IMPORTANT POINT
Clause in an agreement that in event of disputes arising between parties they “shall be referred for arbitration if parties so determine” could not be construed to be an arbitration agreement as main attribute of an arbitration agreement namely, consensus ad idem to refer the disputes to arbitration was missing.

Headnote:(i) Arbitration and Conciliation Act, 1996 — Sections 7 and 11(5) and (6) — Appointment of an arbitrator — Existence of an arbitration agreement is a condition precedent for exercise of power to appoint an Arbitrator — Attributes or essential elements of an arbitration agreement — A clause in a contract could be construed as an “arbitration agreement” only if agreement to refer disputes or differences to arbitration was expressly or impliedly spelt out from clause — Clause in the agreement that in event of disputes arising between parties “shall be referred for arbitration if the parties so determine” was a provision which enabled arbitration only if parties mutually decided after due consideration and could not be said to be an arbitration agreement — Main attribute of arbitration agreement namely consensus ad idem to refer disputes to arbitration was missing — Impugned order appointing arbitrator was liable to be set aside.
       Held : This Court held that a clause in a contract can be construed as an ‘arbitration agreement’ only if an agreement to refer disputes or differences to arbitration is expressly or impliedly spelt out from the clause. (Para 8)
       Para 16 of the Partnership deed provides that if there is any dispute touching the partnership arising between the partners, the same shall be mutually decided by the parties or shall be referred to arbitration if the parties so determine. If the clause had merely said that in the event of disputes arising between the parties, they “shall be referred to arbitration”, it would have been an arbitration agreement. But the use of the words “shall be referred for arbitration if the parties so determine” completely changes the complexion of the provision. The expression “determine” indicates that the parties are required to reach a decision by application of mind. Therefore, when clause 16 uses the words “the dispute shall be referred for arbitration if the parties so determine”, it means that it is not an arbitration agreement but a provision which enables arbitration only if the parties mutually decide after due consideration as to whether the disputes should be referred to arbitration or not. In effect, the clause requires the consent of parties before the disputes can be referred to arbitration. The main attribute of an arbitration agreement, namely, consensus ad idem to refer the disputes to arbitration is missing in clause 16 relating to settlement of disputes. Therefore it is not an arbitration agreement, as defined under section 7 of the Act. In the absence of an arbitration agreement, the question of exercising power under section 11 of the Act to appoint an Arbitrator does not arise. (Para 9)
       (ii) Civil Procedure Code, 1908 — Section 89 — Provision shall have no application in a proceedings u/s 11 of Arbitration and Conciliation Act pending before Court.
       Held : Though the power exercised under section 11 of the Act has been held to be a judicial power [see SBP & Co. vs. Patel Engineering Ltd - 2005 (8) SCC 618], the proceedings relate only to appointment of Arbitral Tribunal. The disputes as such are not before the Chief Justice or his designate for adjudication. Therefore, section 89 CPC has no application. It should not also be overlooked that even though section 89 mandates courts to refer pending suits to any of the several alternative dispute resolution processes mentioned therein, there cannot be a reference to arbitration even under section 89 CPC, unless there is a mutual consent of all parties, for such reference. (Para 10)

JUDGMENT

R.V. Raveendran, J. — This appeal by special leave is against the order dated 10.7.2001 passed by the Designate of Chief Justice of the High Court of Delhi, allowing Arbitration Application No.284 of 1997 filed under section 11(5) and (6) of the Arbitration and Conciliation Act, 1996 (‘the Act’ for short).

2. The appellant and first respondent entered into a Partnership as per deed dated 9.1.1964 to carry on the business under the name and style of ‘Empire Art Industries’. Clause 16 of the said Deed relates to settlement of disputes. The said clause is extracted below :

“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.” (Emphasis supplied)

3. The first respondent filed the application for appointment of an Arbitrator to decide the disputes in regard to dissolution of the said partnership firm and for rendition of accounts. In the said application, the first Respondent arrayed the appellant herein as the first respondent. Respondents 2 to 6 herein were also impleaded as respondents alleging that the two partners entered into an arrangement/agreement with Respondents 2 to 6 in the year 1974 under which Respondents 2 to 6 were to supervise the business of the firm and pay to each of the two partners, a fixed sum, which was increased periodically. According to first Respondent, the arrangement worked satisfactorily for several years, but for some years, the entire amount was being received by the appellant and he was not paying the first Respondent’s half share. The appellant resisted the petition, inter alia, on the ground that the partnership had come to an end in the year 1979 and the accounts were all settled. He also contended that the partnership deed did not contain any agreement to refer disputes to arbitration. It was specifically contended that clause 16 of the Deed of Partnership was not an arbitration agreement.

4. The learned Judge who heard the application under section 11, allowed it by order dated 10.7.2001. He held that if the intention of the parties was not to refer their disputes to arbitration, there was no need to incorporate clause 16 making a specific mention of arbitration, and that such a provision should be liberally interpreted so as to encourage arbitration. The learned Judge held that clause 16 of the partnership deed was an arbitration agreement. In regard to the objection of respondents 2 to 6 that they were not parties to either the partnership deed or agreement, the learned Judge observed that the scope of the proceedings was limited to the extent of examining whether it was a case for appointment of Arbitrator or not, and it was for the Arbitrator to decide whether Respondents 2 to 6 were liable or not. Justice Santosh Duggal, a retired Judge, was appointed as the sole Arbitrator.

5. The appellant has challenged the said order appointing the Arbitrator. It is submitted that the power under section 11 of the Act, to appoint an Arbitrator, can be exercised only if there is a valid arbitration agreement between the parties, and that as there is no arbitration agreement between the parties, the Arbitrator could not have been appointed. Strong reliance was placed by the Appellant on the decision in Wellington v. Kirit Mehta [2000 (4) SCC 272], where a Designate of the Chief Justice of India held that the following clause was not an ‘arbitration agreement’:

“It is also agreed by and between the parties that any dispute or difference arising in connection with these presents may be referred to arbitration in pursuance of the Arbitration Act, 1940 by each party appointing one arbitrator and the arbitrator so appointed selecting an Umpire. The venue of the arbitration shall be at Bombay.”

He also held that the use of the word “may” could not be construed as “shall” and that the clause was only a

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2007 Supreme(SC) 591

Cases Referred (7)