The Supreme Court of India has ruled that a dispute resolution clause in a contract, which uses the word “arbitration” but ultimately permits parties to “seek remedies through the courts of law,” does not constitute a valid arbitration agreement under the Arbitration and Conciliation Act, 1996 (“A&C Act”).
In a judgment delivered by Justice Dipankar Datta and Justice Augustine George Masih, the apex court dismissed an appeal filed by M/s Alchemist Hospitals Ltd. against M/s ICT Health Technology Services India Pvt. Ltd., affirming a judgment of the High Court of Punjab & Haryana. The court held that the clause in question lacked the attribute of finality and merely represented a multi-tier process for amicable settlement, not a binding arbitration.
Background of the Case
The dispute arose from a “Software Implementation Agreement” dated 1st November 2018 between Alchemist Hospitals Ltd. (appellant) and ICT Health Technology Services (respondent) for the implementation of “HINAI Web Software”. The appellant alleged repeated technical failures and procedural delays, leading to a rollback of the software on 1st April 2020.
On the same day, the appellant invoked Clause 8.28 of the Agreement, which was titled “Arbitration”. After an exchange of communications, the appellant issued a notice on 29th June 2020 under Sections 11 and 21 of the A&C Act, suggesting the appointment of a sole arbitrator.
Constrained by the respondent’s communications, the appellant filed an application under Section 11(6) of the A&C Act before the High Court, seeking the appointment of an arbitrator.
Clause 8.28 of the Agreement
The clause at the center of the dispute, Clause 8.28, stipulated a multi-step process:
- First, negotiation between senior executives.
- If unresolved, the matter would proceed to mediation.
- The clause then stated: “Any dispute… shall be resolved by arbitration through senior management comprising respective Chairmen of the two parties (Arbitrators).”
- Crucially, it concluded: “Should the dispute not be resolved within fifteen (15) days after arbitration, the complaining party shall seek remedies through the courts of law.”
High Court’s Findings
The High Court dismissed the appellant’s application, holding that Clause 8.28 was not a valid arbitration agreement. The High Court observed that the term “arbitration” was “loosely employed” and the true intention was for negotiation and mediation at an internal level. It noted that the process lacked finality, as the parties were “expressly free to approach civil courts.”
Supreme Court’s Analysis
The Supreme Court, tasked with deciding “whether Clause 8.28 of the Agreement can be considered to be a valid arbitration agreement,” upheld the High Court’s reasoning.
The bench, led by Justice Datta, began its analysis by citing Section 7 of the A&C Act, which defines an arbitration agreement. The Court referred to established legal precedents to determine the essential attributes of such an agreement.
Citing Jagdish Chander v. Ramesh Chander (2007), the Court reiterated a key principle: “mere use of the word ‘arbitration’ or ‘arbitrator’ in a clause will not make it an arbitration agreement,” especially if it “contains anything that detracts from an arbitration agreement.” The judgment in Jagdish Chander explicitly stated that where an agreement allows a party to “file a civil suit seeking relief” if unsatisfied with a decision, “it cannot be termed as an arbitration agreement.”
The Supreme Court found this precedent to be definitive. “That is precisely the case here,” the judgment stated.
The Court’s analysis focused on two primary deficiencies in Clause 8.28:
- Lack of Finality: The Court observed that the clause’s “penultimate sentence,” which allows the complaining party to “seek remedies through the courts of law” after 15 days, was the determinative factor. “Upon a perusal of Clause 8.28, we are of the view that there is no indication that the proposed ‘arbitration’ was supposed to be final and binding,” the Court held. This provision suggested “an attempt at amicable resolution inter se rather than a definitive submission to arbitration.”
- Nature of the “Arbitrators”: The Court noted that the designated “Arbitrators” were the respective Chairmen of the two parties. It described this mechanism as being “akin to an internal settlement process between the Chairmen of the two companies.” While the judgment clarified that this “does not ipso facto disqualify the clause,” it “remains a significant circumstance in discerning the true intention of the parties.”
The appellant had also argued that the respondent’s failure to deny the existence of an arbitration agreement in their correspondence amounted to an admission. The Supreme Court rejected this, distinguishing the case from precedents like Powertech World Wide Ltd. and Visa International Ltd. The Court held that in those cases, the parties had effectively consented to arbitration. In the present case, the Court concluded, “when there has indeed been no arbitration agreement in the first place, therefore, subsequent correspondence between the parties cannot displace the original intention.”
Decision
Concluding its analysis, the Supreme Court held: “In our view, Clause 8.28 of the Agreement does not evince an intention to refer disputes to arbitration, for the above-mentioned reasons.”
The Court affirmed the final judgment and order of the High Court and dismissed the appeal. The appellant was left “free to seek remedy in accordance with law before the competent civil court,” with a direction that any claim for the benefit of Section 14 of the Limitation Act, 1963, be decided appropriately by the relevant court. The parties were ordered to bear their own costs.
