APPOINTMENT OF ARBITRATOR IN THE ABSENCE OF A VALID ARBITRATION AGREEMENT

Arbitration Agreement

Section 7 of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) defines the expression ‘Arbitration Agreement’ as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.  The arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.  An arbitration agreement shall be in writing.

There shall be a clause in the agreement as to the reference of settling the disputes to arbitrator.  In the absence of such agreement whether it may be treated as an agreement for arbitration?  It is well settled that even if the word arbitration is not mentioned in the dispute resolution clause, mere absence thereof would not make the clause invalid, if the said clause indicated that there had been meeting of the minds of the parties to refer any dispute to a private tribunal, which was supposed to decide the dispute in an impartial manner, upon giving adequate opportunity to the parties to place their case and the parties had agreed to be bound by the decision of the said tribunal.

Case laws

In Jagdish Chander Versus Ramesh Chander & Ors - 2007 (4) TMI 624 - Supreme Court, the Supreme Court held that the words ‘arbitration’ and ‘arbitral tribunal’ were not required to be incorporated in a valid arbitration clause. As long as the other features or elements of an arbitration agreement were present in the said clause, the same would be construed as a valid arbitration clause.

In Punjab State And Others Versus Dina Nath - 2007 (5) TMI 564 - Supreme Court, the term arbitration was not used, but the clause was held to be an arbitration clause. The Supreme Court held  that, to interpret the agreement as an arbitration agreement, one had to ascertain the intention of the parties and whether the parties would treat the decision to be final and binding.

In Balasore Alloys Limited Versus Flynt Mining LLP - 2025 (4) TMI 431 - CALCUTTA HIGH COURT, the petitioner, Balasore Alloys Limited (‘BAL’ for short) is a company registered under the Companies Act and the respondent is a Limited Liability Partnership (‘LLP’ for short).  Both entered into an agreement on 19.02.2009.  By that agreement the respondent would provide mining services to the petitioner, including extraction of chromite ore. 

The initial agreement term was for 37 months, for the eastern side of the mines, i.e., 2 months for the purpose of mobilization and 35 months for operational purposes from the effective date, i.e., 19.02.2019, and a period of 56 months for the western side which was agreed to commence after 8 months from the effective date and included mobilization period of 60 days. The objective for the execution of the contract was described in Clause B of the agreement.

Since the respondent failed to execute its part of obligations, the petitioner filed a writ petition before the High Court for appointment of an Arbitrator in terms of Clause 16 of the agreement dated 19.02.2019.  The petitioner charged the following allegations against the respondent before the High Court-

• The respondent adopted a very casual approach to the excavation related activities from the very beginning. 
• The mobilization of equipment took place after 5 months from the date of execution of the agreement, which was a serious lapse. 
• The respondent also failed to provide skilled personnel, but also failed to employ latest modern technology in spite of promises. 
• On account of deployment of unskilled personnel and failure to implement the use of modern technology, the roofs and sides of the tunnels started collapsing, which made the site conditions unsafe for the task force with an adverse cascading impact.
• There was huge shortfall in the quantity of extraction of ore.
• As a corollary to such lapse, the petitioner allegedly suffered financial loss and also earned a bad reputation in the industry. 
• On 15.11.2019, the respondent abandoned the work site without any intimation or information to the petitioner, thereby avoiding to perform its obligations under the agreement.

The petitioner claimed a sum of Rs.766.64 crores towards costs and liquidated damages.  The respondent did not respond to settle the claims.  Instead, the petitioner received a notice, dated 14.09.2022, from the respondent under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) claiming Rs. 1008.87 crores.  The petitioner denied the same vide his letter dated 05.11.2022.  However, the respondent filed an application under Section 10 of the Code for initiation of corporate insolvency resolution process against the petitioner under CP(IB) No. 19/CB/2023 before the National Company Law Tribunal, Cuttack.   The petitioner also filed a reply before the National Company Law Tribunal disputing the said amount.

In the meanwhile, the petitioner issued a notice on 09.05.2024 to the respondent invoking clause 16 of the agreement invoking arbitration.  The petitioner suggested the name of a retired Judge of the Bombay High Court, as the sole arbitrator. The respondent issued a reply to the notice, thereby rejecting the proposal for initiation of arbitration proceedings and also rejected the name of the proposed arbitrator.  The petitioner prayed the Court to refer the dispute between the petitioner and the respondent to arbitrator.   

The petitioner submitted the following before the High Court-

• Clause 16 of the agreement was a valid arbitration clause providing the mechanism for resolution of the dispute by arbitration, the governing laws and a forum.
• All parties were to endeavour to settle the dispute amicably within 30 days, failing which the dispute was agreed to be referred jointly to the managing director of the petitioner and the designated partner of the service provider, whose decision would be binding on all the parties.
• The words ‘arbitration’ and ‘arbitral tribunal’ were not required to be incorporated in a valid arbitration clause. As long as the other features or elements of an arbitration agreement were present in the said clause, the same would be construed as a valid arbitration clause.
• To interpret the agreement as an arbitration agreement, one had to ascertain the intention of the parties and whether the parties would treat the decision to be final and binding.
•  The proceedings under Section 9 of the Code would not be a bar for appointment of an arbitrator.

The respondent submitted the following before the High Court-

• Clause 16 of the agreement did not satisfy the pre-requisites of an arbitration agreement as contemplated under the Act.
• The High Court did not have the jurisdiction to receive, try and determine the present application.
• Corporate Insolvency Resolution Process was pending before the National Company Law Tribunal, Cuttack.
• The application was an afterthought and the entirety of the claim was sham and moonshine.
• The work was commenced on 01.07.2019. Running account bills from 05.08.2019 to 03.12.2019, had been raised. Apart from making certain ad hoc payments till 17.01.2020 a huge amount had remained due and payable by the petitioner.
• On 19.05.2024 the petitioner invoked the arbitration clause for the appointment of an arbitrator to settle the dispute invoking clause 16 of the arbitration agreement.

The respondent prayed for the dismissal of the petition.

The High Court considered the submissions of the petitioner as well as the respondent.  The High Court considered the question as to whether the prayer of the petitioner can be allowed.  The High Court analysed the provisions of Clause 16 of the Agreement.  Clause 16 provides the following-

• Resolution of Dispute, Governing Laws and Jurisdiction In case of any dispute between the parties, on any terms arising out of the agreement, the parties shall enter into discussion to resolve the dispute mutually.
• The parties hereto agree that the Service Provider shall be obliged to carry out their obligation under the Agreement to the satisfaction of BAL even if a dispute is persisting.
• All the parties shall endeavour to settle the dispute amicably within a period of 30 days failing which the dispute shall be referred jointly to Managing Director of BAL, and Designated Partner of Service Provider whose decision shall be binding on all parties.
• This agreement shall be governed by and construed in accordance with the Indian laws and the courts of Kolkata shall have exclusive jurisdiction.

The High Court also analysed the provisions of Section 7 of the Act. 

The High Court observed that the Managing Director of BAL and the designated partner of the respondent cannot act as arbitrators as they have represented their respective entities in the contract. This is opposed to the fundamental principle of the arbitrator’s impartiality and independence.  The procedure prescribed is contrary to the principles of natural justice. Also, under the Indian law, the arbitrators were required to disclose potential conflict of interest. This was not possible in the instant case.  An arbitral tribunal could not be constituted by even member of persons. The High Court was of the view that the parties did not intend the clause to be an arbitration agreement under Section 7 of the said Act.   The decision of two private entities to refer their dispute to their representatives who executed the subject contract, even if by designation, cannot be held to be a clear intention to bind themselves to an arbitration, as contemplated under the Act. 

The High Court held that unless the clause indicates the clear intention to refer the dispute for arbitration within the meaning and purport of the Act the High Court cannot refer the dispute to arbitration.  In-house mechanism and cannot be construed as an arbitration clause.  Therefore, the High Court held that the clause 16 of the agreement is not a valid arbitration clause as contemplated under the Act and therefore dismissed the writ petition filed by the petitioner.

Conclusion

From the above it can be inferred that there shall be a valid clause for arbitration in the agreement.  In KK. MODI Versus KN. MODI - 1998 (2) TMI 566 - Supreme Court, the Supreme Court gave a guideline what constitutes an arbitration agreement-

• The intention of the parties to enter into an arbitration agreement shall have to be gathered from the terms of the agreement. If the terms of the agreement clearly indicate an intention on the part of the parties to the agreement to refer their disputes to a private tribunal for adjudication and a willingness to be bound by the decision of such tribunal on such disputes, it is arbitration agreement. While there is no specific form of an arbitration agreement, the words used should disclose a determination and obligation to go to arbitration and not merely contemplate the possibility of going for arbitration. Where there is merely a possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.
• Even if the words “arbitration” and “Arbitral Tribunal (or arbitrator)” are not used with reference to the process of settlement or with reference to the private tribunal which has to adjudicate upon the disputes, in a clause relating to settlement of disputes, it does not detract from the clause being an arbitration agreement if it has the attributes or elements of an arbitration agreement. They are

• The agreement should be in writing.
• The parties should have agreed to refer any disputes (present or future) between them to the decision of a private tribunal.
• The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it.
• The parties should have agreed that the decision of the private tribunal in respect of the disputes will be binding on them.