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Even though the arbitration clause does not explicitly states that the arbitrator’s decision is binding on the parties, it must be given effect: High Court

The Supreme Court noted that even if an arbitration clause does not specifically specify that the arbitrator’s judgement will be final and binding on the parties, it must be given effect.

The court made up of Justices Surya Kant and Abhay S. Oka noted that the absence of specific language in the agreement, which would otherwise have strengthened the parties’ intention to arbitrate their issues, cannot be used to justify the repeal of the arbitration clause.

The parties’ contract in this case contained the following clause 18: All disputes or differences arising between the parties hereto with respect to the interpretation of this Agreement or any covenants or conditions thereof, with respect to the rights, duties, or liabilities of any party hereto, or with respect to any act, matter, or thing arising out of or relating to or under this Agreement (even though the Agreement may have been terminated), the same shall be referred to arbitration. The Arbitration shall be governed by the Arbitration and Conciliation Act, 1996 or any reenactment thereof, or, in the absence of mutual appointment of a sole arbitrator, by two arbitrators, one each to be nominated by the parties to the dispute or difference.

The High Court noted that Clause lacks some necessary components of a valid arbitration agreement since it does not stipulate that the arbitrator’s ruling will be final and binding on the parties when it dismissed an application brought under Section 11 of the Arbitration Act.

Was Clause 18 a valid arbitration clause for the purposes of exercising Section 11 of the Act’s powers, as was the question put before the Apex Court?

The court stated that no specific format for the arbitration clause is required by section 7 of the Act. It stated that the following constitute an arbitration agreement’s fundamental components:
(1) There must be a difference in the present or the future in relation to some planned affair.
(2) The parties must intend to resolve this disagreement through a private tribunal.
(3) In order to be bound by the tribunal’s ruling, the parties must express their agreement in writing.
(4) The parties must concur in writing.

As it relates to Clause 18, the bench made the following observation: First, “aside from the fact that Clause 18 of the Development Agreement uses the terms “Arbitration” and “Arbitrator(s),” it has explicitly stated the mandatory nature of reference to arbitration by using the phrase “shall be referred to arbitration of a Sole Arbitrator mutually appointed, failing which, two Arbitrators, one to be appointed by each party to dispute or difference.” Second, the procedure for choosing the third arbitrator – who will be chosen by the two arbitrators who have been chosen – has also been made clear. Last but not least, the parties agreed that “the Arbitration and Conciliation Act, 1996 or any reenactment thereof” will control the dispute. These three recitals strongly suggest that the parties’ desire to submit their disputes to arbitration at the time of contract formation was clear.

The court concluded that even if the words “inal and binding” are not directly contained therein, Clause 18 shows the parties’ desire and obligation to be bound by the tribunal’s ruling.

The bench noted these things in granting the appeal:

“It is clear from other provisions of the arbitration agreement that the parties intended to submit their issues to arbitration. The Respondent” argument that there is no legal arbitration clause in the absence of a clear exclusion of any arbitration agreement feature seems to be an afterthought.
Even if we were to conclude that the subject clause does not contain certain basic elements of arbitration, such as the award’s “final and binding” nature, the parties have made it plain that they want to submit their dispute to arbitration and abide by the tribunal’s ruling. Therefore, the party autonomy in this regard merits protection. A clause’s cancellation cannot be justified by a lack of language that would otherwise confirm the parties’ purpose to arbitrate their differences.

Due to the parties’ clear intent and aims to select a certain type of dispute resolution to handle their disputes, it is essential for the courts to place more weight on the clause’s actual language.
The parties’ intent to submit their disagreement to arbitration, which follows from the Agreement’s terms, must be given appropriate consideration. We are absolutely certain that Clause 18 in this situation entails a legally-binding reference to arbitration between the parties, and the High Court should have given it full effect.

Anamika Singh
Anamika Singh


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