Clause Saying Arbitration "May Be Sought" Doesn't Constitute A Binding Arbitration Agreement : Supreme Court

The Supreme Court recently held that a clause in an agreement that arbitration "may be sought" to resolve disputes between the parties will not constitute a binding arbitration agreement.Approving the refusal of the High Court to refer the parties to arbitartion, the Supreme Court observed that the phraseology of the clause did not indicate that the parties were bound to go for arbitration."...clause 13 does not bind parties to use arbitration for settlement of the disputes. Use of the words “may be sought”, imply that there is no subsisting agreement between parties that they, or any one of them, would have to seek settlement of dispute(s) through arbitration. It is just an enabling clause whereunder, if parties agree, they could resolve their dispute(s) through arbitration. In our view, the phraseology of clause 13 is not indicative of a binding agreement that any of the parties on its own could seek redressal of inter se dispute(s) through arbitration," the Court observed.Reliance was made on the judgments in Mahanadi Coalfields Ltd. vs. IVRCL AMR Joint Venture (2022), Jagdish Chander vs. Ramesh Chander (2007) 5 SCC 719 etc.In Jagdish Chander, the Court had observed that "where there is merely a possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement."In Mahanadi Coalfields, it was held that mere use of the word “arbitration” or “arbitrator” in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration.The Court also clarified that when referral courts do a plain reading of a contractual clause to assess the existence of an arbitration agreement, it does not amount to conducting a detailed inquiry or a mini-trial, and therefore does not violate the limited scope prescribed under Section 11(6-A) of the Arbitration and Conciliation Act, 1996 (“Act”).The Court said that for the limited purpose of satisfying whether an arbitration agreement as contemplated in Section 7 of the Act exists, the referral courts can scrutinize the documents relied upon by the parties in proof of its existence.The bench comprising Justices PS Narasimha and Manoj Misra heard the case where the dispute occurred due to a different interpretation of clause 13 in a contract entered into between the parties. Clause 13 provides an arbitration to be a permissive (or optional) mode of dispute settlement rather than a mandatory one, as it says that the parties 'may' opt for arbitration. The Appellant was aggrieved by the High Court's dismissal of its referral petition under Section 11 of the Act for appointment of arbitration, holding that Clause 13 did not constitute a valid arbitration agreement due to the use of the word "may" (indicating optional arbitration). The Appellant challenged the High Court's decision before the Supreme Court, arguing that Section 11(6-A) of the Act forbids the referral courts from undertaking an intricate inquiry, rather than only restrict their inquiry into determining the existence of the arbitration agreement. It added that the High Court erred in not referring the dispute to the arbitral tribunal, instead of deciding the question itself, thereby transgressing the limited scope prescribed under Section 11(6-A) of the Act. Affirming the High Court's decision, the judgment authored by Justice Misra held that the High Court had not exceeded the limits set by Section 11(6-A) of the Arbitration and Conciliation Act, 1996, as it had confined its inquiry to the existence of an arbitration agreement. The Court upheld the High Court's reasoning, stating that its decision served the purpose of weeding out frivolous claims, since the clause in question only provided for optional arbitration, and therefore did not amount to a binding arbitration agreement.“In the instant case, the appellant is relying on just one clause in the contract which, according to the appellant, constitutes an arbitration agreement whereas according to the respondent, though the clause is not disputed, the same does not constitute an arbitration agreement. In such circumstances, the Court while exercising power under Section 11 would not have to hold a mini-trial or an enquiry into its existence rather a plain reading of the clause would indicate whether it is, or it is not, an arbitration agreement, prima facie, satisfying the necessary ingredients of it, as required by Section 7 of the 1996 Act. In our view, such a limited exercise would not transgress the limit set out by sub-section (6-A) of Section 11 of the 1996 Act as introduced by 2015 Amendment because the object of such an exercise (i.e., of examination) is to weed out frivolous claims for appointment of an arbitrator/ reference to an arbitral tribunal.”, the court observed. “In view of the above discussion, the argument of the appellant that Referral Court...

Clause Saying Arbitration "May Be Sought" Doesn't Constitute A Binding Arbitration Agreement : Supreme Court

Yash Mittal

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Yash Mittal

Clause Saying Arbitration "May Be Sought" Doesn't Constitute A Binding Arbitration Agreement : Supreme Court

Yash Mittal

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Yash Mittal

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