Alternative Dispute Resolution

Jagdish Chander v. Ramesh Chander

(2007) 5 SCC 719

Citation: (2007) 5 SCC 719
Court: Supreme Court of India
Date: 26 April 2007
Bench: H.K. Sema and R.V. Raveendran, JJ.

Facts

Jagdish Chander and Ramesh Chander entered into a partnership deed dated 9 January 1964.
Clause 16 of the deed dealt with disputes between the partners.
It provided that disputes concerning the partnership would:
be mutually decided by the parties; or
be referred to arbitration “if the parties so determine.”
Differences later arose concerning the partnership and its assets.
One party filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 seeking appointment of an arbitrator.
The other party objected that Clause 16 was not a concluded arbitration agreement.
It was argued that the clause merely contemplated the possibility of a future arbitration if both parties later agreed to it.
The High Court nevertheless treated the clause as an arbitration agreement and appointed an arbitrator.
The matter reached the Supreme Court.

Issue

Whether Clause 16 amounted to a binding arbitration agreement under Section 7.
Whether the use of the word “arbitration” is sufficient by itself.
Whether a clause requiring a further future decision by the parties creates an immediate obligation to arbitrate.

Rule

An arbitration agreement requires a clear and binding intention to submit disputes to arbitration.
The parties must reach consensus ad idem that:
disputes will be referred to a private adjudicatory tribunal;
the tribunal will determine the disputes impartially;
its decision will bind the parties; and
ordinary court adjudication will be replaced to that extent.
No particular formula or technical expression is compulsory.
However, the clause must create an obligation to arbitrate, not merely:
an option;
a possibility;
a proposal for future consideration; or
an agreement to agree later.
Words such as “may refer” or “if the parties agree” ordinarily indicate that fresh consent is still required.

Application

The Supreme Court examined Clause 16 as a whole.
The first method suggested by the clause was that the parties would mutually decide their disputes.
Arbitration was mentioned only as an alternative that could be used “if the parties so determine.”
Those words were decisive.
They showed that the partners had not presently committed themselves to arbitration.
Instead, they had left open the possibility that, after a dispute arose, they might jointly decide to arbitrate.
A valid arbitration agreement gives either party the right to insist upon arbitration once the covered dispute arises.
Under Clause 16, one party could not insist on arbitration without securing the other party’s fresh consent.
The clause therefore did not itself remove the dispute from the jurisdiction of ordinary courts.
The Court explained that merely using the expression “arbitration” does not automatically satisfy Section 7.
The substance of the arrangement must show:
a mandatory reference;
adjudication by a neutral decision-maker; and
a binding determination.
The phrase “shall be referred to arbitration” may ordinarily create such an obligation.
By contrast, wording such as:
“may be referred”;
“can be referred”; or
“shall be referred if the parties agree” generally requires a fresh agreement.
No subsequent agreement had been reached between Jagdish Chander and Ramesh Chander.
The refusal of one party to arbitrate could not itself be treated as the consent required by the clause.
The High Court had therefore created an arbitral obligation that the parties had never undertaken.
Section 11 empowers a court to enforce an existing arbitration agreement.
It does not empower the court to manufacture one because arbitration might be convenient or efficient.

Conclusion

The Supreme Court held that Clause 16 was not an arbitration agreement.
It merely provided that the parties could choose arbitration in the future if they jointly decided to do so.
Since no fresh consensus had been reached, the High Court lacked authority to appoint an arbitrator.
The appointment was set aside.
Use this case for: a clause contemplating arbitration only if the parties later agree is not a concluded arbitration agreement.