Arbitration Clause Has To Be Given Effect Even If It Does Not Expressly State That Decision Of Arbitrator Is Final & Binding On Parties: Supreme Court

The Supreme Court observed that an arbitration clause has to be given effect even if it does not expressly state that the decision of the arbitrator will be final and binding on the parties.

The deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause, the bench comprising Justices Surya Kant and Abhay S. Oka observed.

In this case, the agreement between the parties contained the following clause 18: All the disputes or differences arising between the parties hereto as to the interpretation of this Agreement or any covenants or conditions thereof or as to the rights, duties, or liabilities of any part hereunder or as 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 of a Sole Arbitrator mutually appointed, failing which, two Arbitrators, one to be appointed by each party to dispute or difference and these two Arbitrators will appoint a third Arbitrator and the Arbitration shall be governed by the Arbitration and Conciliation Act, 1996 or any re­enactment thereof.

While dismissing an application filed under Section 11 of the Arbitration Act, the High Court observed that Clause lacks certain essential ingredients of a valid arbitration agreement, as it does not mandate that the decision of the arbitrator will be final and binding on the parties.

The issue raised before the Apex Court was whether Clause 18 constitutes a valid arbitration clause for the purpose of invoking powers under Section 11 of the Act?

The court noted that section 7 of the Act does not mandate any particular form for the arbitration clause. It noted that the essential elements of an arbitration agreement are as follows: (1) There must be a present or a future difference in connection with some contemplated affair. (2) There must be the intention of the parties to settle such difference by a private tribunal. (3) The parties must agree in writing to be bound by the decision of such tribunal. (4) The parties must be ad idem. 

Referring to Clause 18, the bench observed:

"Firstly, apart from the fact that Clause 18 of the Development Agreement uses the terms "Arbitration" and "Arbitrator(s)", it has clearly enunciated the mandatory nature of reference to arbitration by using the term "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". Secondly, the method of appointing the third arbitrator has also been clearly mentioned wherein the two selected Arbitrators are to appoint a third arbitrator. Finally, even the governing law was chosen by the parties to be "the Arbitration and Conciliation Act, 1996 or any re­enactment thereof." These three recitals, strongly point towards an unambiguous intention of the Page 12 of 16 parties at the time of formation of the contract to refer their dispute(s) to arbitration"

The court thus found that the Clause 18  discloses the intention and obligation of the parties to be bound by the decision of the tribunal, even though the words "final and binding" are not expressly incorporated therein. While allowing the appeal, the bench observed:

"It can be gleaned from other parts of the arbitration agreement that the intention of the parties was surely to refer the disputes to arbitration. In the absence of specific exclusion of any of the attributes of an arbitration agreement, the Respondents' plea of non­ existence of a valid arbitration clause, is seemingly an afterthought.. Even if we were to assume that the subject­clause lacks certain essential characteristics of arbitration like "final and binding" nature of the award, the parties have evinced clear intention to refer the dispute to arbitration and abide by the decision of the tribunal. The party autonomy to this effect, therefore, deserves to be protected. 25. The deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.

..It is thus imperative upon the courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them. The intention of the parties that flows from the substance of the Agreement to resolve their dispute by arbitration are to be given due weightage. It is crystal clear to us that Clause 18, in this case, contemplates a binding reference to arbitration between the parties and it ought to have been given full effect by the High Court."

Case details

Babanrao Rajaram Pund vs Samarth Builders & Developers |  2022 LiveLaw (SC) 747 | SLP(C) 15989 OF 2021 | 7 September 2022 | Justices Surya Kant and Abhay S. Oka

Arbitration and Conciliation Act, 1996 ; Section 7, 11 - Section 7 of the Act does not mandate any particular form for the arbitration clause - Even if we were to assume that the subject­clause lacks certain essential characteristics of arbitration like "final and binding" nature of the award, the parties have evinced clear intention to refer the dispute to arbitration and abide by the decision of the tribunal. The party autonomy to this effect, therefore, deserves to be protected - The deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause - Courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them. (Para 14-28)

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