Clause Giving Only Supervisory Powers To Third Party With Respect To Disputes; Not An Arbitration Agreement: Madras High court

The Single Bench of Justice M. Sundar held that the adjudicatory process is an essential feature of arbitration, in contra-distinction to mediation, and hence, when there is nothing to demonstrate that the contracting parties intended to put an adjudicatory mechanism in place, an arbitration agreement cannot be said to exist.

After some disputes arose between the parties, the petitioner- Innovators Facade Systems Ltd., invoked the relevant clause in the 'Letter of Intent' (LOI) signed by the parties and filed a petition for appointment of a sole Arbitrator under Section 11 (6) of the A&C Act before the Madras High Court.

The respondent - Larsen & Toubro Limited, submitted before the High Court that the relevant clauses contained in the LOI did not qualify as an 'arbitration agreement' within the meaning of Section 2(1)(b) read with Section 7 of the A&C Act. The respondent added that the use of the term 'arbitration' by itself does not make the clause an arbitration agreement.

Referring to the relevant clauses contained in the LOI, as invoked by the petitioner, the Court noted that under the first clause, the parties had agreed to resolve all disputes or difference of opinion, on account of interpretation of clauses or technical specifications, through direct and mutual discussions. Further, the second clause provided that if the difference of opinion still persisted, it would be referred to the Project Manager of the respondent company, whose decision shall be final and binding on both the parties.

The petitioner Innovators Facade Systems submitted before the Court that the term 'reference' need not necessarily be mentioned in a clause for that clause to qualify as an arbitration agreement and that the two clauses, which provided for settlement of disputes through mutual discussion and through reference to the Project Manager, have to be read disjunctively.

The Court noted that as per the provisions of Section 11(6A), the Court, while considering any application under Section 11(6) for appointment of an arbitrator, shall confine itself to the examination of the existence of an arbitration agreement.

The Bench further ruled that unlike Section 8 of the A&C Act where the court is statutorily required to examine whether a 'valid' arbitration agreement exists, Section 11 (6A) of the A&C Act does not refer to a 'valid' arbitration agreement.

The Court referred to the decision of the Supreme Court in K.K. Modi versus K.N. Modi (1998), where the Apex Court was dealing with a clause which provided for reference of all disputes or clarifications in respect of implementation of the agreement between the parties, to the Chairman of the Industrial Finance Corporation of India (IFCI) or his nominees, whose decisions shall be final and binding. The Supreme Court had ruled that the said clause did not qualify as an arbitration clause.

While holding that the question as to whether a clause in a contract would qualify as an arbitration agreement can sometimes become a conundrum, the Court ruled that the relevant clause contained in LOI cannot be term an 'arbitration agreement', as defined under Section 2(1)(b) read with section 7 of the A&C Act.

Ruling that there was no consensus between the parties with respect to the relevant clauses, the bench held that the two clauses cannot be read disjunctively. The Court added that the second clause, which provided for reference of the dispute to the Project Manager, kicks in only when the dispute does not get settled in accordance with first clause, i.e., through mutual discussion between the parties.

Thus, the Court held that the said two clauses were inextricably intertwined and interwoven, and not just dovetailed.

While ruling that the adjudicatory process is an essential feature of arbitration, in contra-distinction to mediation, the Court held that the parties had agreed to give only a supervisory power to the Project Manager and that the parties did not intend to give any adjudicatory power to the Project Manager. Hence, the Court held that there was nothing to demonstrate that the contracting parties intended to put an adjudicatory mechanism in place.

"To put it differently, clauses 37 and 38 are not just dovetailed but they are inextricably intertwined and interwoven. A careful perusal of clause 37 makes it clear that parties have agreed to give supervisory power to the Project Manager of the respondent at the site level. Therefore, the expression 'interpretation of clauses' has to be read in conjunction with the expression 'technical specification' thereunder. If it is not possible to have difference of opinion regarding technical specification resolved at site level, it has to be escalated to Project Manager level, i.e., Project Manager of the respondent and the decision of Project Manager shall be binding on both parties. Therefore, the parties did not intend to give any adjudicatory power to Project Manager."

The Court noted that the Supreme Court in Mahanadi Coalfields Ltd. versus IVRCL AMR Joint Venture (2022) was considering a clause which provided for settlement of disputes between the parties, firstly, at the company level, and failing such settlement, the parties were required to request the Engineer-in-Charge for settlement of such disputes. Further, if the differences still persisted, the settlement of the dispute was to be dealt with as per the Guidelines issued by the Ministry of Finance, or by adjudication in the Court. The Apex Court, while ruling that the said clause was not an arbitration agreement and that it merely provided for a dispute resolution mechanism at the company level, held that the said clause did not disclose any intention of the parties to make the said Engineer-in-charge an Arbitrator in respect of the disputes between the parties.

The High Court observed that the Apex Court in Mahanadi Coalfields Ltd. (2022) had reiterated that while there is no specific form of an arbitration agreement, the words used in the arbitration clause should disclose an obligation and determination to go for arbitration and not merely contemplate the possibility of going for arbitration. Hence, the Supreme Court laid down that there can be no valid and binding arbitration agreement between the parties where there is no obligation to refer the disputes to arbitration.

Thus, holding that the relevant clauses did not qualify as an arbitration agreement, the High Court dismissed the petition.

Case Title: Innovators Facade Systems Ltd. versus Larsen & Toubro Limited

Dated: 25.08.2022 (Madras High Court)

Citation: 2022 LiveLaw (Mad) 405

Counsel for the Petitioner: Ms. Arati Agarwal for Mr. AR. M. Arunachalam

Counsel for the Respondent: Ms. Preeti Mohan along with Ms. R.S. Pornima

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