The Calcutta High Court has ruled that it is the intention of the parties that has to be deciphered while determining whether or not the parties must be referred to arbitration.
The Single Bench of Justice Shekhar B. Saraf held that where the arbitration clause between the parties provided that "every effort" should be made by them to settle the dispute by arbitration, the term "every effort" expanded the scope and ambit of the arbitration clause, and clearly conveyed the intention to refer the disputes to arbitration.
The petitioner Manika Sett was one of the partners of the respondent partnership firm Sett Iron Foundry. The petitioner communicated her intent to retire from the partnership business, and called upon the remaining partners to pay her legitimate dues and handover the copies of the books of accounts. After some disputes arose between the petitioner and the remaining partners, the petitioner invoked the arbitration clause contained in the partnership deed. The respondent partnership firm, in its reply to the notice, rejected the contention of the petitioner regarding the existence of a dispute and denied the existence of the arbitration clause. Thus, the respondent refused to refer the alleged dispute to arbitration.
The petitioner filed an application before the Calcutta High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking appointment of an arbitrator to adjudicate the dispute between the parties.
The petitioner Manika Sett submitted before the High Court that the Court must refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists between the parties. The petitioner added that all questions pertaining to the validity and existence of the arbitration agreement must be determined by the Arbitral Tribunal.
The respondent Sett Iron Foundry averred that the arbitration agreement must expressly or by necessary implication provide for reference of the dispute to arbitration. The respondent contended that as per the relevant clause contained in the partnership deed, it was evident that it was the intention of the partners to settle the disputes mutually among themselves before approaching the Civil Court.
Hence, the respondent argued that the application filed by the petitioner for appointment of arbitrator should be dismissed since the arbitration clause was not mandatory in nature.
The Court noted that the relevant clause contained in the partnership deed provided that, where any dispute arose between the partners - "such a partner shall be free to seek interference of the Court for remedy although every effort should be made by the partners to settle the dispute by arbitration."
Observing that the parties were free to approach the courts for remedy, however, they were required to make every effort to settle the dispute by arbitration, the Court held that it is a settled principle of law that the consent of the parties to arbitrate must be unequivocal and unambiguous.
The Court placed reliance on the decision of the Supreme Court in Rickmers Verwaltung versus IOCL (1998) and Shakti Bhog Foods Ltd versus Kola Shipping Ltd. (2008), where the Supreme Court had laid down that the Courts have consistently striven to understand the true intention of the parties to determine whether there existed a consensus ad idem between them.
The Bench ruled that the phrase- 'although every effort should be made to settle the dispute by arbitration'- should be given a literal interpretation, and added that the said phrase evinces the intent of the parties and obligates them to undertake every effort to settle the dispute by arbitration before approaching the appropriate court.
The Court observed that the High Court of England and Wales in the case of Rhodia Int'l Holdings Ltd. & Rhodia UK Ltd. versus Huntsman Int'l LLC (2007) had held that the 'reasonable efforts' clause in a contract requires the obliged party to take only one reasonable course, whereas the 'best efforts' clause requires a party to take all the reasonable efforts.
The Court held that the term "every effort", as mentioned in the relevant clause contained in partnership deed, is much wider in nature than the term "best effort", and it expands the scope and ambit of the arbitration clause.
"I am of the view that the term "every effort" in the said clause of the partnership deed can be equated with the term "best effort", in fact, the term "every effort" is much wider in nature in comparison to the phrase "best effort", and therefore, expands the scope and ambit of the arbitration clause. Connected and incidental matters, unless the arbitration clause suggests to the contrary, would normally be covered."
It further observed that the Supreme Court in Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. versus Jade Elevator Components (2018) had held that where the dispute resolution clause is vaguely worded or where there is an ambiguity in the choice of mechanism to be adopted, emphasis must be laid on the intention of the parties to have their disputes arbitrated. The Supreme Court had ruled that a vague and unclear arbitration clause can hold validity as long as the intention of the parties to refer the dispute to arbitration is clear.
Ruling that the relevant clause clearly and unambiguously conveyed the intention of the parties to settle their dispute by way of arbitration, the Court observed that the A&C Act provides various grounds on which the parties can approach the Court during and after the arbitral proceedings.
Holding that the said clause did not imply for resolution of disputes by mutual settlement, and that it clearly indicated the intention of the parties to resolve their disputes by arbitration, the Court said there was a prima facie valid arbitration agreement existing between the parties.
Hence, the Court allowed the petition and appointed a Sole Arbitrator to adjudicate the dispute between the parties.
Case Title: Manika Sett versus Sett Iron Foundry and Ors.
Dated: 28.07.2022 (Calcutta High Court)
Counsel for the Petitioner: Mr. Siddhartha Banerjee, Advocate Ms. Soni Ojha, Advocate Ms. Sambrita B. Chatterjee, Advocate
Counsel for the Respondents: Mr. Subrata Kr. Dutt, Advocate Mr. Dilip Kumar Ghosh, Advocate