Rajasthan High Court Appoints Arbitrator as Dispute Escalates Despite Friendly Consultation Clause

Rajasthan High Court Appoints Arbitrator as Dispute Escalates Despite Friendly Consultation Clause

The Rajasthan High Court's Jaipur bench recently granted permission for the appointment of an arbitrator through an application under Section 11 of the Arbitration and Conciliation Act, 1996.

This decision was based on the fact that the Lease Agreement between the involved parties outlined a procedure for dispute resolution via 'friendly consultation'. The respondent, however, abstained from engaging in such 'friendly consultation', thus prompting the court's intervention in appointing an arbitrator.

Justice Ashok Kumar Gaur, presiding over a single-judge bench, noted that the Court concurs with the argument presented by the applicants' learned counsel. The grievance raised by the applicants remained unaddressed by the respondent, leaving no alternative but to invoke Section 11 of the 1996 Act.

On September 24, 2018, a Lease Agreement was executed between the applicants and the respondent. In this agreement, the respondent, acting as the lessee, secured the premises of the applicants located in Jaipur for a lease term of 108 months, spanning from December 1, 2018, to November 30, 2027. The terms and conditions stipulated in the Lease Agreement governed this arrangement.

The applicants claimed that the respondent breached the Lease Agreement's terms by making significant alterations to the property, resulting in violations of the original conditions under which the premises were leased to them.

Furthermore, it was contended that the respondent failed to remit rent for the period spanning October 2019 to November 2019. Moreover, the respondent accrued several other unpaid obligations and outstanding dues.

Initially, the applicants sought recourse by submitting an Arbitration Application to the High Court in 2020. This application, however, was rejected by the High Court on December 2, 2021.

The Court based its decision on the provisions of the Lease and License Agreement, concluding that the parties were obligated to attempt to address the dispute through friendly consultation first. If such efforts remained unsuccessful within 60 days, only then could the matter be referred to arbitration for dispute resolution.

The lawyer representing the applicants contended that despite serving notice to the respondent, no steps were taken by the respondent to address the dispute.

Furthermore, it was put forth that despite the applicants' attempts to settle the matter, the respondent failed to make the necessary payments. Contrarily, the building leased to the respondent-lessee suffered extensive damage.

On the other hand, the counsel representing the respondent contended that the respondent had made an advance payment of ₹2,50,000 to the applicants for property-related expenses. Furthermore, it was stated that the applicants had agreed to adjust the amount of ₹6,42,000, which had been provided as a security deposit by the respondent.

The respondent’s lawyer drew attention to the Supreme Court's ruling in the case of Suresh Shah v. Hipad Technology India Private Limited 2021 (1) Civil Court Cases 749 (S.C.). It was argued that if the lease or tenancy is established under the Transfer of Property Act rather than Special Statutes, arbitration cannot be employed to resolve disputes between the involved parties.

The Court observed that although a notice for friendly consultation had been issued to the respondent, there was a lack of participation or effort on their part to address the dispute through such a consultation process.

“This Court finds that the Lease Agreement, as entered into between the parties, had provided the mechanism to resolve the dispute and after friendly consultation, the dispute is required to be resolved by way of arbitration,” the Bench said.

The Court referenced the Supreme Court's ruling in Vidya Drolia & Ors. v. Durga Trading 2021 (2) SCC 1. In this case, it was established that parties involved in a valid arbitration agreement are obligated to adhere to the mutually consented method of dispute resolution. Courts are expected to honour arbitration agreements, especially in commercial contexts, by showing appropriate respect to such agreements.

Consequently, the Court granted approval to the arbitration application and designated a former judge, Justice G.R. Moolchandani, as the sole arbitrator responsible for settling the dispute between the involved parties.