Clause Empowering Contract Signatories To Resolve Disputes Does Not Constitute A Valid Arbitration Agreement Due To Lack Of Impartiality: Calcutta HC

The Calcutta High Court bench of Justice Shampa Sarkar has held that merely because a dispute resolution mechanism is provided in a clause empowering the signatories to the contract to resolve the dispute, it cannot be inferred that the parties intended to refer the dispute to arbitration. Such a clause amounts to an in-house mechanism and not a reference to an impartial arbitral tribunal, especially when impartiality is clearly lacking as the very individuals who signed the contract are themselves empowered to decide the dispute. Brief Facts: By the agreement dated February 19, 2019, Flynt Mining LLP (Respondent No.1) undertook to provide mining services to Balasore Alloys Limited (Petitioner) including the extraction of chromite ore. However, the petitioner alleged that Respondent No.1 breached the terms of the agreement by conducting mining operations in a manner that led to a significant shortfall in ore extraction and ultimately leading to the abandonment of work by Respondent No.1. Due to the use of unskilled personnel and failure to adopt modern technology, tunnel roofs and sides began collapsing which rendered the site unsafe. The petitioner issued a notice invoking arbitration on May 9, 2024, under Clause 16 of the agreement dated February 19, 2019, proposing the name of a retired Judge of the Bombay High Court as the sole arbitrator. As the parties failed to constitute the Arbitral Tribunal as per the said clause, the petition has been filed under section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) seeking appointment of a sole arbitrator. Respondent No.1, in reply, rejected both the initiation of arbitration and the proposed arbitrator. The petitioner contends that since the mechanism under Clause 16 has failed, the court must refer the matter to the Arbitration. Contentions: The petitioner submitted that Clause 16 of the said agreement was a valid arbitration clause. It provided the mechanism for resolution of the dispute by arbitration, the governing laws and a forum. It was further submitted that under the clause, all parties were to endeavour to settle the dispute amicably within 30 days, failing which the dispute was agreed to be referred jointly to the managing director of the petitioner and the designated partner of the service provider. In Punjab State and ors. vs. Dina Nath (2007), the term arbitration was not used, but the clause was held to be an arbitration clause by the Supreme Court. It was further contended that the fact that the Managing Director of the petitioner and the designated partner of the respondent No.1 had signed the agreement was of no consideration at all. What was pertinent, was to ascertain whether the parties had an intention to refer the dispute to a private tribunal for final adjudication. Per contra, the Respondent submitted that clause 16 of the agreement did not satisfy the pre-requisites of an arbitration agreement as contemplated under the Arbitration Act. Observations: The court at the outset observed that the clause 16 of the Agreement, though does not mention the word "arbitration," does not become invalid solely on that ground. If the dispute resolution clause reflects a clear intention of the parties to refer disputes to a private tribunal for an impartial decision after providing both parties a fair opportunity to present their case and if they have agreed to be bound by such decision, it would constitute a valid arbitration agreement despite the absence of the word "arbitration." As held in Jagdish Chander vs. Ramesh Chander and ors. (2007). Based on the above, the court held that in the present case, the contract was executed between two private entities through their Managing Director and designated partner and both directly involved in the contract's performance and the resulting disputes does not qualify as a valid arbitration agreement under the Arbitration Act. It further said that unlike contracts with PSUs or the Railways, where the named arbitrator is typically a higher authority not involved in executing the contract, this clause appoints individuals who are directly connected to the dispute. The court further observed that as per Sections 10 and 12(5) of the Arbitration Act after the Arbitration Amendment Act of 2015, such individuals are ineligible to act as arbitrators. The clause, entered into in 2019, at best reflects an internal dispute resolution mechanism, not a binding arbitration agreement under the Arbitration Act. The court opined that in the reply filed to the notice issued under the Insolvency and Bankruptcy Code, 2016 (IBC) as also in the objection filed before the National Company Law Tribunal (NCLT), the petitioner did not contend that the matter should be resolved by arbitration. Based on the above discussion, the court held that thus, the decision of two private ...

Clause Empowering Contract Signatories To Resolve Disputes Does Not Constitute A Valid Arbitration Agreement Due To Lack Of Impartiality: Calcutta HC

Mohd Malik Chauhan

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