A Critical Analysis of Ashapura Mine-Chem Limited versus Gujarat Mineral Development Corporation – Doctrine of Seperability of Arbitration Agreement in a MOU
Taking into consideration the increasing significance and demand in the global economy, the law makers of the country have devised Arbitration and Conciliation Act, 1996 as a mechanism to regulate the management of Arbitration all over the country. The emergence of Arbitration in India has been profound to the extent that, as matter of practice, most of the commercial contracts that are entered in recent times contain an arbitration clause. Arbitration clause in a contract is treated as a separate agreementand it is a settled law that under Section 16(1) of the Arbitration and Conciliation Act, 1996, the legislature makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, the arbitration clause which formed part of the contract, has to be treated as an agreement independent of the other terms of the contract.
To understand this one must necessarily know the difference between a Memorandum of Understanding (MOU) and an Agreement. MOU is a document that captures the intention of the parties prior to the execution of a formal Agreement.It expresses a convergence of will between the parties, indicating an intended common course of action. Contrary to an Agreement, it is neither legally enforceable nor does it grant any rights to any of the parties to such an MOU. An Agreement on the other hand is a definitive document between the parties that is legally binding and enforceable in a court of law. A MOU should clearly mention that a definitive agreement will be entered between the parties at a later stage.
MOUs may or may not provide for resolution of disputes by means of Arbitration. In the event, any MOU does have an arbitration clause; a question arises as to whether such a clause can be enforceable by the court when the MOU itself is not enforceable.
This is clarified by a recent Supreme Court Judgement “Ashapura Mine-Chem Ltd. … .Appellant VERSUS Gujarat Mineral Development Corporation ….Respondent
The Supreme Court in its recent judgment as mentioned supra has addressed the issue of Separability and survival of Arbitration clause in a MOU.
The Appellant and the Respondent entered into a MOU. Under the MOU both the parties proposed to constitute a joint venture with Chinese Company for setting up an Alumina plant of appropriate capacity in Kutch District of Gujrat. The MOU categorically provided an arbitration clause in the event parties fail to settle their dispute amicably.
The Respondent sought certain amendments to the originally signed MOU due to major change in the state policy. After considerable exchange of communication, the Respondent eventually cancelled the MOU stating failure on the part of the Appellant in complying with various terms and conditions of the MOU.
The Appellant and the Respondent failed to resolve their dispute amicably and therefore the Appellant filed an application under section 11 of Arbitration and Conciliation Act, 1996 for appointment of a sole arbitrator. The application was rejected by Gujrat HC.
The Applicant aggrieved with the decision of the High court appealed against the Judgement to the Supreme Court. The Supreme Court relied upon the following judgements in the matter.
This was a case that arose under section 11 of the Arbitration and Conciliation Act 1996. Section 11 deals with the appointment of the arbitrators. A similar question was raised in this matter regarding the validity of the arbitration clause once the MOU terminates. The judge placed emphasis on section 16 (1) of the Arbitration and Conciliation Act 1996 and upheld the survival of the arbitration clause even upon the termination of the MOU. Also in this case since the parties to the MOU failed to appoint an arbitrator under the agreed procedure, it was necessary for the court to appoint one.
Section 16 (1) of the Arbitration and Conciliation Act 1996 provides that any arbitration clause in a contract shall be independent of the other terms of the contract and a decision rendering such a contract null and void by the arbitral tribunal will not invalidate the arbitration clause.
A similar question as that raised in Reva Electrical car company Pvt. Ltd. was also raised in Today Homes and Infrastructure Pvt. Ltd.
In this matter, the court had again relied upon section 16 (1) of the Arbitration and Conciliation Act 1996.
In Enercon (India) Limited case, the contention raised was that there can be no arbitration agreement in the absence of a concluded contract. However, once again the court held that in view of the doctrine of Separability, the legitimacy or independence of the arbitration clause/agreement in a contract is not detracted if the contract itself is claimed to be void or voidable or is un-concluded by one of the parties to the contract.
Hence, the Supreme Court held on the basis of Doctrine of Separability that, although the MOU is non-enforceable, the arbitration clause in such a MOU can be treated as a separate agreement and can be enforced. Therefore, while setting aside the judgment impugned in this appeal, the Court appointed Hon’ble Ms. Justice Rekha Manharlal Doshit, former Chief Justice of Patna High Court and former Judge of Gujarat High Court as the sole Arbitrator to adjudicate the disputes between the parties.
MOU is a document that captures the intent of the parties before they enter into a formally binding agreement. Companies enter into various transactions and most of the time these transactions don’t go beyond a mere hand shake.
Since most of these transactions do not fructify, spending humongous amount and time in drafting a legally binding agreement may not be feasible for the parties.
In such cases, it is prudent to record the intentions of the parties in a written format. This can be done by way of an MOU which is the first step towards entering into a binding agreement. Since in the current scenario, the parties prefer to enter into an MOU, wiser counsel lies in incorporating an arbitration clause in the MOU. This safeguards interests of the parties as the parties can invoke this clause for resolution of disputes pertaining to the subject matter of the MOU applying the Doctrine of Separability.
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