2025 (7) TMI 1205 - SC - Indian Laws

Arbitration clause using 'may' creates optional procedure, not binding agreement under Section 7

The SC dismissed an appeal challenging the HC's refusal to appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The ... Dismissal of application u/s 11 of the Arbitration and Conciliation Act, 1996 on the ground that there exists no arbitration agreement between the parties - disputes arose between the parties during the subsistence of the contract relating to transportation/handling of goods. Whether the question of existence of an arbitration agreement should be left for the arbitral tribunal to decide? - HELD THAT:- In the instant case, the appellant is relying on just one clause in the contract which, according to the appellant, constitutes an arbitration agreement whereas according to the respondent, though the clause is not disputed, the same does not constitute an arbitration agreement. In such circumstances, the Court while exercising power under Section 11 would not have to hold a mini-trial or an enquiry into its existence rather a plain reading of the clause would indicate whether it is, or it is not, an arbitration agreement, prima facie, satisfying the necessary ingredients of it, as required by Section 7 of the 1996 Act. Such a limited exercise would not transgress the limit set out by sub-section (6-A) Section 11. (6-A). The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement. of Section 11 of the 1996 Act as introduced by 2015 Amendment because the object of such an exercise (i.e., of examination) is to weed out frivolous claims for appointment of an arbitrator/ reference to an arbitral tribunal - the argument of the appellant that Referral Court should straight away refer the matter and leave it to the arbitral tribunal to decide whether the arbitration agreement exists or not cannot be accepted. Whether clause 13 would constitute an arbitration agreement between the parties as contemplated under Section 7 of the 1996 Act? - HELD THAT:- Clause 13 in its first paragraph sets out intent to avoid litigation and advises the contractor to make effort to settle the dispute at the company level. Second paragraph sets out the procedure for raising the dispute/ claim for settlement at the company level. It provides that the contractor should make request in writing to the Engineer-in-charge for settlement of disputes/ claims within 30 days of arising of the cause of dispute/ claim failing which it shall not be entertained by the company. Thereafter, clause 13 provides for a two-stage procedure for resolution of the dispute. The argument of the learned counsel for the appellant is that clause 13 provides option to the parties, which include any of one of the parties, to seek dispute resolution through arbitration and, therefore, it is nothing but an arbitration clause. According to him, use of the word “may” in clause 13 does not provide choice to the parties to agree, or not to agree, for arbitration, rather it is a choice given to either of the parties to seek a settlement through arbitration and, therefore, when one party exercises the option, the other party cannot resile from the agreement. In that sense, according to him, clause 13 is an arbitration agreement - As it is not the case of the appellant that parties at any later stage have agreed to refer the disputes to arbitration, the High Court was justified in rejecting the application seeking appointment of an arbitrator. Whether clause 32 of Instructions to Bidders negates the existence of an arbitration agreement? - HELD THAT:- Clause 32 does not exclude resolution of disputes through arbitration agreement. It only fixes jurisdiction and in the event of there being an arbitration agreement could determine the juridical seat. However, since it is held that there is no arbitration agreement between the parties, decision of this issue is of no consequence. Appeal dismissed. ISSUES: Whether the question of existence of an arbitration agreement should be left for the arbitral tribunal to decide'Whether the clause providing for dispute resolution in the contract constitutes an arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996'Whether a separate clause fixing legal jurisdiction negates the existence of an arbitration agreement? RULINGS / HOLDINGS: On the scope of judicial examination under Section 11, the Court held that the Referral Court's jurisdiction is limited to a prima facie 'examination of the existence of an arbitration agreement' and not a full trial; the Court must be satisfied prima facie that an arbitration agreement exists before appointing an arbitrator, but the arbitral tribunal retains competence to rule on its jurisdiction including existence and validity of the agreement.The clause in question, which uses the phrase 'may be sought through arbitration,' does not constitute an arbitration agreement as it lacks the essential element of consensus ad idem to arbitrate disputes; it is an enabling provision permitting parties to agree to arbitration in the future but does not impose a binding obligation to arbitrate.The clause fixing legal jurisdiction to the District Court does not exclude arbitration but since no arbitration agreement exists, the issue is moot. RATIONALE: The Court applied the statutory framework of the Arbitration and Conciliation Act, 1996, particularly Sections 7, 11, and 16, and relied on authoritative precedents including a recent seven-Judge Constitution Bench decision clarifying the limited scope of judicial inquiry under Section 11 post-2015 Amendment.The Court reaffirmed that an arbitration agreement requires a clear, present or future, written agreement to submit disputes to arbitration, reflecting mutual consent ('consensus ad idem') to arbitrate, and that mere possibility or option to arbitrate does not suffice.Precedents such as Jagdish Chander and Mahanadi Coalfields were followed, which held that clauses requiring further consent or using permissive language like 'may' or 'if the parties so decide' do not constitute arbitration agreements.The Court emphasized the doctrine of competence-competence, whereby the arbitral tribunal has the authority to decide on its own jurisdiction, including existence and validity of the arbitration agreement, while the Referral Court's role is confined to prima facie examination to weed out frivolous claims.The Court rejected the appellant's argument that the Referral Court must appoint an arbitrator and leave the question of existence to the arbitral tribunal, holding that the Court must be prima facie satisfied that an arbitration agreement exists before appointing an arbitrator.