The Madhya Pradesh High Court has clarified that an arbitration agreement may be formed not only through a written clause but also through the conduct of parties in litigation, where one party alleges the existence of such an agreement and the other does not deny it. This ruling reinforces the pro-arbitration stance of Indian courts and expands the scope of what constitutes a binding arbitration agreement under the Arbitration and Conciliation Act, 1996.
Background & Facts
The Dispute
The dispute arose from a registered sale deed dated 26.04.2019, executed between Amarjot Developers and Finance Pvt. Ltd. (applicant) and MPM Homes Development LLP (respondent No. 1), along with its two partners (respondents No. 2 and 3). The applicant sold land measuring 2.225 hectares in village Bicholi Hapsi, Indore, for a total consideration of Rs. 9,92,20,000. Of this, Rs. 5,09,92,200 was paid via RTGS, and the balance of Rs. 4,82,27,800 was to be paid through two cheques of Rs. 2,41,13,900 each, dated 05.08.2019 and 05.11.2019. Clause 2 of the sale deed explicitly stated that the sale deed would be considered valid only upon the honour of these cheques.
Key Facts
- The cheques were never presented for encashment, as the respondents requested the applicant to withhold presentation pending payment.
- On 16.06.2022, the applicant sent a WhatsApp message demanding payment by 20.06.2022.
- Respondent No. 2 responded on 17.07.2022, proposing a meeting to discuss amicable timelines for payment.
- No payment was made, and no further resolution was reached.
- The applicant filed Civil Suit No. RCS-A-1404/2023 seeking declaration that the sale deed was void, permanent injunction, and possession of the land.
Procedural History
- 26.04.2019: Sale deed executed between parties.
- 05.08.2019 and 05.11.2019: Cheques issued but not presented.
- 16.06.2022: Applicant’s WhatsApp notice demanding payment.
- 17.07.2022: Respondent’s reply proposing meeting for settlement.
- 2023: Civil Suit filed by applicant.
- Filing of Written Statement: Respondents raised in para 23 that an arbitration clause existed in the sale deed and sought striking off of the plaint.
- Filing of Section 8 Application: Respondents filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, asserting that the dispute was arbitrable under Clause 8.
- 25.04.2025: Trial Court referred the matter to arbitration based on the Section 8 application.
- 14.05.2025: Applicant issued notice proposing an arbitrator; notice returned unserved.
- 23.07.2025: Second notice sent via RERA address; no response received.
- Caveat lodged: Respondents filed a caveat through counsel.
- 23.03.2026: Present application under Section 11(6) heard and decided.
The Parties' Positions
- Applicant: Argued that the respondents’ pleadings in the civil suit (para 23 of WS and Section 8 application) constituted an arbitration agreement under Section 7(4)(c), even if Clause 8 was ambiguous.
- Respondents: Contended that Clause 8 was merely an agreement to agree on arbitration in future and did not cover the present dispute over non-payment. They also argued that no dispute existed since cheques were never presented.
Relief Sought
The applicant sought appointment of a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, to adjudicate the dispute over non-payment of the balance sale consideration.
The Legal Issue
The central question was whether an arbitration agreement can be established under Section 7(4)(c) of the Arbitration and Conciliation Act, 1996, through the exchange of pleadings in a civil suit, where one party alleges the existence of an arbitration clause and the other does not deny it, even if the original contractual clause is ambiguous or limited in scope.
Arguments Presented
For the Appellant
The applicant’s counsel argued that the respondents’ pleadings in para 23 of the written statement and in the Section 8 application constituted a clear allegation of an arbitration agreement. The applicant did not deny this allegation, thereby satisfying the requirements of Section 7(4)(c). Counsel relied on Glencore International AG v. Shree Ganesh Metals, Visa International Ltd. v. Continental Resources, and Wagad Infraprojects v. Aryavrat Projects to establish that conduct and subsequent admissions can create an arbitration agreement. The respondents’ conduct in seeking referral under Section 8 and opposing the suit on arbitration grounds demonstrated their intent to arbitrate.
For the Respondent
The respondents’ counsel contended that Clause 8 of the sale deed was not an arbitration agreement but merely an agreement to enter into one in the future. They argued that the clause was limited to disputes regarding title and ownership, and did not extend to payment disputes. They further asserted that the Section 8 application and written statement were procedural tactics and did not amount to a binding agreement. Reliance was placed on BGM and M-RPL-JMCT v. Eastern Coalfields Limited to argue that mere reference to an arbitration clause without clear intent to arbitrate the specific dispute is insufficient.
The Court's Analysis
The Court undertook a detailed analysis of Section 7(4)(c), which provides that an arbitration agreement is in writing if it arises from an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. The Court held that the respondents’ pleadings in para 23 of the written statement and in the Section 8 application were not mere formal assertions but substantive allegations that the present dispute was arbitrable.
"The respondents not only asserted existence of arbitration clause but equally they asserted that the present dispute is covered under the said arbitration clause."
The Court rejected the respondents’ argument that Clause 8 was merely an agreement to agree, noting that the clause explicitly provided for appointment of a retired High Court Judge as arbitrator whose decision would be final and binding - satisfying the essential elements of an arbitration agreement as laid down in Jagdish Chander v. Ramesh Chander. The Court further emphasized that the respondents’ conduct in filing a Section 8 application and opposing the suit on arbitration grounds amounted to a clear intention to arbitrate.
The Court distinguished BGM on two grounds: first, the respondents in this case did not merely refer to an arbitration clause but affirmatively claimed the dispute fell within its scope; second, the respondents’ subsequent conduct - including seeking referral under Section 8 and opposing interim relief under Section 9 by invoking Section 17 - demonstrated a consistent position that the dispute was arbitrable.
The Court also relied on Wagad Infraprojects, where the court held that a party cannot approbate and reprobate - i.e., rely on an arbitration clause to defeat a suit and then deny its existence when seeking to avoid arbitration. The Court observed:
"Parties cannot be allowed to approbate and reprobate as per their convenience and in derogation of their own pleadings."
The Court concluded that even if Clause 8 was initially ambiguous, the respondents’ pleadings and conduct created a new arbitration agreement under Section 7(4)(c), making the dispute arbitrable.
The Verdict
The applicant succeeded. The Court held that an arbitration agreement existed under Section 7(4)(c) of the Arbitration and Conciliation Act, 1996, by virtue of the respondents’ pleadings and the applicant’s non-denial. The Court appointed Hon’ble Shri Justice Ishwar Sahai Shrivastav (Retd.) as the Sole Arbitrator to adjudicate the dispute. The Principal Registrar was directed to obtain a declaration in the prescribed form under Section 11(8) and Section 12(1) before the next hearing, listed for 31.03.2026.
What This Means For Similar Cases
Arbitration Agreements Can Be Created by Pleadings
- Practitioners must treat pleadings in civil suits with the same gravity as contractual clauses when arbitration is invoked.
- A party alleging an arbitration clause in a written statement and the opposing party failing to deny it creates a binding arbitration agreement under Section 7(4)(c), regardless of the original contract’s wording.
Conduct Overrides Ambiguous Contractual Language
- Even if a contractual arbitration clause is vague or limited, subsequent conduct - such as filing a Section 8 application or opposing a suit on arbitration grounds - can expand its scope.
- Courts will look at the totality of conduct, not just the literal text, to determine intent.
Strategic Risks in Litigation Conduct
- Parties seeking to invoke arbitration to dismiss a suit must be prepared to be bound by it later.
- Filing a Section 8 application and then denying the existence of an arbitration agreement in a Section 11 proceeding will be viewed as approbation and reprobation, and courts will not permit it.
Practical Takeaways for Practitioners
- Always review pleadings for inadvertent admissions of arbitration clauses.
- If a client wishes to avoid arbitration, explicitly deny the existence of an arbitration agreement in the written statement.
- When seeking appointment under Section 11, rely on Section 7(4)(c) if the original clause is weak - pleadings may suffice.
