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

The Delhi High Court has ruled that the dispute between the parties under an agreement titled as a "Non-Binding Term Sheet", can be referred to arbitration, holding that the Arbitration Clause contained in the said agreement was binding between the parties. 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. ...

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

Parina Katyal

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