PNP 1 ARBAP89-12.10 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. ARBITRATION APPLICATION NO.89 OF 2010 Bhansali Inforect Pvt. Ltd. ..Applicant. Vs. B. Raheja Builders Pvt. Ltd. ..Respondent. ...... Ms. Rajalakshmy Mohandas i/b ALMT Legal for the Applicant. Mr. S.V. Doijode with Ms. Deeksha Kakar i/b Doijode Associates for the Respondent. ..... CORAM : DR.D.Y.CHANDRACHUD, J. 12 October 2010. P.C. : 1. This is an application under Section 11(6) of the Arbitration and Conciliation Act, 1996. On 26 March 2007 a Memorandum of Understanding (MOU) was entered into between the Applicant and the Respondent under which the Respondent, as developer, agreed to transfer to the Applicant the right, title and interest in certain premises admeasuring a built up area of 2,13,000 sq. ft. at and for a consideration of Rs.40 Crores. Clause 4 of the Memorandum of Understanding stipulated that immediately upon payment of full consideration the developer shall issue a letter of allotment indicating an unconditional and absolute allotment of the right, title and interest in the area agreed to be sold. PNP 2 ARBAP89-12.10 Clause 13 of the Memorandum of Understanding contains an agreement to refer disputes to arbitration, in the following terms : Parties shall endeavour to amicably resolve all disputes, “ differences, claims, questions arising out of this Deed failing which the same shall be referred to a sole Arbitrator to be mutually appointed by the Parties. The Arbitration shall be held in accordance with the provisions of the Arbitration and Conciliation Act, 1996.. The venue for the arbitration shall be Mumbai.” 2. The Applicant duly paid an amount of Rs.40 Crores to the Respondent upon which a letter of allotment was issued to the Applicant on 3 April 2007. The letter of allotment states that in pursuance of the Memorandum of Understanding the Applicant was being unconditionally and absolutely alloted a right, title and interest in respect of office premises admeasuring 2,13,000 sq. ft. built up area equivalent to 1,70,400 net FSI. The letter of allotment provides as follows : The other terms and conditions of allotment as set out in the “ said MOU shall continue to be binding on the parties thereto to the extent such terms and conditions are not inconsistent with the terms and conditions set out in this letter of allotment.” 3. The Applicant invoked arbitration by a notice dated 1 April 2010 on the ground that the developer had despite receipt of the full consideration of Rs.40 Crores failed to perform its obligation under the PNP 3 ARBAP89-12.10 Memorandum of Understanding and the letter of allotment. 4. The defence of the Respondent to the application under Section 11(6) is that though the Memorandum of Understanding contains an arbitration clause, parties had not entered into an arbitration agreement when a letter of allotment was issued by the Respondent to the Applicant. Counsel appearing on behalf of the Respondent submitted that the letter of allotment stipulates that all terms and conditions of allotment as set out in the Memorandum of Understanding shall continue to be binding on the parties, but this is only to the extent that they are not inconsistent with the terms and conditions set out in the letter of allotment. Hence, it was submitted that since the Respondent while issuing a letter of allotment did not specifically incorporate an arbitration clause, the arbitration agreement contained in the Memorandum of Understanding would be inconsistent and therefore would not be binding. 5. On the other hand, it has been urged on behalf of the Applicant, that the letter of allotment was issued in pursuance of the Memorandum of Understanding. Hence, parties clearly stipulated in the letter of allotment that all the terms and conditions of allotment as PNP 4 ARBAP89-12.10 contained in the Memorandum of Understanding would continue to be binding. There is nothing inconsistent in the letter of allotment that would exclude the application of the arbitration clause. Moreover, it was urged that the Respondent in its letters dated 17 December 2009 and 22 January 2010 had admitted its obligations both under the Memorandum of Understanding and the letter of allotment. Hence, the arbitration agreement which forms part of the Memorandum of Understanding continues to remain in force in view of the specific provisions contained in the letter of allotment. 6. Section 7 of the Arbitration and Conciliation Act, 1996 stipulates that an arbitration agreement means an agreement by parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. Sub section (5) of Section 7 provides that the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract. In order to fulfill the test which is enunciated in sub section (5) of Section 7 there has to be a reference in a contract to a document containing an arbitration PNP 5 ARBAP89-12.10 clause but, in order to constitute an arbitration agreement the legislature has imposed a requirement that the reference must be such as to make the arbitration clause a part of the contract. These provisions have been interpreted in a recent judgment of the Supreme Court in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited1. The Supreme Court has emphasized that Section 7(5) makes it clear that a mere reference to a document would not have the effect of making an arbitration clause from that document, a part of the contract. The reference to the document in the contract should be such as would indicate an intention to incorporate an arbitration clause contained in the document into the contract. There has to be a conscious acceptance of the arbitration clause from another document and here the normal rules of construction of contracts would have to be followed. There is in other words a difference between a mere reference to a document in a contract and the incorporation of another document in a contract by reference. In that context, the Supreme Court held as follows : If a contract refers to a document and provides that the said “ document shall form part and parcel of the contract, or that all terms and conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the said document, or that the 1 (2009) 7 SCC 696. PNP 6 ARBAP89-12.10 terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract. When there is such incorporation of the terms and conditions of a document, every term of such document (except to the extent it is inconsistent with any specific provision in the contract) will apply to the contract. If the document so incorporated contains a provision for settlement of disputes by arbitration, the said arbitration clause also will apply to the contract.” 7. Now in the present case, the relationship between the parties was brought into existence by the Memorandum of Understanding dated 26 March 2007. Under the Memorandum of Understanding parties contemplated that the Applicant would be entitled to the allotment of certain premises against the payment of consideration agreed in the amount of Rs.40 Crores. The Memorandum of Understanding stipulated that the consideration was to be payable within one month and that immediately on the payment thereof the developer would simultaneously issue a receipt and a letter of allotment indicating an absolute allotment of the right, title and interest in the area agreed to be sold. The Memorandum of Understanding made provisions for other matters such as the allotment of parking spaces and amenities. There is no dispute about the position that the Memorandum of Understanding embodies an PNP 7 ARBAP89-12.10 agreement to refer all disputes, differences, claims and questions to arbitration. The letter of allotment that was issued by the developer to the Applicant was in implementation of the terms and conditions spelt out in the Memorandum of Understanding. In fact, the letter of allotment dated 3 April 2007 states that it is pursuant to the Memorandum of Understanding that the developer was unconditionally and absolutely allotting and handing over to the Applicant right, title and interest in the office premises admeasuring 2,13,000 sq. ft. since the Applicant had paid the full consideration of Rs.40 Crores. The letter of allotment states that the other terms and conditions of allotment as set out in the Memorandum of Understanding shall continue to be binding on the parties thereto to the extent to which they are not inconsistent with the terms and conditions set out in the letter of allotment. There is no specific provision in the letter of allotment issued by the developer, in regard to dispute resolution. Obviously no provision could have been made by the developer while issuing the letter of allotment since the letter of allotment was in implementation of the mutual rights and obligations assumed by the parties pursuant to the Memorandum of Understanding dated 26 March 2007. All the other terms and conditions contained in the Memorandum of Understanding continued to bind the parties to the extent PNP 8 ARBAP89-12.10 that they were not inconsistent. The provision for arbitration in the Memorandum of Understanding cannot be treated as overridden by the letter of allotment issued by the developer to the Applicant. In these circumstances, the contention of the Applicant that the agreement to arbitrate continues to be valid and to subsist would have to be accepted. 8. The judgment of the Supreme Court in K. Sasidharan v. Kerala State Film Development Corporation2 on which reliance has been placed by counsel appearing on behalf of the Respondent is clearly distinguishable. In that case, as the observations of the Supreme Court in paragraph 6 of the judgment would indicate, both the Appellant and the Respondent specifically excluded the arbitration clause in the contract. Hence, the Supreme Court concluded that by necessary implication they had excluded clause 73. The facts of the present case are clearly distinguishable. Parties incorporated an arbitration agreement in the Memorandum of Understanding. The Memorandum of Understanding embodies the conditions agreed between the parties and is a document jointly executed by them. By the letter of allotment the developer allotted the agreed space to the Applicant upon receipt of the full 2 (1994) 4 SCC 135. PNP 9 ARBAP89-12.10 consideration of Rs.40 Crores. The letter of allotment is a document which implements the obligation of the developer to allot premises to the Applicant in pursuance of the Memorandum of Understanding against the receipt of full consideration. In this background it is not possible to accept the submission that the arbitration clause was superseded by the letter of allotment. The Applicant had called upon the Respondent to appoint a sole arbitrator in pursuance of clause 13 of the Memorandum of Understanding, but the Respondent failed and neglected to do so. Disputes have arisen. In these circumstances, it will be necessary to exercise jurisdiction in these proceedings by directing the appointment of a sole arbitrator. Accordingly, the Arbitration Application is disposed of by appointing Hon ble Mr. Justice S.P. Bharucha, Former Chief Justice of India ’ as sole arbitrator under the Arbitration and Conciliation Act, 1996. The Arbitration Application is accordingly disposed of. 9. The Prothonotary and Senior Master is directed to forthwith communicate a copy of this order to the Learned Arbitrator together with a memorandum containing the address of the parties. (Dr. D.Y.Chandrachud, J.)