Referral Of Disputes To Arbitration In Absence Of Explicit Arbitration Clause In Contract: An Analysis

In recent years arbitration has become the most sought-after method of resolving commercial disputes due to overburdened Courts, the COVID-19 pandemic and the opportunity it presents in terms of rendering award in a time bound manner.

The Courts in India have further expedited the growth of arbitration with their pro-arbitration stances taken in multiple matters. Continuing the legacy, in the matter of KGPS Mechanical Pvt. Ltd. vs. Cinda Engineering and Construction Pvt. Ltd, the Delhi High Court laid down the circumstances in which contracts that do not have explicit arbitration clauses can be referred to arbitration¹.

Brief background

In the instant case, a dispute arose regarding payment of dues owed to the Petitioner by the Respondent. The Petitioner was awarded two contracts by the Respondent for inter alia works related to construction and manufacturing. However, later on the Petitioner company was awarded seven more contracts that were left incomplete by previous vendors.

The Petitioner’s case was that the Respondent owed payment to the Petitioner with respect to the work completed by them. The Petitioner in its letter to the Respondent, invoked arbitration to settle the said disputes and made references to seven contracts out of nine. However, in response, the Respondent stated that all the nine separate agreements contain independent arbitration clauses.

The Court found out that out of nine there were four agreements which didn’t contain any arbitration clause even though all the nine contracts were related to the same project. The Respondent submitted that only disputes under the five contracts having arbitration clauses can be referred to arbitration. However, the Court observed that the minutes of meetings and correspondence between the parties show that the Respondent perpetually referred to nine contracts as part of the same transaction. Further, the reply by the Respondent to the Petitioner’s letter cements the position that all the nine contracts can be referred to arbitration.

In addition to the above, the Court also observed that accepting the stance of the Respondent that there were arbitration clauses in only five of the nine contracts, even though the said contracts pertain to the same project, would lead to multiplicity of proceedings and conflicting rulings.

Analysis of the issue

The Court clarified, while citing the Supreme Court judgement Mahanagar Telephone Nigam Ltd. v. Canara Bank and Others, that as per Sections 7(4) (b) and 7(3) of the Arbitration and Conciliation Act, 1996, arbitration agreement doesn’t need to necessarily exist in a particular format in order to be valid.² The Court further emphasised that instead the intention of the parties to the dispute, whether they agree to submit the dispute to arbitration or not, need to be inferred from the documents/correspondence between the said parties.

In the Mahanagar Telephone Nigam Ltd judgement, Supreme Court had further laid down that an arbitration agreement must be interpreted in a manner that culminates the intention of the parties instead of nullifying it on merely technical grounds.

The Supreme Court has held in the case of Karnataka Power Transmission Corporation Limited v. Deepak Cables (India) Ltd. that dispute originating from an agreement cannot be referred to an arbitral tribunal in absence of an arbitration clause.³ However, the Apex Court had also clarified that there must be consensual acceptance of the parties to the dispute to refer the said matter to an arbitrator. It was held that there is no need for specific mention of the term ‘arbitration’ in the concerned agreement but what must be seen is whether it was the intention of the parties to resolve the dispute through arbitration.

Section 7 of the Arbitration and Conciliation Act, 1996 doesn’t lay down any particular form in which an arbitration agreement should exist. The same was also stated in Bihar State Mineral Development Corporation v. Encon Building.⁴ It was further held in the said judgement that instead of the form of the agreement, greater emphasis is needed on the intention of the parties to figure out the existence of the agreement. Even in the case of Visa International Ltd vs Continental Resources USA Ltd, the Supreme Court held that whether an arbitration agreement exists or not can be inferred from the material on record including surrounding circumstances.⁵

The Delhi High Court’s decision to refer disputes in relation to all the nine contracts to arbitration based on the correspondence exchanged between the two parties is a step in the right direction. The said decision is consistent with the legislative intent of expediting dispute resolution, reducing the burden on judiciary and preventing multiplicity of disputes.

The Chief Justice of India has recently remarked that arbitration isn’t merely an alternative anymore but is the preferred mode of seeking commercial justice. From the encouragement received by arbitration as alternate mode of dispute resolution from the judiciary and legislature in India, it can be hoped that in the time to come the burden of Courts will be greatly lessened qua commercial disputes. Further, speedier resolution of commercial disputes will encourage more investments from private enterprises, giving our nation’s economy a much-needed boost.

Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in July 2024.