Mere repetitive use of the word “Arbitration” in agreement without any substantive part relating to arbitration is not a valid arbitration agreement – Supreme Court
In a recent judgment, the Hon’ble Supreme Court Mere use of the word “Arbitration” in the title of the clause without any corresponding substantive part relating to arbitration could not be considered a valid arbitration agreement under Section 7 of the A&C Act. mere repetitive use of the word “arbitration” not decisive.
ABCAUS Case Law Citation:
4835 (2025) (11) abcaus.in SC
In the instant case, a appeal was filed before the Hon’ble Supreme Court against the judgment of High Court of Punjab & Haryana dismissing application under Section 11(6) of the Arbitration and Conciliation Act, 1962 (A&C Act) filed by the appellant.
The appellant company, a private healthcare institution entered into Software Implementation Agreement with the respondent company across the appellant’s medical facilities.
The agreement provided that if any dispute is not resolved by negotiation between higher level of management, then the matter will proceed to mediation as prescribed.
However, there was procedural delays and technical failures on the part of the respondent, including performance issue, billing malfunctions, and incomplete integration of diagnostic modules.
As a result, the appellant called upon the respondent to concur in the appointment of a sole arbitrator suggesting names of retired Justices for acting as an arbitrator by a notice issued under Sections 11 and 21 of the A&C Act. Respondent acknowledged receipt of the notice by email and sought time to respond, and after one month filed a reply requesting trial of the project one last time.
Constrained by the respondent’s communication, the appellant approached the High Court invoking Section 11(6) of the A&C Act and praying for the appointment of a sole arbitrator to adjudicate the disputes arising under the Agreement.
The Hon’ble High Court observed that under the agreement the parties had envisaged a three-tier process for resolving disputes: first, by negotiation between senior management executives; next, through mediation between the respective Chairmen of the parties; and finally, through the courts of law if the dispute remained unresolved within fifteen days.
The High Court held that the term “arbitration” had been loosely employed in agreement and that the true intention discernible from its language was only to provide for negotiation and mediation at an internal company level. The clause, in the High Court’s view, merely contemplated negotiation and mediation without creating a binding arbitral process and hence, it dismissed the appellant’s application holding that relevant clause of the agreement was not a valid arbitration agreement.
The Hon’ble Supreme Court observed that Section 7 of the A&C Act posits certain requirements that need to be fulfilled so as to satisfy the attributes of an arbitration agreement. They are (a) there must exist an agreement between the parties to refer a dispute/all disputes to arbitration, either before or after the said disputes arise; (b) the disputes must be in connection with a defined legal relationship, whether contractual or not, and lastly, (c) the agreement must be in writing.
The Hon’ble Supreme Court pointed out that the crux of the controversy was with respect to the first requirement, i.e., whether the parties agreed to have the disputes and differences arising by and between them referred to arbitration?
The Hon’ble Supreme Court observed that the mere use of the word “arbitration” is not sufficient to treat a clause as an arbitration agreement when the corresponding mandatory intent to refer the disputes to arbitration and the consequent intent to be bound by the decision of the arbitral tribunal is missing. Mere use of the word “Arbitration” in the title of the clause without any corresponding substantive part relating to arbitration could not be considered a valid arbitration agreement under Section 7 of the A&C Act.
The Hon’ble Supreme Court observed that the A&C Act acknowledges the existence of an arbitration agreement based on its substance rather than its form. Regardless of the formal structure, effect has to be given to an arbitration agreement in essence. Arbitration being the creature of a contract, the ad idem intention of the parties is paramount to determine whether there exists a valid arbitration agreement. That being said, the invocation of the word “arbitration” nonetheless provides, at the very least, a discernible clue to the parties’ underlying intention.
The Hon’ble Supreme Court noted that in the agreement under consideration, it stated that the parties must first attempt to negotiate the dispute in good faith. The next part of the clause specified that if the negotiation fails, then the parties would be obligated to mediate in the stated procedure and is then followed by the punctuation (:) colon, following which it prescribed that any dispute arising out of or relating in any way to the Agreement shall be resolved by “arbitration” through senior management comprising respective Chairmen of the two parties (Arbitrators). Moreover, the agreement further stipulates that should the dispute not be resolved within fifteen (15) days after the proposed “arbitration”, the complaining party shall seek remedies through the courts of law.
The Hon’ble Supreme Court further noted that the word “arbitration” apart from appearing in the title of the relevant clause has been used three times in the body of the clause. However, the real test is whether mere repetitive use of the word “arbitration” clinching/decisive?
The Hon’ble Supreme Court noted its own judgment about gathering the intentions of the parties in a clause of the contract. In the said decision it was opined that the duty of the court is not to delve deep into the intricacies of human mind to explore the undisclosed intention, but only to take the meaning of words used i.e. to say expressed intentions. In seeking to construe a clause in a contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean. It can happen that in doing so one is driven to the conclusion that clause is ambiguous, and that it has two possible meanings. In those circumstances, the court has to prefer one above the other in accordance with the settled principles. If one meaning is more in accord with what the court considers to be the underlined purpose and intent of the contract, or part of it, than the other, then the court will choose the former or rather than the latter. Every contract is to be considered with reference to its object and the whole of its terms and accordingly the whole context must be considered in endeavouring to collect the intention of the parties, even though the immediate object of inquiry is the meaning of an isolated clause.
The Hon’ble Supreme Court further observed that in a catena of decisions, they have ruled that, in essence, an arbitration agreement should have an element of the nature of finality to refer the matters to arbitration.
Further, the Hon’ble Supreme Court noted that previously discussing a similar situation the Apex Court had observed that when an agreement provides that the decision of the authority will not be final and binding on the parties, or that if either party is not satisfied with the decision of the authority, he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.
Lastly, the Hon’ble Supreme Court noted that the individuals designated as “arbitrators” were the respective Chairmen of the parties themselves. Ordinarily, arbitration contemplates reference to a neutral third party, a process supported by Section 12 read with the Seventh Schedule of the A&C Act. Here, however, the mechanism envisaged was akin to an internal settlement process between the Chairmen of the two companies. While this does not ipso facto disqualify the clause from being an arbitration agreement—since this may be waived under the proviso to Section 12(5)—it remains a significant circumstance in discerning the true intention of the parties.
The Hon’ble Supreme Court also dealt with the issue as to whether the non-denial of the arbitration agreement by the respondent in the correspondence between the parties post the notice issued would have any bearing upon the decision to refer the parties to arbitration. It was held that such correspondence would have indeed been sufficient to displace the original intention if it was unequivocally clear about referring the disputes to arbitration, i.e., the test mentioned under Section 7 of the A&C Act, which did not exist in the instant case.
Accordingly, the impugned final judgment and order of the High Court was affirmed and the appeal was dismissed.
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