An Enabling Clause Does Not Constitute A Binding Arbitration Agreement Between The Parties: Bombay High Court

The Single Bench of Justice G. S. Kulkarni held that the use of the word "may" does not bring about any arbitration agreement between the parties, when tested on the touchstone of Section 7(1) of the Arbitration and Conciliation Act, 1996 (A&C Act), which defines the arbitration agreement.

The applicant Derivados Consulting Pvt. Ltd. is engaged in the business of financial advisory services. A mandate was executed between the parties under which the applicant was appointed as the executive financial adviser of the respondent- Pramara Promotions Pvt. Ltd.

The applicant issued an invoice, calling upon the respondent to pay an amount towards the professional services rendered by the applicant in terms of the engagement letter/mandate executed by the parties. After the respondent denied its liability towards the outstanding dues, the applicant invoked the arbitration agreement as contained in the mandate/engagement letter. The applicant filed an application under Section 11(6) of the A&C Act for appointment of an Arbitral Tribunal before the Bombay High Court.

The respondent Pramara Promotions disputed the existence of the arbitration clause. The respondent submitted that since the Clause contained the word "may", which was further succeeded by the words "but is not required to submit the dispute to binding arbitration", the said Clause only enabled one of the parties to request the other party to agree to enter into an arbitration agreement.

The applicant Derivados Consulting submitted that once an option to take the dispute to arbitration was exercised by one of the parties, the disputes were necessarily required to be referred to arbitration. The applicant contended that there was a lawful invocation of the arbitration clause.

The Court observed that in view of Section 7 (1) of the A&C Act, an arbitration agreement is an agreement which would mandate the adjudication of the dispute by arbitration. The Court held that when the parties to an arbitration agreement provide that they "may" refer the disputes to arbitration, the word "may" takes away a conclusive and mandatory affirmation between the parties to refer the disputes to arbitration.

The Court added that the scope of jurisdiction of the Court under Section 11(6) read with Section 11(A) of the A&C Act is to examine whether there is a clear, unfettered and an absolute intention of the parties, as discerned from the arbitration clause, to refer the disputes to arbitration.

The Court observed that in view of the fact that the relevant Clause in the said agreement provides that either party "may, but is not required to submit the dispute to binding arbitration", it was discernible that the parties have not agreed to have an arbitration agreement.

"The reason being that the very use of the word "may" by the parties, does not bring about any arbitration agreement between the parties, when tested on the touchstone of what sub-section (1) of Section 7 provides, namely an "agreement by the parties" to submit to arbitration. The use of the word "may" cannot be without reason and needs to be given its due meaning, which is the intention of the parties, and more particularly in the light of the above noted succeeding words, the parties have incorporated, in the said clause.", the Court held.

The Court added that once the parties have agreed to use the word 'may', the parties have conferred a choice or a discretion to a party to enter into an arbitration agreement in the future. The Court ruled that the use of the word 'may' cannot be construed as being mandatory for a party to submit or agree to refer the disputes to arbitration.

The Court held that the words succeeding the word 'may', highlighted the intention of the parties that there was no binding arbitration agreement between them.

Thus, the Court ruled that the relevant Clause was merely an enabling clause, which enabled the parties to enter into an arbitration agreement, and that it did not create any binding arbitration agreement between them.

The Court added that any agreement between the parties to refer the disputes to arbitration needs to clearly satisfy the mandate of Section 7 of the A&C Act and that such an arbitration agreement or clause needs to be unambiguous, reflecting a clear intention of the parties to refer the disputes to arbitration. The Court ruled that the said Clause did not qualify any of the basic requirements.

Hence, the Court ruled that there was no arbitration agreement between the parties and thus, the Court cannot exercise jurisdiction under Section 11(6) of the A&C Act for appointment of Arbitrator.

Case Title: Derivados Consulting Pvt. Ltd. versus Pramara Promotions Pvt. Ltd.

Dated: 08.06.2022 (Bombay High Court)

Citation: 2022 LiveLaw (Bom) 261 

Counsel for the Applicant: Ms. Aneesa Cheema i/b. DSK Legal

Counsel for the Respondent: Mr. Yash Kataria i/b. Divekar & Co.

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