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Clear Intent And Unambiguous Language: A Key To Validation Agreements

The Calcutta High Court, in its ruling on June 8, 2023, reaffirmed the established legal position in the case of Blue Star Ltd v. Rahul Saraf.[1] The court emphasized that a valid arbitration agreement must clearly and explicitly express the parties' unmistakable and unequivocal intention to resolve any disputes through arbitration.

Simply including a clause mentioning arbitration does not automatically constitute an arbitration agreement. In the present case, Clause 7 of the agreement referred to "Arbitration Proceedings," while Clause 13 clarified the limitations on the Arbitrator's role. However, upon examination of Clause 7, no intention or understanding was found between the parties that specifically and mandatorily required the referral of future disputes to arbitration.

The plausible interpretation was that the possibility of arbitration was left open for the parties to consider in the future, but such a possibility alone does not fulfill the requirements for an arbitration agreement, as established in previous legal precedents.

What Are The Required Essentials To Incorporate An Arbitration Agreement?
S. 7 of Arbitration and conciliation act, 1996[2] defines: An arbitration agreement is a commercial agreement between two parties to settle their issues through arbitration rather than in court. It is a legally enforceable agreement that requires any disputes originating from the underlying contract to be addressed through arbitration.

The fundamentals of an arbitration agreement may differ depending on the applicable laws and jurisdiction.

However, there are several broad characteristics that are widely acknowledged as necessary for a legitimate arbitration agreement:
  1. Mutual consent:
    To submit their problems to arbitration, all parties engaged in the agreement must express their free and consent. This implies that both parties must agree that their disagreements will be resolved through arbitration rather than litigation.
  2. Intention to Arbitrate:
    The agreement should explicitly state the parties' desire to settle any disputes through arbitration. This might be stated openly by using wording like "any disputes arising out of this agreement shall be resolved through arbitration."
  3. Scope of Disputes:
    The agreement should describe the categories of issues that will be arbitrated. It should explicitly explain the extent of the conflicts covered, whether all disputes are covered or only certain concerns.
  4. Agreement in Writing:
    In most jurisdictions, including many countries' arbitration laws, an arbitration agreement must be in writing. This can be in the form of a separate arbitration agreement or a clause in a larger contract.
  5. Clearly Defined Arbitration Rules:
    The agreement should clearly define the arbitration rules that will govern the arbitration procedures. This might include norms established by a particular arbitration organization or rules agreed upon by the parties.
  6. Arbitral Tribunal Designation:
    The agreement shall specify how the arbitrators or arbitrators will be selected. It has the authority to establish the number of arbitrators, the manner of appointment, and any qualifications that are necessary.
  7. Seat or Place of Arbitration:
    The seat or place of arbitration shall be specified in the agreement. This specifies the legal jurisdiction in which the arbitration procedures will take place, which might have consequences for the governing legislation and the execution of the arbitral result.
It is essential for parties to carefully draft their arbitration agreements to ensure that all necessary elements are included. Consulting with legal professionals experienced in arbitration law can help ensure the validity and effectiveness of the arbitration agreement.

The Need For A Clear And Unequivocal Intention To Arbitrate
The present dispute is concerned with first and second essential which is mentioned above related to mutual consent and parties intention to arbitrate in Supreme court case Jagdish Chander v. Ramesh Chander & Ors.[3] a partnership deed contained Clause 16, which stated that in the event of a dispute between the parties, it would be resolved either through mutual agreement or by referring it to arbitration if the parties decided to do so. The court had to determine whether Clause 16 qualified as an arbitration agreement under Section 7 of the Act.

The court concluded that for an agreement to be recognized as an arbitration agreement, the terms must clearly demonstrate the parties' intention to refer their disputes to a private tribunal for resolution, with a willingness to be bound by the tribunal's decision. In this case, the use of the word "determine" in Clause 16 indicated that the parties were required to make a decision after careful consideration as to whether the disputes should be submitted to arbitration or not.

This provision merely provided an option for arbitration if the parties mutually agreed to pursue it. Consequently, the court held that Clause 16 did not meet the essential requirement of 'consensus ad idem' to refer disputes to arbitration. Thus, the court determined that there was no arbitration agreement in existence.

Mere possibility of the parties agreeing to arbitration in future provides no valid and binding arbitration agreement as in recent case Niwas Enterprises vs. Ravindra Pandurang Ratnaparkhi and Ors.[4] The agreement in question included a clause stating that "any disputes or disagreements between the parties regarding the terms and conditions of the agreement should be initially resolved through mutual agreement."

If no mutual agreement was reached, the parties had the option to refer the dispute to arbitration. However, the court determined that this clause only emphasized the need for mutual resolution and arbitration was considered as a possibility if no agreement was reached. Consequently, the court concluded that this clause did not establish a binding arbitration agreement. It merely provided the potential for the parties to agree to arbitration in the future, but it did not create a mandatory obligation to arbitrate. As a result, the court found that there was no enforceable arbitration agreement in existence.

Even where the dispute resolution clauses are vaguely worded or where there is an ambiguity in choice of the mechanism to be adopted the intention of the parties to have their disputes arbitrated is paramount in Calcutta High Court case Smt. Manika Sett Vs Sett Iron Foundry and Ors.[5] The court's ruling highlighted that an arbitration clause, even if it is vague or unclear, can still be considered valid as long as the intention to refer disputes to arbitration is evident. The court emphasized that the primary focus should be on the parties' intention to resolve their disputes through arbitration, even in cases where the language of the dispute resolution clause is ambiguous or lacks specificity regarding the chosen arbitration mechanism.

The use of word can and may indicates only possibility of something and using that in arbitration clause makes arbitration agreement non-binding as in the case Nagreeka Indcon Products Pvt. Ltd. vs. Cargocare Logistics (India) Pvt. Ltd[6] the clause 25 stated that "Any difference of opinion or dispute thereunder can be settled by arbitration in India or place mutually agreed with each party appointing an arbitrator for." Interpreting the clause the court held that the use of word can implies only possibility to arbitrate in future, it doesn't create any binding arbitration agreement between the parties.

Analysis of present case
The court in Blue Star Ltd v. Rahul Saraf[7] considered the question of whether there existed a valid arbitration agreement between the parties. The court noted that an arbitration agreement can be couched in various modes and forms, but that there must exist a clear intention of the parties and a meeting of their minds to mandatorily submit any future dispute, that may arise, to arbitration. This intention should illuminate itself in the form of an explicit obligation that is binding between the parties and not merely a possibility that may materialize if the parties so decide after a fresh application of mind, post-facto occurrence of disputes.

In the case of Blue Star Ltd, the court found that the clauses in the MoU did not meet the requirements of a valid arbitration agreement. Clause 7 makes a reference to 'Arbitration Proceedings' and Clause 13 clarifies what the Arbitrator shall not do, it does not speak anything regarding parties intention to arbitrate or something which mandates the parties to refer to arbitration.

The court held that this was not enough to constitute a valid arbitration agreement. The clauses did not create a mandatory obligation on the parties to refer disputes to arbitration, but only a possibility that may be exercised by the parties in the future. As such, the court dismissed the petition and held that there was no arbitration agreement between the parties.

The judgement in this case is a useful reminder of the requirements of a valid arbitration agreement. In order for an arbitration agreement to be valid, it must be clear and unambiguous that the parties intend to submit any disputes between them to arbitration. The agreement must also be specific about the disputes that are subject to arbitration, and it must identify the arbitration rules that will govern the proceedings.

To conclude the authors wants put forward that through Blue Star Ltd v. Rahul Saraf and other Supreme court and High court judgements the courts have reaffirmed the requirement of necessary intention of parties to arbitrate in arbitration agreement. Parties must mandatorily comply with all essentials of arbitration agreement which are provided by S.7 of Arbitration and Conciliation Act, 1996, mere use of words like arbitration and arbitrator is insufficient to make valid and binding arbitration agreement.

Judiciary is playing key role in upholding the value of arbitration and making it a suitable alternative of courts. Through number of judgements the courts have made clear that an arbitration agreement should be clear and unambiguous with parties intention to arbitrate so while drafting agreements parties must keep all essentials in mind to save from any conflicting situation in future.

  1. Blue Star Limited v. Rahul Saraf, MANU/WB/1156/2023.
  2. Arbitration and Conciliation Act, 1996, �7, No.26, Acts of Parliament, 1996 (India).
  3. Jagdish Chander v. Ramesh Chander & Ors, (2007) 5 SCC 719.
  4. Niwas Enterprises v. Ravindra Pandurang Ratnaparkhi and Ors., 2022 SCC OnLine Bom 6472.
  5. Smt. Manika Sett v. Sett Iron Foundry and Ors., MANU/WB/1133/2022.
  6. Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd., MANU/MH/0692/2023.
  7. Blue Star Limited v. Rahul Saraf, MANU/WB/1156/2023.

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