When arbitration suits the court

arbitration suits court

An April 2023 decision by a division bench of the Supreme Court of India has held that arbitration is the appropriate method of deciding whether a development agreement can be lawfully cancelled. It also held that the action was in rem and, therefore, open to arbitration.

In the matter of M/s Asian Avenues Pvt Ltd v Sri Syed Shoukat Hussain, the defendant filed an appeal against a suit filed by the respondent. At the heart of the case was a development agreement between the two, which granted the appellant permissive possession of a property for development work.

There was a dispute between the parties, which led to the respondent cancelling the agreement. The respondent issued a legal notice, calling on the appellant to execute a deed of cancellation.

In subsequent steps:

  • The appellant filed an application under rule 11 of order VII of the Code of Civil Procedure, 1908, stating that the dispute ought to be referred to arbitration in view of an arbitration clause in the development agreement. A trial court rejected the plaint and exercised power under section 8 of the Arbitration and Conciliation Act, 1996, directing the parties to refer their dispute to arbitration.
  • However, in a revision application by the respondent, the high court set aside the trial court’s order.

In deciding the matter, the Supreme Court held that the dispute arose out of, and in connection with, the development agreement. Therefore, as per the arbitration clause, if cancellation could not be mutually resolved, it ought to be referred to arbitration. The only ground on which the high court had interfered was that the adjudication under section 31 of the Specific Relief Act was an adjudication in rem.

However, in the case of Deccan Paper Mills Company, the Supreme Court categorically held that it was impossible to hold that a section 31 action for cancellation of an instrument was an action in rem.

The division bench thus held that, in view of the applicability of the arbitration clause, the trial judge was justified in passing an order under section 8 of the Arbitration Act by directing that the dispute be referred to arbitration. The division bench thus allowed the appeal.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.