2007 (4) TMI 624 - SC - Indian Laws

Whether clause 16 of the Deed of Partnership dated 9.1.1964 is an arbitration agreement within the meaning of section 7 of the Act? Held that - The existence of an arbitration agreement as defined under section 7 of the Act is a condition precedent for exercise of power to appoint an Arbitrator/Arbitral Tribunal, under section 11 of the Act by the Chief Justice or his Designate. It is not permissible to appoint an Arbitrator to adjudicate the disputes between the parties, in the absence of an arbitration agreement or mutual consent. The designate of the Chief Justice of Delhi could not have appointed the Arbitrator in the absence of an arbitration agreement. The appeal is therefore allowed, the order appointing an Arbitrator is set aside and the application by the first respondent under section 11 of the Act is rejected.

Summary

Issues:
1. Interpretation of partnership deed clause as an arbitration agreement.
2. Validity of appointing an Arbitrator under section 11 of the Arbitration and Conciliation Act, 1996 without a valid arbitration agreement.

Analysis:

Issue 1: Interpretation of partnership deed clause as an arbitration agreement
The case involved a partnership deed clause (Clause 16) that provided for the settlement of disputes either by mutual decision or through arbitration. The first respondent sought arbitration for disputes related to the partnership firm's dissolution and accounts. The appellant contended that the partnership had ended in 1979, and the accounts were settled, arguing that Clause 16 was not an arbitration agreement. The court analyzed the clause, emphasizing that for an agreement to be considered an arbitration agreement, there must be a clear intention to refer disputes to a private tribunal and be bound by its decision. The court highlighted that the use of words like "shall be referred for arbitration if the parties so determine" in Clause 16 indicated the necessity of mutual consent before arbitration, thus lacking the essential attribute of consensus ad idem required for an arbitration agreement as per Section 7 of the Act.

Issue 2: Validity of appointing an Arbitrator without a valid arbitration agreement
The appellant challenged the appointment of an Arbitrator under section 11 of the Act, arguing that without a valid arbitration agreement, the Arbitrator could not have been appointed. The appellant relied on precedents like Wellington v. Kirit Mehta and Jyoti Bros vs. Shree Durg Mining Co. to support the argument that a mere possibility or desire for arbitration in the future does not constitute a valid arbitration agreement. The court reiterated that the existence of an arbitration agreement, as defined under Section 7 of the Act, is a prerequisite for appointing an Arbitrator under section 11. The court held that since Clause 16 did not meet the criteria of an arbitration agreement, the appointment of the Arbitrator was set aside, emphasizing the need for mutual consent or a valid arbitration agreement for arbitration proceedings.

In conclusion, the Supreme Court ruled in favor of the appellant, setting aside the appointment of the Arbitrator due to the absence of a valid arbitration agreement as required by the Arbitration and Conciliation Act, 1996. The judgment clarified the essential elements of an arbitration agreement, emphasizing the need for a clear intention and mutual consent to refer disputes to arbitration for such agreements to be legally binding and enforceable.