Court thus allowed the application, appointed a Sole Arbitrator and referred the parties to arbitration.

Case Title: Welspun One Logistics Parks Fund I versus Mohit Verma & Ors.

Citation: 2022 LiveLaw (Del) 1210

Counsel for the Petitioner: Mr. Jayant Mehta, Sr. Adv. with Ms. Sanya Sud, Mr. Sanjeev Sharma, Ms. Divya Joshi, Mr. Siddharth & Ms. Ananya Pratap Singh, Advs.

Counsel for the Respondent: Mr. Arvind Nigam, Sr. Adv. with Mr. Sumit Kochhar, Ms. Laavanya Kaushik, Mr. Vineet Malhotra, Ms. Skhita, Mr. Mohit Paul, Mr. Vishal Gohri, Mr. Rajdeep Panda, Mr. Chitranshul Sinha, Ms. Sanjam Chawla & Ms. Akshita Upadhyay, Advs.

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