In the new age, arbitration has gained popularity as a robust mechanism to resolve disputes in a time bound efficient manner. However, if an arbitration agreement is poorly drafted or has any discrepancies, the objective of the mechanism fails. In 1974, Frédéric Eisemann coined the term “pathological clauses” more commonly known as champagne clauses or midnight clauses, which refer to clauses that suffer from defects which can disrupt the process of arbitration.1 The extent of deficiency of the clause is inversely proportionate to the enforceability of the clause. The purpose of arbitration is likely to be defeated, if any party is a signatory to arbitration agreement containing such clauses. This article discusses the common errors faced by practitioners while partaking in arbitrations day in day out, and provides suggestions to address these issues from the get go. The author will scrutinize pathological clauses, their validity and the lastly the interpretation and enforceability of such clauses.

For the sake of understanding, the article has divided the article into two segments, (a) incurable deficiencies in arbitration clauses and (b) curable deficiencies in arbitration clauses.

Incurable Deficiencies in Arbitration Clauses

In instances where the arbitration clause cannot be enforced or is deemed invalid, the same is regarded as an incurable defect. A few instances wherein the Courts have dealt with incurable defects are as follows:

In Wellington Associates v. Kirit Mehta, the Hon'ble Supreme Court was faced with a dispute resolution clause which allowed the Bombay Courts to have exclusive jurisdiction over the matter and furthermore read as “any dispute or differences arising in connection with these presents may be referred to arbitration”. The Court held that since the intention of the parties is unclear and arbitration is not the sole remedy available to the parties, the term “may” should not be interpreted as “shall”.2

In Jagdish Chander v. Ramesh Chander and Ors., arbitration clause read as “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”. The Apex Court was faced with the issue if the appointment of the Arbitrator pursuant to this provision was valid or not. The Court held that any clause requiring or contemplating a further consent or consensus before a reference to arbitration, is not an arbitration agreement, but an agreement to enter into an arbitration agreement in future. It further stated that if the clause reads ‘shall be referred to arbitration', it would have been an arbitration agreement, however the words “shall be referred for arbitration if the parties so determine” indicates that the parties are required to reach a decision by application of mind post the dispute has arisen. Therefore, the arbitration clause 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.”3

In Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. v. Ind Swift Limited, the Delhi High Court was dealt with an agreement wherein the arbitration clause read as “Arbitration-Dispute if any arising out of this Agreement shall be subject to the exclusive jurisdiction of the courts in city of Delhi.” The agreement merely used the term “Arbitration” in the heading and not in the body of the clause. The Court held that mere usage of the term “Arbitration” does not amount to a valid arbitration clause since it does not establish clear intention of the parties, does not lay down an obligation to partake in arbitration, provides for other mechanisms for dispute resolution. 4

In Quick Heal Technologies Limited v. NCS Computech Private Limited & Anr. the Bombay High Court was faced with an arbitration clause which contained these two phrases, on one hand, “if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.” and on the other hand “Disputes under this Agreement shall be referred to arbitration.” The clause further provided that the courts of Pune will have exclusive jurisdiction and parties “may pursue any remedy available to them”. Thus, the controversy before the Court was if the said arbitration clause was mandatory or optional. The Court after considering the submissions made by both parties held that the terms “may” and “shall” in the arbitration clause are used after proper application of mind, making the remedy to arbitration optional. Thus there exists no binding arbitration agreement between the parties.5

In a very recent judgment, the Delhi High Court in Foomill (P) Ltd. v. Affle (India) Ltd. the Agreement before the Court only mentioned the term “arbitration” in the heading of the dispute resolution clause. Thus, the Court relying upon Avant Garde (supra) held that there is no binding arbitration clause between the parties.6 The Bombay High Court recently in Concrete Additives and Chemicals Pvt. Ltd. v S N Engineering Services Pvt. Ltd, held that any arbitration agreement contained in a tax invoice issued, does not constitute a valid arbitration agreement, even though accepted by the Respondent since issuing of such invoices is unilateral in nature and acceptance of such an invoice does not present any conscious agreement to arbitrate between the parties, it only represents the delivery of the goods.7

Curable Deficiencies in Arbitration Clauses

Indian Courts over time have grown arbitration friendly and, in an attempt, to promote arbitration have upheld arbitration clauses while awarding them closest possible meaning when faced with challenge. Such defects are termed as curable defects.

In Pricol Limited v Johnson Controls Enterprise Ltd. the Apex Court upheld an arbitration clause which mandated that the dispute (if any) be adjudicated in accordance with “the rules of arbitration of Singapore Chamber of Commerce”. The Court acknowledged that the Singapore Chamber of Commerce is not an arbitration institute, however used the principle of “most reasonable construction of the said clause” and interpreted the Singapore Chamber of Commerce as the SIAC.8

In Enercon (India) Ltd & Ors. v Enercon GmbH & Anr., the Hon'ble Supreme Court was faced with an unworkable arbitration clause. The arbitration clause provided that any dispute would be adjudicated by a three-member Tribunal, however only provided the mechanism for appointment of two arbitrators. Thus, the Court relied on the principle of officious bystander to interpret the clause. According to this principle if “something so obvious” has been omitted or left to be implied that an officious bystander were to easily understand then it need not expressed. The Court held that the “[t]he omission is so obvious that the court can legitimately supply the missing line” and thus the third arbitrator was to be jointly appointed by the two appointed arbitrators.9

In a landmark decision in Visa International Ltd. v. Continental Resources (USA) Ltd., the Supreme Court was confronted with an issue to determine if the arbitration agreement between the parties was valid or not. The clause read as “Any dispute arising out of this agreement and which cannot be settled amicably shall be finally settled in accordance with the Arbitration and Conciliation Act, 1996.”. The Respondent's primary contention revolved around that fact that since the clause lacked details regarding appointment of arbitrators, the clause is invalid. The Court upheld the clause on the ground that “no party can be allowed to take advantage of inartistic drafting of arbitration clause in any agreement as long as clear intention of parties to go for arbitration in case of any future disputes is evident from the agreement and material on record including surrounding circumstances.”10

Key Takeaways

In order to promote the ‘arbitration friendly' jurisdiction status India has obtained in the recent years, it is of utmost importance that the same be accompanied by a fundamental change in the drafting of arbitration clauses, if not the positive change will be rendered redundant.

Some of the key elements while drafting an arbitration clause are proper application of mind,

clear intention of the parties to arbitrate, simple and direct language. A valid clause does not need to follow a specific format rather only needs to have consensus ad idem to arbitrate. A clause may not cover all nitty-gritties of arbitration, however using the principles of harmonious construction and effective interpretation the remaining blanks regarding the process of arbitration (if any) can be filled.

The Courts in India have taken a liberal stance while interpreting champagne clauses which promotes a pro-arbitration stance for litigants, however the interference of the Courts can be further minimalized if the originally drafted clause is free of errors.  

Footnotes

1 Benjamin . Davis, Pathological Clauses: Frédéric Eisemann's Still Vital Criteria, Arbitration International, Volume 7, Issue 4, 1 December 1991, Pages 365–388.

2 (2000) 4 SCC 272

3 (2007) 5 SCC 719.

4 (2014) 210 DLT 714

5 (2020) SCC Online Bom 693

6 2022 SCC OnLine Del 843

7 Arbitration Application (L) 23207/ 2021 (Bombay High Court)

8 (2015) 4 SCC 77

9 (2014) 5 SCC 1

10 (2009) 2 SCC 55

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.