October 3, 2011

Every Clause For Finality Of Decision Isn’t The Arbitration Clause, There Is No Format For Arbitration, Intention Of Parties Is Important

The Recent decision on the matter of State of Orrisa and Others v Bhagyadhar Dash (4th July, 2011, SC Decision) brings an interesting compilation of the arbitration clause identification in the judgment. The division bench took notice of various prior cases to set the test for the determination of arbitration clause. While going through various decisions, the bench wrote comprehensive judgment and gave opinion on different matter.

Essentials of Arbitration Agreement.

Taking the reference from KK Modi Case, and then Bihar State mineral Corporation v Encon Builders (2003 7SCC 418), court stated following four categories.

(i) There must be a present or a future difference in connection with

Some contemplated affair;

(ii) There must be the intention of the parties to settle such difference

By a private tribunal;

(iii) The parties must agree in writing to be bound by the decision of

Such tribunal; and

(iv)The parties must be ad idem.

The Court also took the principles laid down in Jagdish Chandar v Ram Chandar, which broadly can be stated this

1. The intention of parties to go into the arbitration is to be gathred from the terms of the agreement. A mere possibility doesn’t constitute the arbitration clause or agreement. There should be firm determination.

2. Attributes of arbitration are important, it might not necessarily be using terms connected with arbitration like arbitration per se or arbitral tribunal. The attributes are that the agreement should be in writing, it should have the agreement between parties to go to a private tribunal for adjudication, the private tribunal should be empowered to adjudicate in impartial manner, following natural justice and there should be binding effect as agreed by the parties.

3. Any settlement which excludes any of the attributes of arbitration can’t be called as arbitration. The court however didn’t state the case if the clause states it to be arbitration agreement but it specifically excluded any of the attributes (say hearing) from the process. It is submitted that from the quasi judicial nature of arbitration, such clause might be held to be void. However, it again has to be gathered from the terms and this intention of parties.

4. The contingency on the clause for arbitration would not make it an arbitration clause unless the clause is further approved by the parties.

Test for the Arbitration Agreement:

In KK Modi, it is enunciated, that for the arbitration agreement, emphasis is on

1. The existence of dispute not avoidance of dispute.

2. The judicial action of tribunal in which the dispute is referred.

3. The decision should bind the parties.

In three bench decision of State of Orissa v Damodar Das(1996 (2) SCC 216), Court stated

It would, thereby, be clear that this Court laid down as a rule that the arbitration Agreement must expressly or by implication be spelt out that there is an agreement to refer any dispute or difference for an arbitration and the clause in the contract must contain such an agreement. We are in respectful agreement with the above ratio. It is obvious that for resolution of any dispute or difference arising between two parties to a contract, the agreement must provide expressly or by necessary implication, a reference to an arbitrator named therein or otherwise of any dispute or difference and in its absence it is difficult to spell out existence of such an agreement for reference to an arbitration to resolve the dispute or difference contracted between the parties.

In this decision, Court had to consider the construction of clause

that if the contractor disputes the rate fixed by the Engineer-in-Charge, the decision of the Superintending Engineer in regard to rate for such non-scheduled item shall be final”

Court going through all the above decisions held that though the clause passes the test laid down from prior decisions, the intention of parties can be gathered from the fact that the government deleted the arbitration clause from the agreement and amended the standard form of agreement. Court held that the clause only provided the limited sphere of determination of the rates to avoid the dispute. There is no reference to the tribunal in regard to dispute between parties, the clause is rather unilateral where contractor disputes the rate and then it shall be finalized by the Superintendent Engineer.