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Judgment
S.J. Kathawalla, J.—The above Application is filed by the Applicant under Section 11 of the Arbitration and Conciliation Act (""the Act"") for
the following relief:
(a) This Hon''ble Court be pleased to appoint any suitable person to act as Sole Arbitrator under Section 11 (2), 11 (5) and 11 (6) of the
Arbitration and Conciliation Act, 1996 to decide the disputes between the Applicant and Respondents arising out of the arrangement arrived at
between the parties and recorded in Memorandum of Understanding dated 26th March 2013.
According to the Applicant, Clause 10 of the Memorandum of Understanding (""MOU"") dated 26th March, 2013, executed by and between the
Parties contains an arbitration agreement. The said Clause is reproduced hereunder:
This Memorandum of Understanding is constructed as a contract and is subject to Mumbai jurisdiction only. In case of any disputes, the Courts of
Mumbai will have the sole jurisdiction. Alternatively Arbitrator can be appointed by mutual consent of both the parties and the decisions given by
the Arbitrator will be binding on both the parties"".
(emphasis supplied)
The Learned Advocate appearing for the Respondent has submitted that the Arbitration Clause as contained in Clause 10 of the MOU does not
contain a binding arbitration agreement as per law. The said Clause contemplates Civil Courts in Mumbai to adjudicate upon any disputes that may
arise between the Parties. The said Clause further contemplates that when a dispute actually arises between the Parties then at that time if the
Parties mutually agree to arbitration such disputes may be resolved by way of arbitration, as an alternate forum for dispute resolution.
The Learned Advocate appearing for the Applicant has in response submitted that the said Clause 10 of the MOU constitutes an agreement
between the Parties to refer the disputes to arbitration. It is submitted on behalf of the Applicant that the Courts should not adopt a technical
approach whilst interpreting or construing an arbitration agreement or arbitration clause. In support of this submission, the learned Advocate
appearing for the Applicant has relied on paragraph 88 of the Judgment of the Hon''ble Supreme Court in the case of Enercon (India) Ltd. and
Others Vs. Enercon GMBH and Another, which is reproduced hereunder:
In our opinion, the courts have to adopt a pragmatic approach and not a pedantic or technical approach while interpreting or construing an
arbitration agreement or arbitration clause. Therefore, when faced with a seemingly unworkable arbitration clause, it would be the duty of the court
to make the same workable within the permissible limits of the law, without stretching it beyond the boundaries of recognition. In other words, a
common sense approach has to be adopted to give effect to the intention of the parties to arbitrate. In such a case, the Court ought to adopt the
attitude of a reasonable business person, having business common sense as well as being equipped with the knowledge that may be peculiar to the
business venture. The arbitration clause cannot be construed with a purely legalistic mindset, as if one is construing a provision in a statute. We may
just add here the words of Lord Diplock in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. 1985 AC 191 : (1984) 3 WLR 592 :
(1984) 3 All ER 229 (HL) (AC p. 201 E).
....if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business
commonsense, it must be made to yield to business commonsense.
We entirely agree with the aforesaid observation.
I have considered the submissions advanced on behalf of the Applicant as well as the Respondents. Section 2 (b) of the Act defines ''arbitration
agreement'' as an agreement referred to in Section 7 of the Act. Section 7 defines ''arbitration agreement'' as follows:
Arbitration Agreement.- (1) In this Part, ""arbitration agreement"" means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in -
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
(5) The reference in contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the
reference is such as to make that arbitration clause part of the contract.
In the case of Wellington Associates Ltd. Vs. Mr. Kirit Mehta, the Applicant had moved the Hon''ble Supreme Court for appointment of an
arbitrator under Section 11 of the Act by contending that clauses 4 and 5 of the agreements pertaining to purchase and buy back of shares,
constitute an arbitration agreement between the parties. The said clauses are reproduced hereunder:
It is hereby agreed that, if any dispute arises in connection with these presents, only courts in Bombay would have jurisdiction to try and
determine the suit and the parties hereto submit themselves to the exclusive jurisdiction of the courts in Bombay.
It is also agreed by and between the parties that any dispute or differences arising in connection with these presents may be referred to
arbitration in pursuance of the Arbitration Act, 1940 by each party appointing one arbitrator and the arbitrators so appointed selecting an umpire.
The venue of arbitration shall be at Bombay.
It was contended on behalf of the Petitioner before the Hon''ble Supreme Court that the word ""may"" in clause 5 has to be construed as ""shall
since that was the true intent of the parties. The Hon''ble Supreme Court rejected the said contention and held that Section 7 does not cover a case
where the parties agree that they ""may"" file a suit or that they ""may"" also resort to arbitration. The relevant observations of the Hon''ble Supreme
Court are reproduced hereunder:
.... ..... The words in subsection (1) of section 7, ""means an agreement by the parties to submit to arbitration"", in my opinion, postulate an
agreement which necessarily or rather mandatorily requires the appointment of an arbitrator/arbitrators. Section 7 does not cover a case where the
parties agree that they ""may"" go to a suit or that they ''may'' also go to arbitration.
Thus, unless the document filed by the party before the Chief Justice of India or his designate is an `arbitration agreement'' as defined in section
7 as explained above, requiring a reference in a mandatory sense, no reference, in my view, can be made to the Arbitral Tribunal..... ........
.... ....... The parties, in my view, used the words `may'' not without reason. If one looks at the fact that clause 4 precedes clause 5, one can
see that under clause 4 parties desired that in case of disputes, the Civil Courts at Bombay are to be approached by way of a suit. Then follows
clause 5 with the words `it is also agreed'' that the dispute ''may'' be referred to arbitration implying that parties need not necessarily go to the Civil
Court by way of suit but can also go before an arbitrator. Thus, clause 5 is merely an enabling provision as contended by the respondents. I may
also state that in cases where there is a sole arbitration clause couched in mandatory language, it is not preceded by a clause like clause 4 which
discloses a general intention of the parties to go before a Civil Court by way of suit. Thus, reading clause 4 and clause 5 together, I am of the view
that it is not the intention of the parties that arbitration is to be the sole remedy. It appears that the parties agreed that they can ""also"" go to
arbitration also in case the aggrieved party does not wish to go to a Civil Court by way of a suit. But in that event, obviously, fresh consent to go to
arbitration is necessary. ...... .....
Suffice it to say, that the words ''may be referred'' used in clause 5, read with clause 4, lead me to the conclusion that clause 5 is not a firm or
mandatory arbitration clause and in my view, it postulates a fresh agreement between the parties that they will go to arbitration.......
A similar issue also came up for consideration before the Hon''ble Supreme Court in the case of Jagdish Chander Vs. Ramesh Chander and
Others, . In that case the Appellant and the first Respondent entered into a partnership deed dated 9th January, 1964. Clause 16 of the said deed
pertained to settlement of disputes and the same is reproduced hereunder:
(16). If during the continuance of the partnership or at any time afterwards any dispute touching the partnership arises between the partners, the
same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine.
(emphasis supplied).
The Hon''ble Supreme Court after discussing at length the principles as to what constitutes ""arbitration agreement"" within the meaning of Section 7
of the Act, in paragraph 9 of its Judgment held that Clause 16 of the deed is not an arbitration agreement as defined under Section 7 of the Act.
Paragraph 9 of the said Judgment is reproduced hereunder:
Para 16 of the Partnership deed provides that if there is any dispute touching the partnership arising between the partners, the same shall be
mutually decided by the parties or shall be referred to arbitration if the parties so determine. If the clause had merely said that in the event of
disputes arising between the parties, they ""shall be referred to arbitration"", it would have been an arbitration agreement. But the use of the words
shall be referred for arbitration if the parties so determine"" completely changes the complexion of the provision. The expression ""determine
indicates that the parties are required to reach a decision by application of mind. Therefore, when clause 16 uses the words ""the dispute shall be
referred for arbitration if the parties so determine"", it means that it is not an arbitration agreement but a provision which enables arbitration only if
the parties mutually decide after due consideration as to whether the disputes should be referred to arbitration or not. In effect, the clause requires
the consent of parties before the disputes can be referred to arbitration. The main attribute of an arbitration agreement, namely, consensus ad idem
to refer the disputes to arbitration is missing in clause 16 relating to settlement of disputes. Therefore it is not an arbitration agreement, as defined
under section 7 of the Act. In the absence of an arbitration agreement, the question of exercising power under section 11 of the Act to appoint an
Arbitrator does not arise.
In the present case, relying on Clause 10 of the MOU, the Applicant has contended that the said Clause constitutes an arbitration agreement.
Clause 10 is once again reproduced hereunder with necessary emphasis supplied:
This Memorandum of Understanding is constructed as a contract and is subject to Mumbai jurisdiction only. In case of any disputes, the
Courts of Mumbai will have the sole jurisdiction. Alternatively Arbitrator can be appointed by mutual consent of both the arties and the decisions
given by the Arbitrator will be binding on both the parties"".
Reading of the said Clause makes it clear that it is not the intention of the Parties that arbitration is to be the sole remedy. It is agreed between the
Parties that in case of any disputes, the Courts of Mumbai will have the sole jurisdiction. In other words, in case of disputes the Parties shall move
the Courts of Mumbai. It is only in the alternative and by mutual consent, that both the Parties may refer their disputes to arbitration. It is therefore
obvious that fresh consent to refer the dispute to arbitration would be necessary. Therefore when Clause 10 uses the words ""alternatively
Arbitrator can be appointed by mutual consent of both the parties....."" it means that it is not an arbitration agreement but a provision which enables
arbitration only if the Parties mutually decide to take that route instead of moving the Courts of Mumbai, which appears to be the first preference.
The Clause therefore postulates a fresh agreement between the Parties as and when they decide to refer their disputes to Arbitration. To borrow
the words of the Hon''ble Supreme Court in its decision in Jagdish Chander vs. Ramesh Chander and others (supra), the main attribute of an
arbitration agreement, namely, consensus ad idem to refer the disputes to arbitration is missing in Clause 10, relating to settlement of disputes.
Therefore, it cannot be said that Clause 10 of the MOU is an arbitration agreement between the Parties as defined under Section 7 of the Act. The
Applicant has relied on paragraph 88 of the decision of the Hon''ble Supreme Court in the case of Enercon (India) Limited and others vs. Enercon
GMBH and another (supra), wherein the Hon''ble Supreme Court has made observations which are quoted above. The same cannot be relied
upon by the Applicant in a case where there is no arbitration agreement between the Parties.
The Arbitration Application is accordingly dismissed.