Clause Making Arbitration An Option For Resolution Of Dispute Is Not A Valid Arbitration Agreement: Calcutta High Court

The High Court of Calcutta has held that a clause in an agreement that merely provides for a possibility of arbitration is not a binding arbitration agreement.

The bench of Justice Shekhar B. Saraf held that a clause which provides for resolution of dispute either by way of litigation or arbitration cannot be held to be a binding arbitration agreement as the clause makes arbitration a possibility which may unravel itself, if and only if the parties choose to opt for it, post occurrence of disputes.

The Court also reiterated that nomenclature of a clause is irrelevant and mere use of words like ‘arbitration’ would not make any clause a valid arbitration agreement.

Facts

The parties entered into an agreement dated 01.01.2019 wherein the petitioner agreed to provide operation and maintenance services to the respondent.

Clause 7 of the agreement provided that in case of any dispute or pendency of litigation or arbitration between the parties, the performance of the agreement should not be stopped. Further, Clause 13 provided that in case of any dispute, no party shall be entitled to claim any interest on the principal sum and that the arbitrator should not entertain any claim for interest.

A dispute arose between the parties with respect to the non-payment of the due amount by the respondent, therefore, the petitioner invoked clause 7 of the agreement and requested the respondent to nominate its arbitrator. In its reply to the notice, the respondent disputed the existence of the arbitration clause. Accordingly, the petitioner filed the application for the appointment of the arbitrator.

Contention of the Parties

The petitioner made the following submissions in favour of the application:

• There is a binding arbitration clause in the agreement, therefore, the dispute must be referred to arbitration.
• The intention of the parties to refer the dispute to arbitration is clear and can be deduced from a reading of Clause 7 read with Clause 13 of the agreement.

The respondent made the following submission against the maintainability of the petition:

• There is no valid arbitration clause between the parties as Clause 7 does not make it mandatory for the parties to refer the dispute to arbitration but merely provides for a possibility of it.
• Clause 7 confers the parties with an option to choose between the arbitration and litigation, therefore, it is not a concluded arbitration agreement.

Analysis by the Court

The Court referred to the judgment of the Hon’ble Supreme Court in Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719 wherein the Court held that for a clause to become an arbitration agreement it must clearly indicate the willingness of the parties to refer the dispute to arbitration and to be bound by the decision of the tribunal. It further held that the wording of the clause should be such that make the arbitration an obligation and not a mere possibility.

In light of the law laid down by the Supreme Court, the Court examined the Clauses 7 and 13 of the agreement to determine if those fulfil the requirement of Section 7 of the Act.

The Court observed that Clause 7 does not make it mandatory for the parties to refer the dispute to arbitration and provides them with the option of either choosing to litigate before the Court or to choose to refer the dispute to arbitration. It held that the clause merely provides for a possibility of arbitration.

The Court held that held a clause which provides for resolution of dispute either by way of litigation or arbitration cannot be held to be a binding arbitration agreement as the clause makes arbitration a possibility which may unravel itself, if and only if the parties choose to opt for it, post occurrence of disputes as against an arbitration agreement which makes it mandatory for the parties to refer the dispute to arbitration.

The Court also reiterated that nomenclature of a clause is irrelevant and mere use of words like ‘arbitration’ would not make any clause a valid arbitration agreement.

Accordingly, the Court dismissed the petitions for the reason that there was no arbitration agreement between the parties.

Case Title: Blue Star Limited v. Rahul Saraf, A.P. 852 of 2022

Date: 08.06.2023

Counsel for the Petitioner: Mr. Avishek Guha, Mr. Sourajit Dasgupta, Ms. Akansha Chopra, Mrs. Debarati Das.

For the Respondents: Mr. Pranit Bag, Ms. Riti Basu, Ms. Piyali Pan, Mr. Sayan Banerjee, Mr. Ishan Saha and Mr. Saunak Sengupta.

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