Arbitration as a Preferred Dispute Resolution Mechanism
With the exponential growth in commercial transactions, disputes between parties have also increased. Instead of resorting to a court-administered litigation process, parties often rely on arbitration as a dispute resolution mechanism. Arbitration provides party autonomy over procedural aspects, choice of venue, time-bound resolution, cost predictability and limited grounds for challenging the decision.
Why Drafting Matters: The Risk of Ambiguity
It is pertinent to note that if the arbitration clause/agreement is vaguely drafted or provides a possibility of dispute resolution through arbitration rather than mandating it, does not clearly specify the procedure, governing law, etc., the courts or arbitral tribunals may not recognize it as a valid arbitration agreement.
The parties need to agree on an arbitration clause that is well drafted, clear in terms of the intention of the parties, laws and the procedure they want to opt for, and not leave any room for ambiguity. In the absence of a valid arbitration clause, it may first result in litigation on the ‘dispute resolution procedure’ itself and later on the merits of the case. Thereby, defeating the very purpose of choosing arbitration.
Supreme Court’s Position: When an Arbitration Clause Fails
The observations and decisions of the Supreme Court in relation to arbitration clauses will be helpful to understand the important facets required to ensure that the arbitration clause is valid and parties can initiate dispute resolution through arbitration as intended.
In the recent judgment of Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd.,[1] the question before the Hon’ble Supreme Court of India was as to whether the following clause 25 qualifies to be an arbitration clause: –
“25. Arbitration:
The contract evaluated hereby or contained herein shall be governed by and construed according to Indian Laws. Any difference of opinion or dispute thereunder can be settled by arbitration in India or a place mutually agreed with each party appointing an arbitrator.”
The court observed that the word “can” means the following: “used to say that it is possible for someone or something to do something, or for something to happen”, “used to indicate possibility”, thereby leaving the option open to the parties to refer the dispute for arbitration.
Further, the Court extensively discussed and relied upon the landmark judgments like Jagdish Chander v. Ramesh Chander[2] and Cox & Kings Ltd. v. SAP India (P) Ltd.[3], and held that the aforementioned Clause 25 does not constitute a valid arbitration agreement as the clause merely postulates the “future possibility” of referring the disputes to arbitration. Moreover, a further agreement between the parties is required to refer the dispute to arbitration.
The Supreme Court of India in the Jagdish Chander[4] case discarded the following clause as an arbitration clause due to the requirement of fresh consent post contract in order to refer the dispute to arbitration.
“(16) If during the continuance of the partnership or at any time afterwards any dispute touching the partnership arises between the partners, the same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine.”
Moreover, the Supreme Court in the Jagdish Chander[5] case listed the below guidelines to determine an arbitration agreement:
(i) The Arbitration clause/agreement must mandate the referral of the dispute to arbitration rather than making it optional.
(ii) A clause pertaining to the settlement of disputes does not cease to be an arbitration agreement even if the terms “arbitration” and “arbitral tribunal (or arbitrator)” are not used in reference to the settlement process if the following conditions are fulfilled: (a) The agreement should be in writing, (b) The parties should have agreed to refer any disputes (present or future) between them to the decision of a private tribunal, (c) The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it, and (d) The parties should have agreed that the decision of the Private Tribunal in respect of the disputes will be binding on them.
(iii) The arbitration agreement need not contain all the characteristics of an arbitration agreement in order for it to be considered an arbitration agreement if there is a clear and unequivocal intent to have the disputes resolved through arbitration.
(iv) If a clause provides for the requirement of additional or new permission from the parties for referring the disputes to arbitration, the inclusion of the term “arbitration” or “arbitrator” will not make it a valid arbitration agreement.
The Hon’ble Supreme Court of India in the judgment of Cox & Kings Ltd.[6] clearly held that the presence of “consent” is an indispensable condition for the differences between the parties to be settled by an arbitration tribunal.
Common drafting pitfalls to avoid while drafting an arbitration clause:
- Use of “may”, “can” when referring a dispute to arbitration instead of ‘shall’ / ‘must’; shareholder agreements.
- Implied or express requirement of future consent from the parties before finally referring to arbitration;
- Lack of binding intent;
- Not mentioning the seat/law.
Key Takeaways and Drafting Guidance
It can be safely concluded that the Courts consider an arbitration clause as valid when it clearly reflects the intent of the parties to be bound by the arbitral award, purpose, and procedure, rather than a possibility of invocation of such a mechanism.
A question may also arise as to whether all the conditions mentioned in the Jagdish Chander[7] case must be expressly included in order to qualify as an arbitration clause. The Supreme Court clearly stated in para (iii) above that where the clause mandatorily refers the disputes to arbitration, it is not essential to specify all the characteristics of an arbitration agreement. However, in such cases, issues may arise as to the jurisdiction of the Courts, composition of the arbitration tribunal, scope of the disputes ought to be referred, etc.
Hence, for clarity, a well-drafted arbitration clause should, at a minimum, also include:
- Clear scope of disputes or claims that can be referred to and finally resolved by Arbitration;
- Mandatorily referring the parties to arbitration in case of any dispute
- Under which law the arbitration is to be conducted;
- Seat, venue, and language of arbitration; and
- Composition of the arbitral tribunal.
For any queries or discussions, you can reach out to our contributors:
Arpit Sarangi (arpit.s@asqlegal.com)
Akash Kumar (akash@asqlegal.com)
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References:
- Nagreeka Indcon Products Pvt. Ltd. v. Cargocare Logistics (India) Pvt. Ltd., 2026 INSC 384.
- Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719.
- Cox & Kings Ltd. v. SAP India (P) Ltd., 2023 INSC 1051.
- Jagdish Chander case, supra.
- Jagdish Chander case, supra.
- Cox & Kings Ltd. case, supra.
- Jagdish Chander case, supra.
