India: Whether The Use Of The Word ‘Arbitration' In The Heading Of An Agreement Entails The Existence Of An Arbitration Agreement? The Delhi High Court Answers

Introduction:

An arbitration proceeding or reference would not persist unless an arbitration agreement or an arbitration clause exists. Section 7 of the Arbitration and Conciliation Act, 1996 ("the Arbitration and Conciliation Act") stipulates that an arbitration agreement means an agreement by which the parties submit to arbitration all or certain disputes which have arisen or which may arise in the future between them in respect of a defined legal relationship, whether contractual or not.

In the recent judgment of Foomill Pvt. Ltd. v. Affle (India) Ltd¹, the Hon'ble Delhi High Court held that the passing usage of the word 'Arbitration' cannot on its own result in the creation of an Arbitration Agreement.

Factual Matrix:

On 29th July 2021, Foomill Pvt. Ltd. ("the Petitioner") and Affle (India) Ltd. ("the Respondent") entered into a Master Service Agreement for software development. The Petitioner raised certain concerns after the commencement of the project due to deferments on part of the respondent. The Respondent intimated the petitioner of an 'expectation mismatch' due to which the project was put on hold by the Respondent. Since the respondent showed no intention of resolving the dispute amicably, the Petitioner sent a legal notice invoking arbitration under Clause 11 of the Master Service Agreement. The Respondent replied to the said legal notice contending that there was no arbitration agreement or even an arbitration clause between the parties.

Clause 11 of the Master Service Agreement stated that:

The heading of Clause 11 noted the word 'Arbitration' was the basis of the petitioner's claim for resolution of the disputes arising between the parties through arbitration. The present petition is filed by the Petitioner before the Delhi High Court for the appointment of an Arbitrator to resolve the disputes between the Petitioner and the Respondent related to software development arising out of the Master Service Agreement.

The Issue before the Court:

The Court has delved into the question of the use of the word 'arbitration' in the heading of the dispute resolution clause in the Agreement would be sufficient to deem the particular clause as an 'Arbitration Clause'.

The Decision of the Court:

The High Court of Delhi relied on its decision in the case of Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. v. Ind Swift Limited². The decision in the above case was primarily based on two judgments. First was the case of Bernhard consultancy Pvt ltd³, wherein the Arbitration clause was named such, but no wording of the clause placed all disputes arising out of the Agreement under the jurisdiction of Courts at Hyderabad. The Chief Justice of the Andhra Pradesh High Court held that the terms of an Arbitration agreement as stipulated under section 11 of the Arbitration and Conciliation Act need to be fulfilled for a clause to qualify as an Arbitration Clause.

The Supreme Court, on the other hand, has upheld the validity of an arbitration clause that was contented to be ambiguous and unclear. In the case of Trimex International FZE Limited, Dubai⁴, Refraining from delving into the principles of law, the apex Court held that the intention of the parties clearly shows that they wanted to refer the disputes to arbitration.

In the matter of Avant Garde Clean Room & Engg. Solutions Pvt., the words of the dispute resolution clause provide exclusive jurisdiction of any dispute to courts in the city of Delhi. There are no words or terms in the clause that throws light on the intention of the parties to refer the dispute to arbitration. The mere presence of the word arbitration in the heading of a clause does not qualify as proof of the intention of the parties, which instead must be gathered from the terms of the clause.

In the present matter, the Court followed the principles laid down in the above-mentioned cases and rejected the contention that the clause at hand qualifies as an arbitration clause.

Concluding Remarks:

One of the most essential ingredients to be present to constitute a valid arbitration agreement is Consensus ad idem i.e., agreeing to the same thing in the same sense between the parties. The present case denotes the need for a clearly drafted Arbitration Agreement or an Arbitration Clause in a contract. A bare usage of the word 'Arbitration', without any express specification of the intention of the parties to refer the dispute to arbitration, cannot be reckoned upon to invoke an Arbitration. Thus, while drafting an Arbitration Clause/Agreement, the intention of the parties should be clearly indicated using unambiguous expressions.

Footnotes

1. Foomill Pvt. Ltd. v. Affle (India) Ltd, ARB. P. 325/2022, decided on 25.03.2022.

2. Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. v. Ind Swift Limited, (2014) 210 DLT 714.

3. Bernhard Consultancy Private Ltd. v. Ind Agro Synergy Limited, Nagpur, 2001 (4) ALD 720.

4. Trimex International FZE Limited, Dubai v. Vedanta Aluminium Ltd., India, (2010) 3 SCC 1.

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