Clause terming arbitration an option for dispute resolution, not a valid agreement: Calcutta High Court

Clause terming arbitration an option for dispute resolution, not a valid agreement: Calcutta High Court

Dismisses the petition on the basis that there was no prior consensus between the parties

The Calcutta High Court has held that a clause in an agreement that merely provides for a possibility of arbitration is not a binding arbitration agreement.

The bench of Justice Shekhar B. Saraf stated there could be such a possibility only if the parties chose to opt for it, before the occurrence of dispute. It reiterated that the nomenclature of a clause was irrelevant and the mere use of the word ‘arbitration’ did not make any clause a valid arbitration agreement.

In January 2019, the parties had entered into an agreement wherein the petitioner agreed to provide operation and maintenance services to the respondent.

Clause 7 of the agreement provided that in case of any dispute or pendency of litigation or arbitration between the parties, the performance of the agreement should not be stopped. Further, Clause 13 provided that no party shall be entitled to claim any interest on the principal sum and the arbitrator should not entertain any claim for interest.

Meanwhile, a dispute arose between the parties on the non-payment of the due amount by the respondent. The petitioner invoked Clause 7 and requested the respondent to nominate its arbitrator. In reply to the notice, the respondent disputed the existence of the arbitration clause. Thereafter, the petitioner filed the application for the appointment of the arbitrator.

The petitioner maintained there was a binding arbitration clause in the agreement, therefore, the dispute must be referred to arbitration. He added that it could be deduced from Clause 7 read with Clause 13 of the agreement.

However, the respondent submitted there was no valid arbitration clause between the parties, as Clause 7 did not make it mandatory for the parties to refer the dispute to arbitration, but merely provided a possibility. It conferred the parties with an option to choose between arbitration and litigation, hence, it was not an arbitration agreement.

The court referred to the judgment of the Supreme Court in the 2007 Jagdish Chander vs Ramesh Chander case, wherein it was held that for a clause to become an arbitration agreement it must clearly indicate the willingness of the parties to refer the dispute to arbitration and to be bound by the decision of the tribunal. Also, the wording of the clause should be such that makes the arbitration an obligation, not a possibility.

Thus, the high court observed that Clause 7 did not make it mandatory for the parties to refer the dispute to arbitration. It provided them the option of either choosing to litigate before the court or referring the dispute to arbitration.

The bench dismissed the petitions due to a lack of arbitration agreement between the parties.