Often, arbitration clauses in commercial contracts are provided in a tiered mechanism in order to facilitate speedy resolution of disputes and preservation of commercial relationships between parties. Such clauses generally involve taking certain pre-arbitral steps in the form of amicable/good faith negotiation between parties, mediation or appointment of expert or a non-binding decision-making person or body. Despite being a common feature in dispute resolution clauses, an overview of the judgments by the Supreme Court and various High Courts would show that the legal character of these procedures has been unclear.
Recently, the Bombay High Court in its judgment titled Quick Heal Technologies Limited Vs.NCS Computech Private Limited and Ors.1 , while deciding upon a petition for appointment of sole arbitrator (Petitio) under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Act) had the opportunity to decide upon the nature of one such pre-arbitration clause and also examine whether an arbitration clause which provides a discretion to parties to invoke arbitration, would qualify as an arbitration clause. The judgment was delivered by a single judge bench of Justice Kathawalla, where he interpreted the wordings of the Dispute Resolution Clause in question, and consequently dismissed the Petition in light of the observations discussed herein below.
A Software Distribution Agreement (Agreement) was executed between Quick Heal Technologies Limited (Petitioner) and NCS Computech Private Limited (Respondent No. 1) and Innovative Edge (Respondent No. 2) on 02.04.2011 for distribution of the products manufactured by the Petitioner. Clause 17 of the Agreement provided for the Dispute Resolution mechanism as follows:
"17. Dispute Resolution:
a. All disputes under this Agreement shall be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.
b. Disputes under this Agreement shall be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. The place of arbitration shall be at Pune and language shall be English. The arbitral tribunal shall comprise one arbitrator mutually appointed, failing which, three (3) arbitrators, one appointed by each of the Parties and the third appointed by the 2 so appointed arbitrators and designated as the presiding arbitrator and shall have a decisive vote.
c. Subject to the provisions of this Clause, the Courts in Pune, India, shall have exclusive jurisdiction and the parties may pursue any remedy available to them at law or equity."
Certain disputes arose between the parties regarding payment of balance amounts and the Petitioner, through an Advocate's letter dated 07.08.2017 addressed to Respondent No. 1 and letter dated 02.01.2018 addressed to Respondent No. 2 invoked the Arbitration Agreement and proposed the name of the sole arbitrator. Repeated requests made by the Petitioner to pay the outstanding amounts and settle matter amicably failed and consequently, the option for amicable settlement provided under Clause 17 (a) lay exhausted in its realistic sense. Hence, the Petitioner was constrained to file the Petition seeking appointment of Arbitrator.
The Respondent disputed the allegations and challenged the Petition on two grounds:
i. that the Petition was not maintainable in light of Clause 17 of the Agreement which does not provide for any mandatory Arbitration Agreement, but only provides that that if the disputes cannot be resolved within 30 days, the same "may" be referred to Arbitration, suggesting that there had to be a fresh agreement between the parties to refer the matter to arbitration; and
ii. that in any case, the Petition was premature, since amicable discussion for resolution did not take place between the designated personnel of each party and the Petitioner filed the Petition by-passing the agreed procedure laid down under Clause 17, which is mandatory/binding on the parties.
Issues in Question
i. Whether the pre-arbitration clause under Clause 17 of the Agreement was mandatory in nature?
ii. Whether an arbitration clause providing discretion to the parties to refer to arbitration is an arbitration clause?
Arguments on Behalf of the Parties
The counsel on behalf of the Petitioner argued that Clause 17 had to be read in its entirety and disputes under Clause 17 (b) were mandatorily required to be referred to arbitration by specific use of the term "shall" in the said Clause. Clause 17 (b) envisaged disputes of all nature, without any qualification whatsoever, in terms of the words "Disputes under this Agreement" and not "Disputes as referred in Sub Clause (a) above". Thus, Clause 17 (a) and Clause 17 (b) provided for two distinct types of disputes. In case of disputes where there was no scope for discussion i.e. disputes of SubClause (b), such disputes were agreed to be referred to arbitration. Further, Clause 17 (b) provided for a clear consensus ad idem between the parties to refer disputes under the Agreement to arbitration as per the Act.
The counsel further relied on several judgments of the Supreme Court 2 to contend that in case where the Dispute Resolution Clause gave an option to the parties to refer the dispute to arbitration, or the court, a party having then invoked the arbitration clause, the matter would have to be referred to arbitration and that the use of the of the word "may" or "shall" was not the decisive factor for referring the matter to arbitration. He further argued that it was open to the court to hear the Petition and refer the matter to arbitration, even when the procedure prescribed in the Agreement was not followed.
Per contra, the Counsel for the Respondents argued that Clause 17 provided for a mandatory reconciliation process and/or mechanism of amicable settlement of disputes and only after failure to arrive at such amicable settlement, the parties may go for arbitration. The Petitioner, by ignoring the request of the Respondent for such settlement, had breached the procedure laid down in the Dispute Resolution Clause and hence, such deviation was not permissible under law.
The counsel further relied on judgments of the Supreme Court3 and the Bombay High Court4 to contend that an unwilling party to such conciliation measures could be permitted to frustrate the mechanism agreed between the parties and if from the correspondence between the parties, it became clear that both the parties did not intend to come to any kind of settlement, then at that stage such a precondition would not hinder furtherance of the dispute resolution process. He further contended that allowing such a petition in spite of conciliation mechanism was not a good law and the condition precedent in the nature of such mechanism had to be mandatorily adhered to. The judgments relied upon by the Petitioner were factually distinguished and the counsel relied on various other judgments5 to interpret the usage of the words "shall" and "may" used in arbitration clauses.
Observations of the Court
Whether the pre-arbitration clause under Clause 17 of the Agreement was mandatory in nature?
The court observed that it was clear from sub-clause (a) of Clause 17 that the parties had agreed to a specific procedure/mode of settlement of all the disputes between them under the Agreement, i.e. they had agreed to designate/appoint their respective personnel to amicably resolve/settle all their disputes by discussion, and if the disputes were not amicably settled within 30 days, the next step would be that they may refer their disputes to arbitration as set out in Sub-Clause (b) of Clause 17 of the Agreement. The court placed reliance on the judgment of Visa International Ltd. Vs. Continental Resorts (USA) Ltd. 6 wherein it was held that if from the correspondence between the parties, it becomes clear that both parties do not intend to come to any kind of settlement then such a pre-condition will not hinder furtherance of the dispute resolution process. However, in light of the facts and circumstances of the case, the court held that since there was no scope for an amicable settlement between the parties, the invocation of arbitration without complying with pre-arbitration clause was not fatal.
Whether an arbitration clause providing discretion to the parties to refer to arbitration is an arbitration clause?
The court, while examining whether the clause was a valid and binding arbitration clause or not, distinguished the case of Zhejiang Bonly Elevator Guide Rail Manufacture Company Limited7 as relied upon by the Petitioner and held as follows:
"12....... In the instant case there is no preexisting agreement between the parties that they "should" or they "will" refer their disputes to arbitration or to the Court. In other words, the parties have at no stage agreed to an option of referring their disputes under the said Agreement to arbitration or to the Court. Instead, it is clear beyond any doubt that Clause 17 of the Agreement is a Clause which is drafted with proper application of mind. Under sub-clause (a) of Clause 17, the parties have first agreed that all disputes under the Agreement "shall" be amicably discussed for resolution by the designated personnel of each party, thereby making it mandatory to refer all disputes to designated personnel for resolution/settlement by amicable discussion. It is thereafter agreed in Sub-Clause (a) of Clause 17 itself, that if such dispute/s cannot be resolved by the designated personnel within 30 days, the same "may" be referred to Arbitration, thereby clearly making it optional to refer the disputes to Arbitration, in contrast to the earlier mandatory agreement to refer the disputes for amicable settlement to the designated personnel of each party."
The court, further while refuting the argument of the Petitioner that Clause 17 (a) and 17 (b) of the Agreement talk about distinct procedures, held that arbitration under Clause 17(b) refers to a situation where under Clause 17(a) parties have agreed, through a fresh consent to refer their disputes to arbitration, after failure of the amicable settlement process. Clause 17(b) thus cannot operate independently and cannot be used to initiate an arbitration process, if both the parties did not agree to refer their disputes to arbitration under Clause 17(a).Hence, the court dismissed the Petition and decided in favour of the Respondent on the ground that there was no binding arbitration agreement between the parties.
Conclusion and Analysis
While the judgment sheds light upon the nature of interpretation of such tiered arbitration clauses, parties to a commercial contract must be very cautious while defining the pre-conditions or pre-arbitral obligations and it should be done with high clarity and specificity so that disputes regarding the interpretation of the same can be avoided and the ultimate goal of speedy and effective resolution of disputes can be achieved. It would help the parties to clearly understand and make efforts for compliance of such obligations. Moreover, it would further allow the parties to explore the possibility of amicable settlement of their disputes without compromising on arbitration, and in some cases, could also result in successful settlements, thereby saving time and costs of the parties.
1 Arbitration Petition No. 43 of 2018, decided on 05.06.2020
2 Zhejiang Bonly Elevator Guide Rail Manufacture Company Limited Vs. Jade Elevator Components (2018) 9 SCC 774, JagdishChanderVs. Ramesh Chander&Ors. (2007) 5 SCC 719
3 Visa International Ltd. Vs. Continental Resorts (USA) Ltd. (2009) 2 SCC 55
4 Tulip Hotel Vs. Trade Links Ltd. (2010) 2 Arblr 286
5 Wellington Associates Ltd. Vs. Kirit Mehta (2000) 4 SCC 272, Powertech World Wide Ltd. Vs. Delvin International General Trading LLC (2012) 1 SCC 361, Labour Commissioner, Madhya Pradesh Vs. Burhanpur Tapti Mills Ltd. and others AIR 1964 SC 168,JamatrajKewaljiGavaniVs. State of Maharashtra AIR 1968 SC 178
6 Supra, Note 3.
7 Supra, Note 2.
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