M J Antony: Holes in arbitration agreements

OUT OF COURT

Faced with vague terms in contracts, the Supreme Court has set guidelines for legal draftsmen.

Though contracts and arbitration agreements are drafted by resourceful lawyers, sometimes they do leave gaps, thus creating more business for the legal profession. Some of the judgements delivered in recent weeks by the Supreme Court highlighted such vagueness in contracts leading to litigation up to the apex court.

In one important case, some judges found an arbitration agreement in the contract, while others insisted that there was none. This is a frequent incident in arbitration cases. Therefore, the Supreme Court summarised the law in its judgement, Jagdish Chander vs Ramesh Chander.

In this case, a partnership failed, leading to the appeal to the Supreme Court. The main question was whether there was an arbitration provision in the partnership deed. The relevant clause said that if any dispute arose, "the same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine". Legal brains stretched tight over the last clause.

The issue was whether it constituted an arbitration agreement. The Delhi high court understood it as an arbitration agreement and therefore appointed a retired judge as an arbitrator to settle the disputes. However, on appeal, the Supreme Court ruled that it was not an arbitration agreement proper.

According to the Supreme Court, it was "a provision which enabled arbitration only if the parties mutually decided after due consideration as to whether the disputes should be referred to arbitration or not. In effect, the clause requires the consent of the parties before the disputes can be referred to arbitration".

In an earlier case, Wellington vs Kirit Mehta, the contract between the parties said that any dispute "may be referred to arbitration". Again, there was a row over whether it constituted an arbitration agreement. Finally, the Supreme Court decided that it was not an arbitration agreement. The word 'may' could not be construed as 'shall' and the clause was only an enabling provision and a fresh consent was necessary to go to arbitration.

In State of Orissa vs Damodar Das, the Supreme Court has laid down that a clause in a contract could be construed as an arbitration agreement only if an agreement to refer disputes to arbitration is expressly spelt out from the clause.

Its decisions in K K Modi vs K N Modi, Bharat Bhushan vs UP Small Industries Corporation and Bihar State Mineral Development Corporation vs Encon Builders also considered the attributes or essential elements of an arbitration agreement.

The Jagdish Chander decision has now crystallised the principles so far evolved by the Supreme Court in four paragraphs. Some notable points may be referred to thus: While there is no specific form of 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 word 'arbitration' is not used in the contract, it does not detract from the clause being an arbitration agreement if it has the attributes of one. Some of the basic elements are that the agreement should be in writing, the parties should agree to refer any dispute to the decision of a private tribunal and they should have agreed that such decision is binding on them. If the contract excludes any of the above attributes of arbitration, it would not be an arbitration agreement.

For instance, if any party dissatisfied with the verdict goes to a civil court, it cannot be termed as an arbitration agreement. The mere use of the word arbitration or arbitrator in the contract would not make it an arbitration agreement if it requires fresh consent of the parties for reference to arbitration. Examples: "In the event of dispute, the parties may also agree to refer the same to arbitration" or "if any dispute arises, they should consider settlement by arbitration".

Writing arbitration agreements might often prove to be a high-wire balancing act. If the right words are not used, instead of resolving the dispute quickly, the parties might wind up doing exactly what they wanted to avoid: suing and counter-suing for long periods, paying the lawyers heavily, spoiling relationships and getting a bad reputation. That is why the recent Supreme Court guidelines are extremely useful for those who draft arbitration agreements.

The advent of the Arbitration and Conciliation Act has not diminished uncertainties on the law. The government is said to be reviewing the performance of the Act to further cut down the number and length of arbitration cases. It is time the law-makers incorporated the principles laid down by the Supreme Court to increase business confidence.