nstruments in Escrow and their enforceability
In several corporate commercial transactions parties often agree upon drafts and keep them in escrow, not only for safekeeping but also since there are several conditions which parties have amongst themselves agreed upon to be complied with prior to the consummation of the transaction and registration of the documents. What happens when a dispute arises basis these documents which are executed but are kept in escrow?
In this article, we look at the judgment of the Hon’ble Bombay High Court in Jeweltouch (I) Private Limited v. Naheed Hafeez Quraishi And Ors. 1 which decided this question.
- A plot of land formed the subject matter of the dispute in this case. Prior to his death, the owner of the plot of land (“Owner“) had executed a Memorandum of Understanding (“MOU“) between the Petitioner and Respondent No. 8, wherein it was agreed that Respondent No. 8 would be entitled to develop the plot of land.
- The Petitioner also claimed to have paid some monetary consideration to the Owner prior to his death.
- Certain formalities were required to be fulfilled in accordance with clauses set out in the MOU and hence the parties to the MOU agreed that until such formalities are completed, the original MOU duly executed and original title deeds would be kept in escrow with a partner of the firm representing the Petitioner.
- None of the parties to the agreement retained a copy of the MOU. The MOU was (i) executed (ii) not stamped (iii) not registered as the parties contemplated that the MOU may have to be redrafted in the form of several documents while keeping the basic terms intact and binding.
- Pursuant to the death of the Owner, the Petitioner approached the legal heirs of the Owner being the Respondent Nos. 1 to 7 for completion of certain formalities in respect of the plot of land in accordance with the MOU.
- The Respondent Nos. 1 to 7 did not comply with the formalities as there were certain disputes and differences between themselves. The Petitioner claimed that the MOU has been terminated and invoked arbitration in accordance with the Arbitration Clause contained in the MOU.
- The Petitioner thus filed a Petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act“), for appointment of Receiver in respect of the plot of land under dispute and injunction restraining the Respondents from creating third party rights in respect of the plot of land.
- In its reply, Respondent No. 2 contended that as the terms have not been complied with or certain terms were to be agreed upon, there is no concluded contract.
- The Respondent Nos. 1 to 5 contended that since the MOU was kept in escrow it was not to be acted upon until certain conditions and other terms were agreed upon between the parties and there was therefore no concluded contract.
- Respondent No. 6 argued that he was deceived to sign the MOU without understanding the implications thereof.
The Counsels for the Petitioners argued that
- Execution of the MOU is not disputed. The intention of the parties was never to keep the Arbitration Agreement out of the purview of enforceability, but it was the parent contract in regard to enforceability of the assignment which was to be lodged in escrow;
- The arbitrability of the dispute is admitted.
- The arbitration clause would survive even if the condition precedent to release the documents from escrow had not been fulfilled.
Counsel for the Respondents argued that
- It was an admitted position that the duly executed MOU was lodged in escrow.
- A document which is placed in escrow is still born has no legal effect whatsoever unless the conditions subject to which the document was to be released, are fulfilled.
- Consequently, the Arbitration Agreement being contained in an MOU kept in Escrow will not have any legal effect so long it is contained in escrow.
The Court considered the submissions and held that:
- When parties to an agreement place the agreement in escrow, parties intend that pending the fulfilment of certain conditions which they stipulate, the document will be held in custody by the person with whom it is placed.
- Notwithstanding the execution of the agreement, the act of placing the instrument in escrow evinces an intent that the document would continue to lie in escrow until a condition which is precedent to the enforceability of the document comes to exist.
- The instrument becomes valid and enforceable in law only upon the due fulfilment of a pre-requisite and often the parties may stipulate the due satisfaction of a named person on the fulfilment of the condition.
- However, the conditions to be fulfilled may involve the performance of multifold obligations by different parties to the same contract and the condition may involve a reciprocal discharge of obligations between parties. In such a situation, the question as to whether the escrow conditions have been duly fulfilled so as to warrant the release of the document from escrow may involve a complex determination and the Court will not readily assume the exclusion of the jurisdiction of an adjudicatory forum where a dispute arises in regard to the fulfillment of the conditions.
- Unless the parties have expressly or by necessary implication excluded the jurisdiction of an adjudicatory forum such an exclusion shall not be readily inferred. That must apply with equal force to an arbitration clause which forms part of the agreement.
- The provisions of Section 7(4) of the Arbitration Act when juxtaposed with subsection (1) of Section 16 of the Arbitration Act would lead to a reasonable inference that an arbitration clause can well be treated as a condition independent of the other terms of the contract and that even the nullity of the underlying contract shall not necessarily in the eyes of law, lead to invalidity of the arbitration clause.
While we observe that the Court rejected the argument of the Respondents and considered the arbitration clause to be valid and enforceable, we note that as regards the other provisions and clauses of an agreement held in escrow, the Court has observed that the same don’t have any effect until the conditions set out therein are complied as agreed by the parties amongst themselves.
This was expounded in detail by the Court while placing reliance inter alia on the following authorities:
- Wharton’s Law Lexicon states that Escrow is a writing under seal delivered to a third person to be delivered by him to the person it purports to benefit upon some condition. Upon the performance of the condition, it becomes an absolute deed but if the condition be not performed it never becomes a deed. It is not delivered as a deed, but as a scroll, writing which is not take effect as a deed till the condition be performed.
- Halsbury states that when a sealed writing is delivered as an escrow it cannot take effect as deed pending the performance of the condition subject to which it was delivered and if that condition is not performed it remains entirely inoperative.
- For a deed delivered as an escrow to take effect, the party making it must be fully capable at the time of its delivery as an escrow of doing the act evinced by that deed.
- Escrow has also been defined to mean that when an instrument is delivered to take effect upon happening of a specified event or upon event or upon condition that is not to be operative until some condition is performed then pending the happening of that event or the performance of the condition the instrument is called an escrow.
- The Judgment of Hira Mistan v. Rustom J Noble and Ors. 2 supports the aforesaid principles the same have been applied in India.
Thus, this Judgment settles the question that an arbitration clause contained in a document in escrow is enforceable while the other provisions of an agreement in escrow may not be enforceable and binding basis the principles set out above.
1 2008 (2) ARBLR 321 Bom
2 (2000) 1 Bom CR 716
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