The Delhi High Court, in the case of Foomill Pvt. Ltd. v. Affle (India) Ltd, ARB. P. 325/2022, decided on 25.03.2022, held that the mere use of the word ‘Arbitration’ in the Agreement between the parties cannot be inferred as an Agreement existed between the parties for dispute resolution through Arbitration.
Foomill Pvt. Ltd. (“the Petitioner”) and Affle (India) Ltd. (“the Respondent”) entered into a Master Service Agreement dated 29.07.2021 for software development. Disputes arose between the parties due to certain delays and expectation mismatch, and the project under the Master Service Agreement was put on hold by the Respondent.
As the disputes could not resolved amicably, the Petitioner served the Respondent a Legal Notice invoking Arbitration under Clause 11 of the Master Service Agreement. Clause 11 of the Master Service Agreement stated that:
“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.”
Thereafter, the Respondent replied to the Legal Notice stating that no Arbitration agreement existed between the parties. The present petition is filed by the Petitioner before the High Court of Delhi (“High Court”) for the appointment of an Arbitrator to resolve the disputes between the Petitioner and the Respondent related to software development arising out of the Master Service Agreement.
ISSUE BEFORE THE HIGH COURT
Whether the use of word ‘Arbitration’ in the heading of an Agreement entails the existence of an Arbitration agreement?
DECISION AND FINDINGS
The High Court observed that although the heading of Clause 11 of the Master Service Agreement read as “Jurisdiction, Arbitration & Dispute Resolution”, the main body of the clause itself did not provide that the parties agreed to refer their disputes for resolution through Arbitration.
The High Court relied on its decision in Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. v. Ind Swift Limited (2014) 210 DLT 714 (“Avant Garde”), wherein the High Court had extensively dealt with the issue that whether the use of the word ‘Arbitration’ in the heading of an Agreement entails the existence of an Arbitration Award.
In the Avant Garde decision, the High Court noted that even though the agreement used the word “Arbitration” in the heading of Clause 11, the main body of the clause completely contra-indicated the existence of any Arbitration agreement as it expressly provided that disputes arising out the agreement would be subject to the jurisdiction of Courts.
The High Court in the Avant Garde decision cited the judgements of the Supreme Court in Jagdish Chander v. Ramesh Chander and Ors. 2007(3) AWC 2402 (SC) (“Jagdish Chander”) and Bernhard Consultancy Private Ltd. v. Ind Agro Synergy Limited, Nagpur 2001(4) ALD 720 (“Bernhard Consultancy”) which dealt with similar facts.
The High Court reiterated the observations of the Supreme Court in Jagdish Chander and stated that:
“mere use of the word, ‘arbitration’ or ‘arbitrator’ 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.”
Relying on the Supreme Court’s decisions in Jagdish Chander and Bernhard Consultancy, the High Court in Avant Garde held that the intention of the parties has to be gathered from the terms of the agreement, and that the terms of the agreement do not indicate an intention to refer the dispute to Arbitration for adjudication nor disclose any obligation to go to Arbitration.
In light of the aforesaid decisions, the High Court in the present petition held that:
“It is clear 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.”
Thus, the High Court dismissed the Petition due to lack of ground for the appointment of Arbitrator.
An essential pre-requisite for the reference of any dispute arising out of an agreement, to Arbitration, is the existence of a valid and binding Arbitration agreement between the parties, as stipulated under Section 8 of the Arbitration and Conciliation Act, 1996 (“the Act”).
Section 7 of the Act defines Arbitration agreement as an agreement between the parties to submit all or certain disputes arising out of a defined legal relationship to Arbitration. Sub-clause (2) of Section 7 further recognizes an Arbitration clause within a contract as an Arbitration agreement.
In the present case, the High Court held that a passing usage of the term ‘Arbitration’ in the agreement cannot result in creation of an Arbitration agreement. The High Court highlighted the need for a strongly-drafted Arbitration clause in the contract. A clause, which merely references to Arbitration, but does not expressly stipulate the intention of the parties to refer disputes to Arbitration or casts an obligation to do so, cannot be relied upon to invoke Arbitration.
This judgment will be of great assistance to parties who intending to establish new commercial relations and are in the stage of drafting agreements. While drafting the Arbitration clause in the agreement, it must be ensured that such clause clearly indicates that the parties have agreed to refer disputes to Arbitration, and that an obligation is cast on the parties to refer the disputes to Arbitration if and when such disputes arise.
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