India: "May", "Can" & 'Shall Have The Right' In Arbitration Clause – The Legal Position Under The Arbitration Law Of India

Last Updated: 17 September 2014
Article by Vijay Pal Dalmia, Partner

Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India with able assistance of  Ms. Shreyosi Pal, 5thyear, B.A., LL.B. (Hons.), Amity Law School, Noida.

The universally acceptable legal position is that once there is an arbitration clause in an agreement, the same shall be referred to arbitration. However, it seems that under the present law, as interpreted by the various High courts and the Supreme Court of India, a legal position which may be a bottleneck for resolution of disputes by way of arbitral proceedings has been propounded. From the discussion below, it will be clear that the nuances of language have taken over precedence over the possible intent of the parties to resolve their disputes by way of Arbitration, thereby damaging the dynamism of The (Indian) Arbitration and Conciliation Act, 1996. The interpretations given by the Indian courts, whose verdicts are equivalent to the law of land, to the words like "MAY", "CAN" AND "SHALL HAVE THE RIGHT", appear to be hyper-technical. In any case as already mentioned above, the interpretations given by the various Indian High Courts and the Supreme Court of India are, as of now, the law of the land. These decisions also highlight the need to carefully draft the arbitration clauses in the agreements, as at times use of a loose word like "MAY", "CAN" AND "SHALL HAVE THE RIGHT" may be fatal to the real intent of the parties to the agreement. Howsoever, careful one may be, still one cannot rule out the judicial scrutiny and interpretation of such words, at a distant later stage of disputes.

In the cases titled K.K. Modi v. K.N. Modi]1 ; Bharat Bhushan Bansal v. U.P. Small Industries Corpn. Ltd.2 ; Bihar State Mineral Development Corpn. v. Encon Builders (I) (P) Ltd.3 ; and State of Orissa v. Damodar Das4, the Hon'ble Supreme Court of India had the occasion to refer to the attributes or essential elements of an arbitration agreement and held that a clause in a contract can be construed as an "arbitration agreement" only if an agreement to refer disputes or differences to arbitration is expressly or impliedly spelt out from the clause. It was observed that the intention of the parties to enter into an arbitration agreement shall have to be gathered from the terms of the agreement. It has been held that where there is merely a possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.

The following fundamental guidelines and principles relating to a valid arbitration agreement have been laid down by the Hon'ble Supreme Court in the case of Jagdish Chander v. Ramesh Chander and Ors5 along with the reference of the cases mentioned above:

  1. Where the clause provides that in the event of disputes arising between the parties, the disputes shall be referred to arbitration, it is an arbitration agreement. But where the clause relating to settlement of disputes, contains words which specifically exclude any of the attributes of an arbitration agreement or contains anything that detracts from an arbitration agreement, it will not be an arbitration agreement.
  1. 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. For example, use of words such as "parties can, if they so desire, refer their disputes to arbitration" or "in the event of any dispute, the parties may also agree to refer the same to arbitration" or "if any disputes arise between the parties, they shall consider settlement by arbitration" in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement.
  1. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. Such clauses require the parties to arrive at a further agreement to go to arbitration, as and when the disputes arise. Any agreement or clause in an agreement 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.

Further, in some of the following recent judgments, the Courts have examined as to whether the use of word 'may'/'can' in the arbitration clause/agreement can render the parties to arbitration, the courts have relied upon the above cases and further enumerated the position of Indian law in this regard to what constitutes an arbitration agreement.

In M/S Linde Heavy Truck Division Ltd V. Container Corporation Of India Ltd & Anr.(2012)6the Arbitration Clause of the agreement contained "...that in case either party may require that the dispute be referred for resolution by arbitration...". The Apex Court relying on the well settled principles laid down in the above referred cases, held that if the agreement between the parties provides that in the event of any dispute, they may refer the same to arbitration, such clause would not constitute a binding arbitration agreement. The Hon'ble Supreme Court held that the above clause envisages a fresh consent for arbitration, in case the option for arbitration is sought to be exercised by one of the parties to the disputes. Accordingly it was held that the above clause containing the word 'may' does not constitute a binding arbitration agreement.

Again in another case, Wellington Associates Ltd. v. Kirit Mehta7clause 4 and 5 of the Arbitration agreement respectively, prescribed that:

Clause 4: It is hereby agreed that, if any dispute arises in connection with these presents, only courts in Bombay would have jurisdiction to try and determine the suit and the parties hereto submit themselves to the exclusive jurisdiction of the courts in Bombay

Clause 5: It was also agreed by and between the parties that any dispute or differences arising in connection with these presents may be referred to arbitration in pursuance of the Arbitration Act, 1947.

Holding that clause 5, extracted above, does not constitute a firm or mandatory arbitration clause, the Hon'ble Supreme Court of India, inter alia, held as under:-

"Clause 5 follows with the words 'it is also agreed' that the dispute 'may' be referred to arbitration implying that parties need not necessarily go to the Civil Court by way of suit but can also go before an arbitrator. Thus, clause 5 is merely an enabling provision as contended by the respondents. I may also state that in cases where there is a sole arbitration clause couched in mandatory language, it is not preceded by a clause like clause 4 which discloses a general intention of the parties to go before a Civil Court by way of suit. Thus, reading clause 4 and clause 5 together, the court is of the view that it is not the intention of the parties that arbitration is to be the sole remedy."

Again in the case of B.Gopal Das v. Kota Straw Board8 the dispute resolution clause in the agreement prescribed:

"That in case of any dispute arising between us, the matter may be referred to arbitrator mutually agreed upon and acceptable to you and us."

It was held that fresh consent for arbitration was necessary.

In the case of Jyoti Brothers v. Shree Durga Mining Co9, the arbitration clause read as under:

"In the event of any dispute arising out of this contract the same can be settled by Arbitration held by a Chamber of Commerce at Madras. Their decision shall be binding to the Buyers and the Sellers."

Holding that the arbitration clause, extracted above, was not a valid Arbitration agreement, the Calcutta High Court, inter alia, held that:-

"The word 'can' by the most liberal interpretation only indicate a possibility. It only means this that after the dispute has occurred, the parties may go to Arbitration as an alternative method of settling the dispute instead of going to the Courts. But that means that after the dispute has arisen, the parties will have to come to a further agreement that they shall go to Arbitration.

In another case titled Powertech World Wide Limited v. Delvin International General Trading LLC10, The Hon'ble Supreme Court reiterated the law on subsistence of an arbitration agreement, but also in addition, looked into particular facts and circumstances of the case, and thereby specified an additional factor to establish the existence of an Arbitration agreement. The Dispute resolution clause provided that:

"Any disputes arising out of this Purchase Contract shall be settled amicably between both the parties or through an Arbitrator in India/UAE"

The Court held that there exists consensus ad idem between the disputed parties to amicably settle their disputes or settle through arbitration in India or UAE. Also, notwithstanding the judgment in Jagdish Chander, the correspondence letters between parties signifies that the petitioner invocated the arbitration and the respondent did not refute the existence of said clause invoked had also referred to the appointment of arbitrator.

Thus, along with the requirements of the factors required to determine the existence of an arbitration agreement, the Court in this case also enumerated an additional factor to determine existence of an arbitration agreement – i.e. the related correspondences/documents which would point to the intention of parties.

In the case of M/S .Castrol India Ltd. v. M/S. Apex Tooling Solutions11 , the Hon'ble High Court of Madras held that though the arbitration clause used the words 'shall have the right', the court held that the said wordings are only optional in nature, either to go for competent civil Court or to refer the matter to the arbitration, and further observed that there is no definite intention of the parties to go for arbitration in the case of any dispute or differences arises between the parties. It was held that unless there is a definite intention in the clause found in the agreement to refer the matter only to arbitration, it cannot be said that there is a valid clause of arbitration in the agreement.

In the recent case titled Avant Garde Clean Room & Engg Solutions Pvt Ltd v. Ind Swift Limited12 , the dispute resolution clause read as under:

"Arbitration-Dispute if any arising out of this Agreement shall be subject to the exclusive jurisdiction of the courts in city of Delhi."

The Hon'ble High Court of Delhi held that the above clause merely uses 'arbitration' in the heading of the clause. However, the main body of the said clause completely contra-indicates the existence of any arbitration agreement since it provides that disputes, if any, arising out of the agreement 'shall be subject to the exclusive jurisdiction of the courts in city of Delhi'. It was held by the Court that in the present case, the main body of the clause does not even contemplate that the parties may agree to arbitration in future. The Court also compared the present case with the Linde Heavy Truck and Wellington case (referred above) on the use of the expression, 'may be referred to arbitration' as opposed to the expression, 'shall be referred to arbitration', and held that the intention of the parties was not to refer their disputes for arbitration. The submission of the petitioner that the word, 'may' used in clause aforesaid has to be construed as 'shall', was rejected by the Court by observing that the parties had used "shall" and "may" at different places in the dispute resolution clause. It was held that the parties used the word, 'may' not without any reason. It was held that was merely an enabling provision.

Therefore, unlike most US and UK courts addressing the question hold that language providing that a party "may" submit a dispute to arbitration requires mandatory arbitration, and not just permissive, the courts held that the arbitration clause mandated arbitration because if it did not, it "would render the clause meaningless for all practical purposes" since parties "could always voluntarily submit to arbitration. The decisions are in concert with several state court decisions holding that arbitration was mandatory once demanded by either party even though the arbitration clause used the word "may" instead of "shall"13, and therefore arbitration clauses have to be given the broadest possible interpretation in order to promote the resolution of controversies outside of the courts.

In view of the above discussion, it is clear that presently the Indian courts are of the conclusive view that an arbitration agreement is to follow the well settled principles whereby the specific and direct expression of intent of the parties to refer to arbitration proceedings are clear and precise from the language and terms of the clause in the agreement. The words used disclosing a determination and obligation to go for such arbitration proceedings, such an agreement would then make it a valid and binding agreement. Whereas any agreement or clause in an agreement 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, such agreements would not be a valid agreement.

Footnotes

1 (1998) 3 SCC 573

2 (1999) 2 SCC 166;

3 (2003) 7 SCC 418;

4 (1996) 2 SCC 216

5 (2007) 5 SCC 719

6 195(2012)DLT366

7 (2004) 4 SCC 272

8 1970 WLN 572

9 AIR 1956 Calcutta 280

10 2011(4) ARBLR 278 (SC)

11 2014(2) ARBLR 481(Madras)

12 210 (2014) DLT 714

13 Hirshenson v. Spaccio, 800 So. 2d 670, 674 (Fla. 5th DCA 2001); Moses H. Cone v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Maguire v. King, 917 So.2d 263, 266 (Fla.App. 2005); Austin v. Owens-Brockway Glass Container, Inc. 78 F.3d 875, 879 (4th Cir. 1996) ; in Ziegler v. Knuck, 419 So. 2d 818 (Fla. 3rd DCA 1982; Conax Florida Corp. v. Astrium Ltd., 499 F. Supp. 2d 1287 (M.D. Fla. 2007)

© 2014, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Vijay Pal Dalmia, Partner
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