The Supreme Court of India ("SC") in the case of South Delhi Municipal Corporation of Delhi v SMS Limited, 2025 SCC OnLine SC 1138 (decided on 15 May 2025) reiterated the mandatory features of a dispute resolution clause in order to constitute it a valid arbitration agreement. The Court passed a common judgment in a batch of three appeals.
Facts:
- The three appeals from the High Court of Delhi ("HC") involved a similar question regarding interpretation of a dispute resolution clause in Concession Agreements ("Agreements") between the Municipal Corporation of Delhi ("MCD") and three private contractors for the development of parking spaces and commercial complexes. While MCD contended that the dispute resolution mechanism under Article 20 of the Agreements provided for dispute resolution through mediation, the private contractors interpreted the clause to mandate arbitration between the parties.
- The appeals arose from the adjudication of the HC on the dispute resolution mechanism in applications for commencement of arbitration between the parties. In two out of three matters the HC held that Article 20 of the Agreements provided for arbitration, while in the third matter it held that the Agreements provided for mediation.
- While Article 20 of the Agreements were similarly worded, there were minor differences in the dispute resolution process specific to each contract. The clause did not contain any reference to the terms "arbitration", "arbitral tribunal" or the "Arbitration and Conciliation Act, 1996". It also inter alia provided for reference of any dispute, controversy or claim under the Agreement to MCD's officers for resolution.
Issues:
- The primary issue before the SC was whether the Agreements constituted a valid arbitration agreement between the parties. To adjudicate on the same, the SC dissected the issue into two sub-issues on (i) the necessary ingredients of an enforceable arbitration agreement and (ii) whether Article 20 of the Agreements contained those ingredients.
Analysis:
- The SC commenced its analysis by addressing the rudimentary issue of what constituted a valid arbitration agreement under Indian law, which was the sine qua non for the invocation of the arbitral process. The SC referred to Section 7 of Arbitration and Conciliation Act, 1996 ("Act") for the definition of an arbitration agreement, and culled out the primary features of such an agreement to conclude that the statute prioritizes substance over form in the case of a valid arbitration agreement.
- The SC took note of the findings regarding the essential
elements of an arbitration agreement such as the following:
- Parties' consensual intent to settle any difference between them through a private tribunal and that such decision would be binding on them;
- Jurisdiction of the tribunal to decide the parties' rights should be derived from the consent of the parties;
- The tribunal will determine the rights of the parties in an impartial and judicial manner;
- The parties must intend to enforce the decision of the tribunal;
- The Court also relied on South Delhi Municipal Corporation v SMS AAMW Tollways (P) Limited ("Tollways judgment"), (2019) 11 SCC 776 and the legislative frameworks under the UNCITRAL Model Law, arbitration laws applicable in the United Kingdom, United States of America, Singapore and France. From the overall analysis, the SC summarized the common elements of an arbitration agreement as being (i) a written agreement, (ii) a defined legal relationship, and (iii) a clear agreement between parties to submit present or future disputes to arbitration.
- The SC then went on to elaborate on the essential ingredients
that are necessary for the existence of an arbitration agreement as
follows, while adding that this test would be a conjunctive
elemental test:
- Clear intent to arbitrate – which contemplated that the agreement related to a definitive and mutual intention to refer to arbitration and exclude the jurisdiction of civil courts for adjudication of the disputes.
- Binding adjudicatory process - which contemplated that the outcome of the process must be a final and conclusive award, being final and binding on the parties.
- Compliance with the arbitration norms – such as clarity on procedural aspects for the conduct of the arbitration while allowing for party autonomy in the appointment of arbitrators and conduct of proceedings.
- The SC after making an elaborate review of the requirements of an arbitration agreement examined whether Article 20 of the Agreements contained these features. The SC held that the language of Article 20 did not contemplate an express intent to arbitrate. The SC took note of the fact that the title of the clause itself referred to 'Mediation by Commissioner' and this raised a conundrum regarding the dispute resolution mechanism. Though the precedents in this regard set out that there need not be an excessive focus on the nomenclature or express reference to arbitration, the SC was of the view that the title of the clause in Article 20 indicated a non-adjudicatory and conciliatory process rather than an arbitration mechanism.
- The SC also took note of the absence of the terms 'arbitration', 'arbitrator', 'Arbitration Act' in the Article 20, which are generally included in an arbitration agreement to indicate the parties' intention. Further, after considering that 'Commissioner, MCD', was the authority to whom the reference was to be made, the SC was of the view that the clause only suggested an internal dispute resolution mechanism. Further, the SC also took note of the fact that the appointment of such "decision-maker" was within the control of MCD without any role being adduced to the other party, which undermines the claim that an arbitration was contemplated.
- Though it was argued by the private contractors that the decision rendered under Article 20 led to an outcome that was final and binding, the SC held that this alone could not render it an arbitration agreement since there were other forms of decision-making such as expert determinations, departmental adjudications and administrative reviews that led to final and binding decisions but did not constitute arbitration.
- Lastly, the SC analyzed if Article 20 met the criteria of compliance with arbitral norms. Taking cognizance of the fact that the officer appointed exclusively by MCD was the one to decide the dispute, the SC took note of the absence of mutual agreement between the parties. Further, the SC also took note of the lack of the structured adjudicatory process wherein the parties are afforded sufficient opportunity to participate in the adversarial process. The SC also considered the absence of constituting an impartial functionary for the purposes of decision-making while noting that it was only an officer of MCD who was unilaterally selected, thereby compromising the requirement of neutrality to the process.
- Consequently, the SC held that the Article 20 did not satisfy the requirements of Section 7 of the Act despite containing textual elements which superficially appear to suggest dispute resolution by arbitration. Further, it highlighted that the case in Tollways judgment arose from a similar clause in an agreement with the Municipal Corporation and that there was no reason to deviate from the view of the coordinate bench in Tollways judgment.
The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.
