Everything you need to know arbitration clause in a builder-buyer agreement

Introduction

Arbitration clause is a dispute resolution clause in a contract. Where the parties mutually agree to refer their dispute (coming out of the contract or in relation to the contract) to arbitration, for adjudicating their dispute, and not to sue each other and drag each other to the Court. Parties agreeing to the arbitration clause bind themselves with the award coming out of the arbitration proceedings which is final and cannot be appealable.

Arbitration is an outside court settlement where the parties to the contract appoint a third party name as arbitrator to adjudicate their dispute. Parties prefer arbitration over court proceedings due to various reasons such as:

1. Arbitration is time efficient. Any arbitration proceedings must be over in 18 months.
2. Arbitration is cheaper than court proceedings (only if you see it in a long term way).
3. Confidentiality is one the main reason for preferring arbitration over court proceedings. Nowadays people are more concerned about their goodwill in the market.
4. Outcome/Award is very creative in arbitration because of its flexible nature.
5. Party autonomy is the main reason why parties prefer arbitration over court proceedings.
6. Arbitration is very professional especially in Institution Arbitration, by professional I mean to say that there are people who can assist and manage the whole arbitration proceedings.

Arbitrability of real estate dispute

Real estate disputes are arbitrable. Generally, disputes of civil or commercial nature that can be adjudicated by a civil court can also be settled through arbitration, unless barred expressly or by necessary implication. It is pertinent to mention that Arbitration and Conciliation (Amendment) Act, 2020 does not specifically exclude any specific category of civil or commercial disputes from arbitrability. However, the Supreme Court of India in its judgement of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. and Ors. listed six categories of disputes which are non-arbitrable, they are:

1. Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
2. Guardianship matters;
3. Insolvency and winding-up matters;
4. Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
5. Matters related to grant of probate, letters of administration and succession certificate; and/or
6. Matters related to eviction of tenants where the tenant enjoys statutory protection against eviction by special statutes.

In addition to the above, the supreme court in its recent decisions in Shri Vimal Kishor Shah & Ors v Mr. Jayesh Dinesh Shah & Ors stated that cases arising out of trust deeds and the trust act, 1882 are to be listed as non-arbitrable disputes.

How to draft an arbitration clause in a builder–buyer agreement

Answer to this question is very subjective. There is no general sample/ method to draft an arbitration clause in a builder-buyer agreement, but there are few key points that one should add in their arbitration clause:

1. The intention of the parties to refer their disputes to arbitration. The mere use of word “Arbitration” is not sufficient.
2. The applicable governing law for the arbitration must be mentioned.
3. Venue and seat of arbitration
4. Nature of arbitration should be categorically stated.
5. Number and name of arbitrators (if any, name of arbitrators is not that important but it is better to mention it in the arbitration clause)

Here is a sample for the same:” That all disputes or disagreements arising out of , in connection with or in relation to the allotment which can not be amicably settled , shall be finally decided by arbitration and the sole arbitrator in such a case shall be appointed by the company and other provision of Indian Arbitration and Conciliation Act, 1996, or any amendment thereof shall be applicable.”

Can arbitration clause oust the power of consumer courts to adjudicate real estate disputes

No, both arbitration and consumer proceedings can go side by side because the Consumer Protection Act, 2019 provides an additional remedy and is not derogatory to consumers and the mere existence of an arbitration clause in the builder-buyer agreement does not oust the consumer jurisdiction. Consumer protection act is a special act and its application is not restricted by any other legislation rights. Consumers can always approach local district consumer dispute redressal forums alleging deficiency in services and unfair business practices and claim specific performance as regard the quality, handing over possession, damage, interest and cost.

The supreme court of india in its recent decisions held that one sided clauses/Arbitration clauses in builders-buyers agreement constitutes unfair business practices.

In M/S Emaar MGF land limited vs. Aftab Singh, the supreme court of india held that an Arbitration clause in a builder-buyer Agreement can not circumscribe the jurisdiction of consumer Forum notwithstanding amendment of section 8 of the Arbitration and conciliation Act, 1996.

Facts of the case

M/S Emaar MGF land limited is the real estate developer and the appellant in this present appeal and Aftab Singh is a buyer of a property sold by the appellant. The parties to this present appeal entered in an builder-buyer Agreement, where they inserted an Arbitration clause and agreed to approach Arbitration incase of any dispute arises in the future in connection to this agreement. After some dispute arose between the parties, the respondent in this present appeal approached National Consumer Dispute Redressal Commission (NCDRC) and filed a complaint against the appellant. In reply to that the appellant filed an application under sec. 8 of Arbitration and conciliation Act. 1996.

NCDRC held

Though there was a valid arbitration clause in the agreement, the court rejected the sec. 8 application. The appellant challenged the order of NCDRC in the Delhi High Court, and the Delhi high court also rejected the appeal filed by the appellant. Therefore the appellant approached the Supreme Court of India in way of this present appeal.

SC Held

Complaints filed by the respondent/buyer under the consumer protection act is an additional right and can also be proceeded with despite there being any arbitration between the parties. The court further held:

1. Complaints filed under Consumer Protection Act could also be proceeded with despite there being any arbitration agreement between parties which had been well settled.
2. While carrying out amendment under Section 8(1) of Act, 1996, statutes providing additional remedies/special remedies were not in contemplation. Legislative intent was clear that judicial authority’s discretion to refuse arbitration was minimised in respect of jurisdiction exercised by judicial authority in reference to Section 8. Amendment was also aimed to do away with special or additional remedies that were not decipherable from any material. Law Commission 246th Report, Statement and Objects of Bill and notes on clauses did not indicate that amendments were made for overriding special/additional remedies provided under different statutes. In event,interpretation as put by learned Counsel for Petitioner was accepted, Section 8 had to be read to override law laid down by this Court in reference to various special/additional jurisdictions as had been adverted to and noted in judgment of this Court in Booz Allen and Hamilton Inc. which was never intent of amendment in Section 8.
3. Amendment in Section 8 could not be given such expansive meaning and intent so as to inundate the entire regime of special legislations where such disputes were held to be not arbitrable. Something which legislation never intended could not be accepted as side wind to override settled law.
4. This Court held that disputes within trust, trustees and beneficiaries were not capable of being decided by arbitrator despite the existence of arbitration agreement to that effect between parties. This Court held that, remedy provided under the Arbitration Act for deciding such disputes was barred by implication. Ratio laid down in the above case was fully applicable with regard to disputes raised in consumer fora.
5. In event a person entitled to seek an additional special remedy provided under statutes did not opt for additional/special remedy and he was a party to an arbitration agreement, there was no inhibition in disputes being proceeded in arbitration. It was only cases where specific/special remedies were provided for and which were opted by an aggrieved person that judicial authority could refuse to relegate parties to arbitration.
6. There was no error committed by NCDRC in rejecting an application filed by Appellant under Section 8. No exception could be taken to dismissal of appeals by this Court against judgment of NCDRC. No ground was made out to review the order. Review petitions dismissed.

Conclusion

Arbitration is always preferred by the parties when there is an arbitration clause in the agreement but there are times when one party takes advantage over the other. This happens when both the parties do not stand on the same footing. There may be cases where one party is superior to the other party, this happens when there is a mandatory arbitration clause and when only the superior party has the power to appoint an arbitrator. Disputes related to public/right in rem cannot be adjudicated through arbitration. Therefore, builder-buyer agreement falls within the ambit of Consumer Protection Act, 2019. Consumer rights are an additional remedy given to the consumer. Therefore, arbitration clauses can not oust the power of consumer courts to adjudicate real estate disputes.

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