INDIAN ARBITRATION UPDATE | WHAT MAKES A VALID ARBITRATION AGREEMENT?
Bombay High Court (BHC) in the recent case of Quick Heal Technologies Ltd. v. NCS Computech Pvt. Ltd. construed the use of the word ``may`` in an arbitration agreement as an option for dispute resolution and not a mandatory provision, thereby dismissing the application for appointment of an arbitrator. In this update, we will analyses this interesting judgment.
- Quick Heal Technologies Limited (Petitioner) entered into a software distribution agreement with one NCS Computech Private Llimited (Respondent No 1) and one Innovative Edge, a partnership firm (Respondent No 2) on 2 April 2011 (Agreement).
- The Agreement contained an arbitration clause which reads as follows:
``17. Dispute Resolution:
a. All disputes under this Agreement shall be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.
b. Disputes under this Agreement be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. The place of arbitration shall be at Pune and language shall be English. The arbitral tribunal shall comprise one arbitrator mutually appointed, failing which, three (3) arbitrators, one appointed by each of the Parties and the third appointed by the 2 so appointed arbitrators and designated as the presiding arbitrator and shall have a decisive vote.
c. Subject to the provisions of this Clause, the Courts in Pune, India, shall have exclusive jurisdiction and the parties may pursue any remedy available to them at law or equity.``
- Later in 2017, disputes arose between the parties, and as a result of failure to settle the disputes amicably, the Petitioner sent the notice of invocation of arbitration to the Respondents. As the Respondents disputed the said notice, the Petitioner was constrained to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Arbitration Act).
- The Petitioner argued that there was a valid and mandatory arbitration agreement, which was binding on the parties, while the Respondents disputed the existence of a valid arbitration agreement, on the account of use of the word â€˜mayâ€™ in the relevant clause.
- Whether the use of the word `may` in the arbitration clause can amount to a valid arbitration agreement?
The BHC answered the above question in the negative and dismissed the petition for the following reasons:
- The Court observed that the use of both the words `shall` and `may` clearly indicates that the parties intended to resolve the dispute through amicable settlement. In case of failure of such settlement, the disputes `may` be settled by way of an arbitration. Use of both the words in the same clause indicates that the parties were well aware of the implications of both these words, and thus the construction of the provision of reference to arbitration cannot be made as mandatory, but has to be made as optional. Thus, the agreement is not a mandatory arbitration agreement and thus the petition was dismissed.
- The Court further relied upon the cases of Wellington Associates Ltd. v. Kirit Mehta and Powertech Worldwide Ltd. v. Delvin International General Trading LLC and held that there was no consensus ad idem between the parties with regard to arbitration and they only agreed to provide fresh consent (by use of the word `may`) in order to proceed with the arbitration. Since there was no fresh consent in the present case, the petition was dismissed.
- As regards the interpretation of the mandatory or optional nature of the words contained in the clause, the Court relied upon the Supreme Court judgments in the cases of The Labour Commissioner, Madhya Pradesh v. Burhanpur Tapti Mills Ltd. and others and Jamatraj Kewalji Govani v State of Maharashtra, and held that in the clauses where the words `may` and `shall` both appear, they must be construed to have a distinct meaning.
- The court however, distinguished the facts of the present case from the landmark judgments of the Supreme Court, in cases of Zhejiang Bonly Elevator v. Jade Elevator Components and Indtel Technical Services v. Atkins Rail Ltd. where the words `should` and `will` were used respectively, and the apex court had construed the same as being mandatory in nature, thus holding the arbitration agreement as valid. The BHC in the present case, however, observed that the word `may` has a non-binding implication, and thus can be differentiated from the use of words such as `should` and `will`.
The Court takes a conservative view in terms of construction of an arbitration clause. In terms of business efficacy as well as encouragement of Alternative Dispute Resolution mechanism, Indian courts have time and again construed badly worded arbitration clauses as valid arbitration agreements, giving due consideration to the intention of the parties. The present judgment contrasts with the liberal approach which is generally taken by the Courts.
Cases such as these emphasise the importance of well-drafted, water-tight and unambiguous arbitration clauses, leaving no room for any party to escape the procedure of arbitration by convenient interpretation in case of any dispute. Even though the judiciary has generally been construing rather weak or ambiguous arbitration clauses as valid arbitration agreements, it should not be taken for granted by the parties and the parties should take enough care at the time of drafting the clause.
This update was released on 11 Aug 2020.
Legal Update Team
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