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Arbitration Clause: Important Considerations

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In terms of Arbitration and Conciliation Act, 1996 (in short, “Arbitration Act”), existence of an arbitration agreement is essential for the courts to refer the matter for arbitration. Section 7 of the Arbitration Act lays down the essential conditions for existence of an arbitration agreement. The agreement between the parties to resolve their disputes through arbitration needs to be in writing (either reflected in a clause in the contract, or by way of a separate contract or recorded in any set of letter/email/message exchanges). However, all of this should clearly establish that there was an agreement between the parties to resolve their disputes through arbitration.

Golden Rule for interpretation of contracts

The golden rule under Contract Law is to give primacy to the true intent of the parties. Any term of the contract, by whatever name it is called, can be legally binding if it reflects the mutual intention of the parties. For gauging the intent of the parties, the whole document has to be considered in totality.

Mere use of the word ‘arbitration’ in the clause heading does not establish agreement between parties.

Delhi High Court in Foomill Pvt. Ltd. vs Affle(India) Ltd., 2022 LiveLaw (Del) 239 relied on Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. Vs. Ind Swift Limited, (2014) 210 DLT 714 and observed that mere use of the word ‘Arbitration’ in the heading in the Clause 11 of the Agreement between the parties in the present proceedings would not lead to the inference that there exists an agreement between the parties seeking resolution of disputes through arbitration.

Clause 11 of the Master Service Agreement dated 29th July 2021 read: “11. Jurisdiction, Arbitration & Dispute Resolution This Agreement and any dispute or claim relating to it, its enforceability or its termination shall be governed and interpreted according to the laws of India Subject to this Clause 11, the Courts at Delhi, shall have exclusive jurisdiction over any disputes under this Agreement”.

A perusal of the clause clearly shows that the term ‘arbitration’ has been used only in the heading of the clause. A reading of the complete clause will not show the intent of the parties to resolve disputes through arbitration.

Earlier, in Jagdish Chander Vs. Ramesh Chander and Ors., Manu/SC/8280/2007, the Supreme Court has observed that mere use of the word ‘arbitration in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration.

Concluding Remarks

It is important for parties to explicitly express their intention to resolve disputes through arbitration as arbitration can be undertaken only on consent of both the parties. Moreover, this agreement of the parties regarding arbitration should be in written form and should also be signed by both the parties. The arbitration clause can be incorporated either in the main agreement or a separate detailed arbitration agreement can be executed in case the parties wish to lay down the detailed terms for the arbitration.