Arbitration Can't Be 'Optional' When Agreement Provides Arbitration Clause : Supreme Court

The Supreme Court held that there cannot be an 'optional' arbitration, where parties are required to mutually agree to invoke the arbitration clause.

Setting aside the MP High Court's decision, the Court said that there is nothing like 'optional arbitration' that could be invoked after both parties mutually agree to invoke the arbitration clause. According to the Court, arbitration is not 'optional' in practice.

“In our view, it cannot be said that the arbitration clause is optional in the sense that the arbitration clause is non-existent or that the matter would be referred to arbitration only if all the parties to the dispute agree to refer the dispute to arbitration.”, the court said.

The bench comprising CJI Sanjiv Khanna and Justice Sanjay Kumar heard the appeal filed against the M.P. High Court's decision refusing to appoint an arbitrator on the note that the invocation of the arbitration clause was 'optional', and the matter would be referred to the arbitration after both the parties mutually agree to resolve the dispute via arbitration.

Upon interpreting the arbitration clause contained in an agreement, the Court noted that the arbitration clause should not be narrowly interpreted limiting the scope and meaning of one part of the clause with other parts.

The court emphasized that while the appointment of an arbitrator may require mutual consent, the invocation of the arbitration clause itself was not optional. The clause was meant to resolve disputes, and even if the partners could not agree on the arbitrator, the Court could appoint one under Section 11(6) of the Arbitration and Conciliation Act, 1996.

“Reliance placed on the second portion of the arbitration 3 clause, which states that if any dispute arises, the arbitration shall be optional and the Arbitrator will be appointed by the partners with their mutual consent, is not to be read in isolation but in the context of the earlier portion of the arbitration clause. This means that the arbitration clause can be invoked by an aggrieved party who wants to take recourse to arbitration. To this extent there is mutual agreement. Thereupon, the arbitrator can be appointed by mutual consent of all parties. This does not obliterate or write off the arbitration clause. In terms of the Arbitration and Conciliation Act, 1996,where parties cannot agree upon a common name as to who will act as an arbitrator, the court can appoint the arbitral tribunal. The arbitration clauses have to be read in a pragmatic manner.”, the court observed.

Accordingly, the appeal was allowed, and the direction for an appointment of the arbitrator was passed.

Appearance: 

For Petitioner(s) Mr. Ravindra Singh Chhabra, Sr. Adv. Mr. Mudit Maheshwari, Adv. Mr. Aman Arora, Adv. Ms. Praneesha Nayyar, Adv. Mr. Sahil Monga, AOR

For Respondent(s) Mr. Soumitra Chatterjee, Adv. Mrs. Sriparna Chatterjee, Adv. Mr. Anant Kumar Vatsya, AOR Mr. Puneet Jain, Sr. Adv. Ms. Christi Jain, AOR

Case Title: TARUN DHAMEJA VERSUS SUNIL DHAMEJA & ANR.

Citation : 2024 LiveLaw (SC) 996

Click here to read/download the order