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TO BE OR NOT TO BE: An Assessment of a Pathological Arbitration Clause
Existence of an arbitration agreement is a necessary corollary for maintaining a petition under Sections 9 and 11 of the Act[2] and through this article, we will endeavour to breakdown and analyse the various principles which a court may look into, in order to hold, as to whether an arbitration clause exists or not.
[1] O.M.P.(I) (COMM.) 281/2021, Decided on 07th December 2021. [2] Vidya Drolia & Ors. Vs. Durga Trading Corp. (2021) 2 SCC 1. [3] (2009) 2 SCC 55. [4] (2012) 1 SCC 361. [5] 2015 SCC Online Cal 6582. [6] Officious Bystander Test is developed by MacKinnon LJ in the matter of Southern Foundries (1926) Ltd v Shirlaw; [1939] 2 KB 206, wherein it was held that "prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common 'Oh, of course!". [7] (2014) 5 SCC 1. [8] Visa International Ltd. v. v. Continental Resources (USA) Ltd.; (2009) 2 SCC 55. [9] Vidya Drolia & Ors. Vs. Durga Trading Corp.; (2021) 2 SCC 1.
Assessment of the Arbitration Paradigm
Courts have placed paramount reliance on the intention of parties, whilst considering the validity of an arbitration agreement. Certain principles that emerge from analysing several precedents can be summarised as below:- Intention to arbitrate by conduct
- Intention to arbitrate, as an alternative
- Intention to arbitrate and the Officious Bystander Test[6]
Analysis of ‘Sapna Gupta (Supra)’
The arbitration clause governing the parties was observed to be ex-facie ambiguous and could be split-up into three parts for convenience and better understanding of the intention of the parties:- The first part provided that for matters where there is no provision in the deed and a dispute arises relating to affairs of the firm, the same has to be mutually decided by the partners.
- The second part provided for applicability of the Indian Partnership Act, 1932 which has actually no correlation to the preceding or succeeding parts.
- The third part stipulated - “however the dispute can also be decided under the provisions of Indian Arbitration Act”.
Key Takeaway
The question of validity of an arbitration clause hinges on the dual aspect of construction of arbitration clause and the intention of the parties. In case the language of the arbitration clause is ambiguous in nature, the Court will endeavour to gather the intention of the parties, basis their conduct, correspondence and other circumstances. In case of a doubt regarding existence of an arbitration agreement, the Court would refer the disputes for arbitration having regard to the principles of kompetenz-kompetenz. However, where the Court can ex-facie notice that there is no arbitration agreement, the parties need not be referred to arbitration.[9] Therefore, inartistic drafting of an arbitration clause may prima facie render an arbitration clause as, at the most, unreliable, however, the validity of the same can truly be ascertained only through adjudication by the Court.Authors
Dhruv Malik Counsel, Juris Corp Email: [email protected] Sharmistha Ghosh Senior Associate, Juris Corp Email: [email protected][1] O.M.P.(I) (COMM.) 281/2021, Decided on 07th December 2021. [2] Vidya Drolia & Ors. Vs. Durga Trading Corp. (2021) 2 SCC 1. [3] (2009) 2 SCC 55. [4] (2012) 1 SCC 361. [5] 2015 SCC Online Cal 6582. [6] Officious Bystander Test is developed by MacKinnon LJ in the matter of Southern Foundries (1926) Ltd v Shirlaw; [1939] 2 KB 206, wherein it was held that "prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common 'Oh, of course!". [7] (2014) 5 SCC 1. [8] Visa International Ltd. v. v. Continental Resources (USA) Ltd.; (2009) 2 SCC 55. [9] Vidya Drolia & Ors. Vs. Durga Trading Corp.; (2021) 2 SCC 1.