Recently, in the case of Panasonic India Pvt. Ltd. vs. Shah Aircon Through Its Proprietor Shadab Raza,1 the Single Bench of Hon'ble Delhi High Court held that mere use of the term "can" in an Arbitration Clause, cannot render the intention of the parties to refer the dispute to arbitration, ineffective. The intention of the parties should be determined after reading the contract wholistically.
Panasonic India Pvt. Ltd. (hereinafter referred to as " t he Petitioner ") and Shah Aircon (hereinafter referred to as "the Respondent") entered into a Distribution Agreement for the sale of electronic goods. The claim of the Petitioner arose out of alleged unpaid invoices which were raised to the Respondent towards the sold goods.
The disputes between the parties remained unresolved which led to the invocation of the Arbitration Clause by the Petitioner. In response, the Respondent stated that it did not sign the agreement with Petitioner and that the disputes were to be referred to the court of competent jurisdiction in Gurugram, Haryana.
Hence, the Respondent filed a Civil Suit before the Court of Learned Civil Judge, Gurugram, Haryana (hereinafter referred to as "the Civil Court") inter alia seeking rendition of accounts and permanent injunction which was still pending at the time of passing of judgment.
While the suit was pending, the Petitioner filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the Act") before the Civil Court to refer the suit for arbitration. Additionally, the Petitioner filed a petition under Section 11 of the Act, before the Hon'ble High Court of Delhi, for appointing an arbitrator.
II. RELEVANT CLAUSES OF THE DISTRIBUTION AGREEMENT
"XXIV. GOVERNING LAW:
This Agreement and all PO under this Agreement shall be exclusively governed by and construed in accordance with the laws of India, without regard to choice of law principles. All issues relating to appointment of arbitrator or any petition or application to be made to the Court under the applicable arbitration law or any Arbitration Award or any issue arising out of such arbitration proceedings shall be subject to the exclusive jurisdiction of Courts at New Delhi only.
The parties will attempt to settle any dispute, claim or controversy arising out of this Agreement through consultation and negotiation in good faith and in a spirit of mutual co-operation. If those attempts fail, then either Party can refer the disputes, issues or claims arising out of or relating to this Agreement for arbitration by a sole arbitrator who shall be appointed by the Managing Director of the Panasonic. The arbitration proceedings shall be held in New Delhi, conducted in English, and shall be subject to the provisions of the Arbitration and Conciliation Act 1996. The Arbitrator shall give a reasoned award. In the event the Appoint Authority fails to act or appoint a sole arbitrator, then either Party can have the sole arbitrator appointed under the provisions of the Arbitration and Conciliation Act, 1996. The use of any ADR procedure will not be construed under the doctrines of laches, waiver or estoppels to affect adversely the rights of either party, and nothing in this Section will prevent either party from resorting to judicial proceedings if (1) good faith efforts to resolve the dispute under these procedures have been unsuccessful, or (2) interim relief from a court is necessary to prevent serious and irreparable injury to one party or to others."
III. ISSUE BEFORE THE HIGH COURT
Whether the Agreement is binding upon the parties to refer the dispute to Arbitration?
IV. CONTENTIONS OF THE PARTIES
Petitioner: With regard to the interpretation of the arbitration clause, the Petitioner contended that the essential ingredients of a valid arbitration agreement as stipulated in Section 7 of the Act are satisfied. The Petitioner submitted that, upon a combined reading of Clauses XXIV and XXV of the Agreement, it is clear that the parties intended a mandatory reference to arbitration, and that such intention cannot be eclipsed by the mere use of the word "can". The Petitioner cited the case of Jagdish Chander vs. Ramesh Chander2 to support its arguments.
Respondent: The Respondent contended that the arbitration clause in the Distribution Agreement does not make a "mandatory" reference to the arbitration, and, hence, it is not a valid arbitration clause. The Respondent submitted that the use of the word "can" signifies an option in the hands of the parties as to whether to refer a dispute to arbitration or not.
V. FINDINGS OF THE COURT
Section 7 of the Act encapsulates the mandatory requirements to make an arbitration agreement valid. It provides that the parties must contemplate a mandatory reference to arbitration. The same has been confirmed through judicial precedents, as in the cases of K.K Modi v. K.N Modi,3 Bihar State Mineral Development Corporation v. Encon Builders (I)(P) Ltd.,4 and Babanrao Rajaram Pund vs. Samarth Builders and Developers.5
The Hon'ble Judge laid down the following principle:
"15. The interpretation of an arbitration clause, as indeed of all contractual provisions, must be predicated upon a construction of the contract as a whole, and no particular word or phrase should be unduly emphasised to negate the clause of its true meaning."
The Court while deciding the matter held that:
"15.... The use of the word "can", which normally signifies an option, as opposed to the word "shall", which is mandatory in nature, is not determinative of the present case. This is because the word "can" is juxtaposed with the words "either party", signifying the option of either Panasonic, or Shah Aircon, to refer disputes to arbitration. If either of the parties can exercise such an option by referring the disputes under the Agreement to arbitration, it is for all practical purposes, binding upon the other party as well. The remainder of the clause, insofar as it refers to the venue of arbitration, the language of arbitration, the applicability of the Act, the requirement to give reasons, and the procedure for appointment of an arbitrator by reference to the Court, also supports the view that the parties intended a mandatory reference to arbitration, and incorporated the ancillary provisions into the Agreement for this purpose only."
The Court further negated the Respondent's contention that the case of Jagdish Chander is applicable in the present matter. The Court held that the Arbitration Clause in Jagdish Chander provided that the disputes "shall be mutually decided by the parties or shall be referred to arbitration if the parties so determine". It is on the interpretation of the phrase "if the parties so determine" that the Court concluded that the Arbitration Agreement lacked consensus as idem to refer the parties to the arbitration and required fresh agreement for this purpose. In the present matter, as provided in the above-mentioned reasons, there is no need for fresh consent for referring the matter to arbitration because the Agreement adequately demonstrates consensus between the parties. Resultantly, the Court allowed the Petition and appointed an Arbitrator to adjudicate the dispute.
In order to derive the intention of the parties as to referring the matter to arbitration, it should be derived from the interpretation of the relevant agreement in its entirety. No particular phrase or a word should be unduly emphasized in such a manner, which can frustrate the true meaning of the agreement.
1. Panasonic India Pvt. Ltd. v. Shah Aircon Through Its Proprietor Shadab Raza, ARB. P. 621/2021; decided on 11.10.2022
2. (2007) 5 SCC 719.
3. (1998) 3 SCC 573, refer paragraph 17(5).
4. (2003) 7 SCC 418, refer paragraph 17.
5. 2022 SCC OnLine SC 1165 [Judgment in Civil Appeal arising out of S.L.P.(Civil) 15989/2021.
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