Infering Parties' Intention To Arbitrate In Absence Of Express Arbitration Clause Under The Contract

Introduction

'Consensus ad idem' or 'meeting of minds' is an indispensable requirement under the Indian Contract Law for the formation of any valid agreement.¹ It means that two or more people agree on the same thing in the same sense. In complex commercial transactions, the intention of parties at the time of entering the contract becomes even more important as it not only binds the parties with their future obligations but also mutually & definitively ascertains mechanisms of recourse in case of breach of any such obligations. Therefore, in case of any ambiguity in interpretation of the contract the courts have relied on identifying the intention of parties at the time of execution of the contract.

Recently, the Hon'ble High Court of Bombay in the case of Lords Inn Hotels and Resorts (Formerly known as Lords Inn Hotels and Developers Pvt. Ltd.). vs. Pushpam Resorts LLP and Others² in its judgment dated 11.02.2025, was faced with similar complex issue of determining parties' intention to arbitrate in an otherwise ambiguous contract.

Background

A Hotel Franchisee and Management Agreement dated 10.02.2021 ("Agreement") was executed between Lords Inn & Pushpam ("the Parties"). Thereafter, certain disputes arose between the parties and consequentially Pushpam issued a termination notice dated 08.10.2024.³ Lords Inn vide letter dated 07.12.2024 invoked arbitration under Article XXIV (Governing Law & Jurisdiction) of the Agreement. Pushpam countered the aforesaid allegation stating that there is no valid arbitration agreement between the parties in terms of Section 7 of Arbitration and Conciliation Act, 1996. This led to proceedings under Sections 9 (seeking a stay on the termination of Agreement) and Section 11 (seeking appointment of an arbitrator) of the Arbitration Act, 1996 before the Hon'ble Bombay High Court.⁴

Bone of Contention: Whether an Arbitration Agreement exists between the parties?

Interestingly, even in the absence of an express Arbitration Clause in the Agreement, three Clauses referred to the word "Arbitration":

Notably, no such arbitration clause was included in the final agreement drawn up between the parties. Therefore, whether an arbitration agreement between the parties is at all in existence, is the vexed question that falls for consideration in these proceedings under Section 11 of the Arbitration and Conciliation Act, 1996.

Court's Rationale: Contractual interpretation beyond the literal terms of contract to reflect business sense

The Court examined the emails, correspondence & draft versions of the agreement exchanged between the parties. It observed that an earlier draft included a full arbitration clause Article XXV the provision "below" Article XXIV, which was later removed and not reinserted despite references to arbitration being reintroduced elsewhere in the agreement. This strongly indicated an intent to arbitrate that was likely lost due to a drafting oversight.⁵

Since the literal reading of the Agreement did not lend itself to a fully satisfactory conclusion, with regards to Article XXIV, Section 23.3. & 28.3 of the contracts, the Court opined that to rule out three provisions in the Agreement that have references to "Arbitration" as being utterly meaningless, appears absurd and therefore, examined if the agreement would make more sense by applying the business efficacy test.⁶

Principle of Business Efficacy: In a Nutshell

The principle of business efficacy evolved in the landmark judgement of The Moorcock⁷ wherein, the Court observed that that terms could be implied into contracts when they are so obvious that they go without saying or are necessary to make the agreement work as intended by both parties for giving the contract business efficacy, without which, the agreement would be practically useless. The Moorcock judgement remains foundational in the interpretation of the implied terms in a contract.

Thereafter, the Hon'ble Supreme Court further solidified the Principle of Business Efficacy (Penta-Test) in the case of Nabha Power Ltd. v. Punjab State Power Corporation Ltd.⁸, and observed that, "...The development of law saw the 'five condition test' for an implied condition to be read into the contract including the 'business efficacy' test... (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3) it goes without saying, i.e., The Officious Bystander Test; (4) capable of clear expression; and (5) must not contradict any express term of the contract."⁹

Findings of the Court in Lords Inn Case

The Hon'ble Bombay High Court discussed and applied the Penta-test¹⁰ to determine whether an implied term (here, an arbitration clause) could be read into the contract, and concluded as follows: with respect to the requirement for "

1. Reasonable & Equitable": the Court found that it was reasonable & apparent that every clause having reference to arbitration was re-inserted except Article XXV (Arbitration Clause).¹¹
2. with respect to the requirement for "Necessary to give Business Efficacy:" the Court found that if the parties had been willing to arbitrate about one facet, and they reintroduced three out of four references to arbitration, it implies that parties intended to have the fourth provision in the agreement as well.¹² to record the satisfaction of the "Officious Bystander Test:" the Court noted that the reintroduction of three out of four references to arbitration in the backdrop of negotiations between the parties shows that the omission of the fourth clause (i.e., arbitration clause) was an unintended error in handling the draft.¹³

in respect of the test for "Capable of Clear Expression": the Court observed that the very reason that Article XXIV is drafted in the form it does, would show that it was meant to have Article XXV (Arbitration clause) below it.¹⁴ ,for the fifth test qua the implied term being "Non-contradictory with express terms of the contract:" the Court observed that inferring an arbitration clause in the contract did not contradict any express provisions of the contract. On the contrary, it gives a legitimate and harmonious completion to the otherwise inchoate and cures the commercia absurdity of having meaningless provisions in three places.¹⁵

Based on these findings, the Court held that based on a purposive reading & the principle of business efficacy as well as on an examination of the e-mail exchanges immediately preceding the executed agreement that "the parties had originally envisaged arbitration, then wanted to give it a complete go-by, and then brought it back." In doing so, the parties missed out on one provision, rendering the other three provisions i.e. (Article XXIV, Section 23.3 and Section 28.8) commercially absurd. Accordingly, it was necessary to apply the business efficacy test. As a way forward, Court appointed a sole arbitrator for adjudication of disputes and opined that it will be open for the Arbitral Tribunal to examine existence of the arbitration agreement under Section 16 of the Arbitration & Conciliation Act, 1996.

Conclusion

This judgment is particularly instructive for contract drafters and litigants alike to be highly cautious at every stage for ensuring that true & correct intention of parties is incorporated in the contract for avoiding future litigations based on such crucial lackings. It illustrates how Courts may look beyond literal wording to uphold party autonomy and ensure commercial practicality. This decision forms an important precedent for Courts in navigating the contractual ambiguities, especially in commercial arbitration contexts, by reading beyond the literal terms of an agreement and discerning the intention of the parties at the time of entering in the contract.

Footnotes

1. Section 13, Indian Contract Act, 1872

2. 2025 SCC OnLine Bom 447

3. Para 2 & 3, 2025 SCC OnLine Bom 447

4. Para 4, 5 & 5, 2025 SCC OnLine Bom 447

5. Para 18, 2025 SCC OnLine Bom 447

6. Para 30 & 40, 2025 SCC OnLine Bom 447

7. (1889) 14 P.D. 64

8. (2018) 11 SCC 508

9. Para 49, (2018) 11 SCC 508

10. (2018) 11 SCC 508

11. Para 43, 2025 SCC OnLine Bom 447

12. Para 44, 2025 SCC OnLine Bom 447

13. Para 45, 2025 SCC OnLine Bom 447

14. Para 46, 2025 SCC OnLine Bom 447

15. Para 47, 2025 SCC OnLine Bom 447

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