The Hon’ble High Court of Delhi, placing reliance on a catena of judgments, has reiterated that the main attribute of an arbitration agreement is consensus ad idem to refer the disputes to arbitration. In the matter of “Sapna Gupta v. Ajay Kumar Gupta & Ors[1].”, it has been held that in case the same is missing, it is not an arbitration agreement, as defined under Section 7 of the Arbitration and Conciliation Act, 1996 (“Act”) and in the absence thereof, petition under Section 9 of the Act seeking interim measures, is not maintainable. 

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.

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:

1. Intention to arbitrate by conduct

In Visa International Ltd. v. Continental Resources (USA) Ltd.[3], ambiguity in the arbitration clause arose because it also stipulated that dispute arising out of the agreement could be settled amicably. The Court observed that no party can be allowed to take advantage of inartistic drafting of arbitration clause and instead the intent of the parties
can be gathered from the surrounding circumstances, including their conduct and the correspondence exchanged between them.

In Powertech World-Wide Ltd. v. Delvin International General Trading LLC[4], on the basis of correspondence between the parties on record, it was held that parties had an arbitration agreement in writing and were ad idem in their intention to refer disputes to arbitration.

1. Intention to arbitrate, as an alternative

In Suresh Tulshan Trustee of K.P. Foundation & Ors. v. Marco Polo Restaurant Pvt. Ltd.,[5], ambiguity in the arbitration clause in question arose because of the phrase “may” used therein.

The Court found distinguishing factors and observed that the arbitration clause contained an option that the parties either resort to arbitration or file a suit. Since parties through conduct had submitted to the jurisdiction of ordinary courts, the clause was found to be an invalid arbitration agreement.

1. Intention to arbitrate and the Officious Bystander Test[6]

In Enercon (India) v. Enercon GMBH[7], the question regarding validity of arbitration clause arose on account of its lack of workability for adjudicating dispute. It was held that the duty of the court is to make the same workable. A common-sense approach has to be adopted to give effect to the intention of the parties to arbitrate.

The omission in the arbitration clause was so obvious that it was held that the court can legitimately supply the missing line, applying the officious bystander principle, so as to enable the parties to proceed to arbitration.

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:

1. 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.
2. The second part provided for applicability of the Indian Partnership Act, 1932 which has actually no correlation to the preceding or succeeding parts.
3. The third part stipulated - “however the dispute can also be decided under the provisions of Indian Arbitration Act”.

The third part, which refers to ‘arbitration’, begins with the expression “however” and further stipulates that “disputes can also be decided” under the provisions of the Act, which is, in essence, a proviso to the first part, which provides for dispute resolution by mutual discussions amongst the partners.

Thus, a conjoint reading of the first and third parts implies that parties could resolve disputes mutually or if they so desire, could also take recourse to the Act. Therefore, there was no binding agreement for arbitration.

Even if this was a case of inartistic drafting[8], plain reading of the clause manifests the requirement of a fresh consent for arbitration from the usage of the phrase “can also be decided”, meaning thereby, that the parties may agree to refer the disputes to arbitration in the future.

Thus, it was held that this clause merely indicates a desire or hope to have the disputes settled through arbitration, or at best, a tentative arrangement to explore arbitration as a mode of resolution. Therefore, it is only an agreement to enter into an arbitration agreement in the future.

Placing reliance on the precedents mentioned hereinabove, the Court considered surrounding circumstances in the instant case and held that there was an absence of consensus ad idem. Since there was no arbitration agreement as defined under Section 7 of the Act, the petition under Section 9 of the Act was also not maintainable.

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.