2025 (4) TMI 431 - HC - Indian Laws

Application for appointment of a learned Arbitrator - Clause 16 of the agreement constituted a valid arbitration clause under the Arbitration and Conciliation Act 1996 or not - The respondent No. 1 had approached the NCLT Cuttack for initiation of insolvency proceedings against the petitioner as the corporate debtor. The petitioner also participated in the said proceeding and after several months has invoked Clause 16 by treating the same to be an arbitration clause. In the reply filed to the notice issued under the IBC as also in the objection filed before the NCLT the petitioner did not contend that the matter should be resolved by arbitration. HELD THAT - In the decision of Jagdish Chander 2007 (4) TMI 624 - SUPREME COURT the Hon ble Apex Court held that intention of the parties to enter into an arbitration agreement will have to be gathered from the terms of the agreement. If the terms of the agreement clearly indicated an intention on the part of the parties to refer the dispute to a private tribunal for adjudication and a willingness to be bound by the decision of such tribunal on such disputes it would constitute as an arbitration agreement. While there was no specific form of an agreement the words used should disclose a determination and an obligation to refer to arbitration but not merely a possibility of going for arbitration. In the present case the Managing Director of BAL represented the company and signed the contract. The designated partner of the respondent No. 1 also represented the partnership firm and signed the contract. Thus these two officials were representing the parties to the contract and were binding themselves to the terms and conditions of the contract. They were also bound to ensure that the parties to the contract performed their rights and liabilities there under. By signing the contract the Managing Director of BAL and the designated partner committed that the respective parties would be bound by the obligations and responsibilities outlined in the contract. Both parties have alleged breach. Thus it would be absurd to hold that under such circumstances the same persons could impartially settle the disputes - In the case in hand compliance of Clause (4) is not ensured. Conclusion - Clause 16 do not constitute a valid arbitration agreement under the Arbitration and Conciliation Act 1996. The application for appointment of an arbitrator is dismissed as the clause failed to meet the statutory requirements for an arbitration agreement. Application dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue considered was whether Clause 16 of the agreement constituted a valid arbitration clause under the Arbitration and Conciliation Act, 1996, thereby allowing for the appointment of an arbitrator by the Court. This involved examining whether the clause met the necessary criteria for an arbitration agreement, including the intention of the parties to refer disputes to a private tribunal and whether such a tribunal could be considered impartial and independent.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The analysis centered on the Arbitration and Conciliation Act, 1996, particularly Section 7, which defines an arbitration agreement. The Court also referred to precedents such as Jagdish Chander vs. Ramesh Chander and ors., Punjab State and ors. vs. Dina Nath, and Perkins Eastman Architects DPC and anr. vs. HSCC (India) Ltd., which discuss the attributes of a valid arbitration agreement and the importance of impartiality and independence in arbitration.

Court's Interpretation and Reasoning

The Court interpreted Clause 16, which did not explicitly mention arbitration, as not constituting a valid arbitration agreement. The Court emphasized that the clause lacked the essential attributes of an arbitration agreement, such as a clear intention to refer disputes to an impartial and independent private tribunal. The clause merely provided an in-house mechanism for dispute resolution, involving representatives of the contracting parties, which compromised impartiality.

Key Evidence and Findings

The agreement was signed by the Managing Director of the petitioner and the designated partner of the respondent, who were also named as the dispute resolvers in Clause 16. This dual role raised concerns about impartiality and independence. The Court found that the clause did not demonstrate a clear intention to arbitrate as per the 1996 Act, given the conflict of interest inherent in the proposed dispute resolution mechanism.

Application of Law to Facts

The Court applied the legal principles from the cited precedents to the facts, concluding that the clause did not meet the requirements of an arbitration agreement under the Act. The involvement of company representatives as arbitrators was contrary to the principles of impartiality and independence required by the Act.

Treatment of Competing Arguments

The petitioner argued that Clause 16 was a valid arbitration clause, citing precedents where similar clauses were upheld. However, the Court distinguished these cases, noting that the clause in question involved representatives directly connected to the dispute, unlike in public sector contracts where arbitrators are typically independent officials.

Conclusions

The Court concluded that Clause 16 did not constitute a valid arbitration agreement, as it failed to ensure impartiality and independence, essential elements of arbitration under the 1996 Act. The application for appointment of an arbitrator was dismissed.

SIGNIFICANT HOLDINGS

The Court held that for a clause to be considered an arbitration agreement, it must demonstrate a clear intention to refer disputes to an impartial and independent tribunal. The decision emphasized that mere absence of the word "arbitration" is not detrimental if the clause otherwise indicates an intention to arbitrate, but impartiality and independence are non-negotiable attributes.

Core Principles Established

The judgment reinforced the principle that arbitration agreements must ensure impartiality and independence of the arbitrators. The Court reiterated that representatives of the parties involved in the contract cannot serve as arbitrators due to inherent conflicts of interest.

Final Determinations on Each Issue

The final determination was that Clause 16 did not constitute a valid arbitration agreement under the Arbitration and Conciliation Act, 1996. The application for appointment of an arbitrator was dismissed, as the clause failed to meet the statutory requirements for an arbitration agreement.