Correspondence Stating Non-Arbitrability Of Dispute Due To Negotiable Instruments Act Proceedings Implies Recognition Of Arbitration Clause: Delhi High Court

The Delhi High Court bench of Justice Prateek Jalan has held that correspondence from a party stating that ongoing proceedings under the Negotiable Instruments Act, 1881 barred initiation of arbitration implicitly acknowledged the existence of the arbitration clause. Brief Facts: The matter pertained to an application filed under Section 11 of the Arbitration and Conciliation Act, 1996 where Dhanlaxmi Sales Corporation (Petitioner) sought the appointment of an arbitrator to resolve disputes arising under a Dealership Agreement. The core issue in this dispute was the existence of an arbitration agreement that governs the resolution of conflicts between the parties involved. The Petitioner argued that Clause 7.6 of the Agreement, which mentioned "Dispute resolution by Arbitration," should be interpreted as an arbitration agreement. This clause included language stating that any dispute or claim, whether arising out of or relating to the Agreement or not, shall be referred to the courts of New Delhi. The Petitioner contended that the clause was invoked for arbitration through a communication and that the respondent's reply did not contest the presence of an arbitration clause but rather rejected the request for arbitration. This, the Petitioner argued, indicates an acknowledgment of the arbitration clause. On the other hand, the Respondent opposed the petition for arbitration and argued that Clause 7.6 does not qualify as an arbitration agreement under Section 7 of the Arbitration Act. It argued that the clause lacked the necessary intent to resolve disputes through binding arbitration, as merely mentioning "arbitration" in the heading does not suffice. The relevant clause is reproduced below: “7.6 Dispute resolution by Arbitration. Any and every dispute, controversy or claim between the parties and/or their valid and lawful assignees and successors, including, but not limited to (i) any and every dispute, controversy or claim arising out of or relating to this Agreement and/or its amendments, and (ii) any and every dispute, controversy or claim not arising out of or not relating to this Agreement and of its amendments, shall be referred to the courts of New Delhi.” Observations by the High Court: The High Court noted that the referral court's role is restricted to a preliminary determination of whether an arbitration agreement exists without delving into the substantive validity or applicability of such an agreement. This limited scope aligns with the principle of kompetenz-kompetenz which states that the arbitral tribunal is best suited to make a final determination on issues of arbitrability and the validity of the arbitration agreement. The High Court referred to the Supreme Court in In SBI General Insurance Co. Ltd. v. Krish Spinning where it was held that under Section 11(6-A), the referral court should only conduct a prima facie examination of the arbitration agreement's existence, focusing on whether the agreement is in writing, as stipulated by Section 7. The court noted that the use of the term "examination" in Section 11(6-A) signifies a preliminary review, distinct from the term "rule" under Section 16, which involves a more thorough evaluation. Further, the Supreme Court in In Re: Interplay reiterated that at the stage of appointing an arbitrator, the High Court's role is confined to assessing the existence of a prima facie arbitration agreement, excluding any other issues. The High Court noted that on a plain reading of Clause 7.6, which mentions "arbitration" only in the heading, it would not normally constitute an arbitration agreement. Previous judgments, such as Jagdish Chander and Foomill Pvt. Ltd. v. Affle (India) Ltd., indicate that merely referencing "arbitration" in a clause heading is insufficient if the clause text suggests otherwise. However, the High Court held that the true nature of an arbitration clause depends on the parties' intent as demonstrated through their conduct and correspondence. The Supreme Court's decisions in Visa International Ltd. v. Continental Resources (USA) Ltd. and Powertech World Wide Ltd. v. Delvin International General Trading LLC emphasize that the intention of the parties, as discerned from correspondence and context, is crucial in determining whether a clause constitutes an arbitration agreement. In Visa International, the Supreme Court highlighted the importance of considering the correspondence and surrounding circumstances to ascertain the parties' intention to arbitrate disputes. The High Court noted that the correspondence exchanged between the parties revealed that they did not dispute the arbitration nature of Clause 7.6. Instead, the Respondent argued that ongoing proceedings under the Negotiable Instruments Act, 1881 barred arbitration. This stance, taken in their letters, the High Court held indicated an acceptance of the clause's...

Correspondence Stating Non-Arbitrability Of Dispute Due To Negotiable Instruments Act Proceedings Implies Recognition Of Arbitration Clause: Delhi High Court

Rajesh Kumar

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