Bombay High Court: Interpretation of ‘May’ & ‘Shall’ in Dispute Resolution Clauses and Conciliation As A Pre-Condition to Arbitration

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In Quick Heal Technologies Limited v. NCS Computech Private Limited Arb Pet. 43/2018 decided on 5 June 2020, the dispute resolution clause provided that all disputes under the agreement shall (‘First shall’) be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration. This was further proceeded by following expression Disputes under this Agreement shall (‘Second shall’) be referred to arbitration. Based on this clause, in an application under Section 11(6) of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’), the Petitioner inter alia contended that the Second shall envisages disputes of all nature, without any qualification whatsoever, as the Clause starts with the words “Disputes under this Agreement” and not “Disputes as referred in Sub Clause (a) above”.

Per contra, the Respondent relying on First shall argued that the dispute resolution clause provides for a mandatory reconciliation process and/or mechanism of amicable settlement of disputes which has not been adhered to by the Petitioner. Thereafter, if such amicable settlement cannot be arrived at, the parties may decide to go for arbitration. Further, the word used for arbitration is ‘may’, and the same cannot be understood as ‘Should’ or ‘Will’. As per the Respondent, a reading of arbitration clause indicates that in case the amicable settlement between the parties fails, then there should be fresh consent between the parties to refer the disputes to arbitration. In other words, the parties retain the right to agree to refer the dispute to arbitration and/or to refuse the same, since the word ‘may’ does not denote any binding obligation. In the above backdrop, the Court was asked to decide whether the parties can be referred to arbitration or not. The Court discussed the following judicial precedents to decide the application for the appointment of arbitrator under Section 11(6) of the Arbitration Act.

Interpretation of ‘Shall’ & ‘Will’ in General

In Labour Commissioner, Madhya Pradesh vs. Burhampur Tapti Mills Ltd. & Ors.[1], three-Judges Bench of the Supreme Court while interpreting the provision of the Central Provinces and Berar Industrial Dispute and Settlement Act, 1947 construed the word “shall” as “shall” and “may” as “may“. In Mahaluxmi Rice Mills & Ors. vs. State of U.P.& Ors.[2], another three-Judges Bench of the Supreme Court while interpreting the words “may” and ‘shall’ appearing in sub-section (3) of section 17 (III) (b) in U.P. Krishi Utpadan Mandi Adhiniyam, 1964 held that the employment of the said two monosyllables of great jurisprudential import in the same clause dealing with two rights regarding the same burden must have two different imports.

Interpretation of ‘Shall’ & ‘Will’ in Arbitration Clauses

In Wellington Associates Ltd. v. Kirit Mehta[3], the Supreme Court considered an arbitration clause [Clause (5)] which stated “it is also agreed by and between the parties that any dispute or differences arising in connection with these presents may be referred to arbitration in pursuance of the Arbitration Act, 1947, by each party appointing one arbitrator and the arbitrators so appointed selecting an umpire”. The Supreme Court held that the preceding clause (4) in the agreement desired that disputes between parties should be adjudicated in a suit by the Civil Courts at Bombay; that Clause (5) suggests that parties need not necessarily go to the Civil Court by way of suit, but can also go before an arbitrator; that it is only an enabling provision. It observed that normally, there is a sole arbitration clause couched in mandatory language and it is not preceded by a clause disclosing a general intention of the parties to go before a civil court by way of a suit; and it suggests that parties can “also” go to arbitration in case the aggrieved party does not wish to go to a civil court by way of a suit, but in that event, fresh consent to go to arbitration is necessary. It observed that the Clause (5) is not a firm or mandatory arbitration clause and it postulates a fresh agreement between the parties that they will go to arbitration.

In Jagdish Chander vs. Ramesh Chander and Ors.[4] the Supreme Court considered an arbitration clause which stated: “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”. The Supreme Court held that if the clause had merely said that in the event of dispute arising between the parties, they “shall be referred to arbitration”, then 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. It held that the expression “determine” indicates that the parties are required to reach a decision by application of mind, i.e., 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 and the main attribute of an arbitration agreement, i.e., consensus ad idem to refer the disputes to arbitration is missing in the above clause relating to settlement of disputes; and consequently it is not an arbitration agreement and there is no question of exercising power under Section 11 of the Arbitration Act to appoint an arbitrator.

Parties Intentions Test

In Indtel Technical Services (P) Ltd. v. W.S. Atkins Rail Ltd.[5], the Supreme Court was called upon to decide the issue of appointment of an arbitrator based on the settlement of disputes clause which reads as follows:

“13. Settlement of disputes

…13.3. If any dispute or difference under this agreement touches or concerns any dispute or difference under either of the sub-contract agreements, then the parties agree that such dispute or difference hereunder will be referred to the adjudicator or the courts as the case may be appointed to decide the dispute or difference under the relevant sub-contract agreement and the parties hereto agree to abide by such decision as if it were a decision under this agreement”

Interpreting the aforesaid clause, the Supreme Court held that for the purpose of the application for the appointment of arbitrator, the parties intended to have their disputes resolved by arbitration. Thus, the rule enunciated was that the emphasis has to be laid on the intention of the parties to have their disputes resolved by arbitration while interpreting a dispute resolution clause.

Surrounding Circumstances and Parties Intentions

In Visa International Ltd v. Continental Resources (USA) Ltd[6]  following clause fell for consideration before the Supreme Court:

“Any dispute arising out of this agreement and which cannot be settled amicably shall be finally settled in accordance with the Arbitration and Conciliation Act, 1996.”

The disputes having arisen between the parties, the respondent, instead of challenging the existence of a valid arbitration clause, took the stand that the arbitration would not be cost effective and will be pre-mature. In view of the facts, the Supreme Court held that there was an arbitration agreement between the parties and the Petitioner was entitled to a reference under Section 11 of the Arbitration Act. The Supreme Court opined that if the intention of the parties to have their disputes resolved through arbitration was evident, the absence of the expressions “arbitration” and “arbitrator” would make little difference. The intention of the parties, according to the judgment, is to be gathered from the surrounding circumstances including the conduct of the parties and the evidence such as exchange of correspondence between them.

In Powertech World Wide Limited v. Delvin International General Trading LLC[7], the arbitration clause specifically provided that any dispute arising out of the purchase contract shall be settled amicably between both the parties or through the Arbitrator in India/UAE. The Supreme Court held that once the correspondence between the parties and attendant circumstances are read conjointly with petition for appointment of arbitrator and with particular reference to purchase contract, it becomes evident that parties had an agreement in writing and were ad idem in their intention to refer these matters to an arbitrator in accordance with provisions of the Arbitration Act.

Recently, the Supreme Court in the case of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. Vs. Jada Elevator Components[8] had considered a similar clause which reads as under:-

“15. Dispute handling:

Common processing contract disputes, the parties should be settled through consultation; consultation fails by treatment of to the arbitration body for arbitration or the court”

The Supreme Court held that the intention of the parties, as it flows from the clause, is that efforts have to be made to settle the disputes in an amicable manner and, therefore, two options were available, either to go for arbitration or for litigation in a court of law. After adverting to the earlier judgment of the Supreme Court in the case of Indtel Technical Services Private Limited (supra), the Supreme Court held that the intention of the parties to have their disputes resolved by arbitration has to be considered.

In Panchsheel Constructions vs. Davinder Pal Singh Chauhan and Ors.[9] , the Delhi High Court dealt with the following arbitration clause:

“That in case of any difference of opinion between the first party/owner and second party/builder in regard to the interpretation or scope of his agreement of any part thereof they should try to solve the problem to any Arbitrator.”

The Court relied on Wellington Associates Ltd (supra) and observed that the use of the word “try to solve” does not give a binding effect to the purported Arbitration Agreement between the parties. It, in fact, does not even give a binding effect to the decision that may be taken on such so called arbitration. Interestingly, the Court remarked that what if after an Award the losing party says that it tried to solve the problem through arbitration, however, as the same has not been solved, it will now go and file a suit. The Court further observed that in any case, arbitration being an alternate dispute resolution mechanism, where the regular Courts are bypassed and challenge to an Award is permitted only within a very narrow scope, clear words expressing an unequivocal intent to accede to such a mechanism is a prerequisite before a party is referred to arbitration.

Conciliation as a Condition Precedent to Arbitration

In Rajiv Vyas v. Johnwin Manavalan[10], the Bombay High Court held that the failure to mutually negotiate which is stipulated as a condition precedent to arbitration proceedings would not invalidate the arbitration proceedings. In Tulip Hotels, Pvt Limited v. Trade Wings Limited[11], the Bombay High Court held that when a party refuses to participate in the reconciliation proceedings, stipulated as condition precedent, it cannot seek to defeat the arbitration by contending that conciliation proceedings have failed.

Judgement

In the instant case, the dispute resolution clause provided as under:-

“17. Dispute Resolution :

(a) All disputes under this Agreement shall be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.

(b) Disputes under this Agreement shall be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. The place of arbitration shall be at Pune and language shall be English. The arbitral tribunal shall comprise one arbitrator mutually appointed, failing which, three (3) arbitrators, one appointed by each of the Parties and the third appointed by the 2 so appointed arbitrators and designated as the presiding arbitrator and shall have a decisive vote.

(c) Subject to the provisions of this Clause, the Courts in Pune, India, shall have exclusive jurisdiction and the parties may pursue any remedy available to them at law or equity.”

The Court held that as per sub-clause (a) of Clause 17 reproduced above, the parties have agreed to a specific procedure / mode of settlement of all the disputes between them under the said Agreement, i.e. they have agreed to designate/appoint their respective personnel to amicably resolve / settle all their disputes by discussion, and if the disputes are not amicably settled within 30 days, the next step would be that they may refer their disputes to Arbitration as set out in Sub-Clause (b) of Clause 17. In other words, the parties have at no stage agreed to an option of referring their disputes under the said Agreement to arbitration or to the Court. Instead, it is clear beyond any doubt that Clause 17 of the Agreement is a Clause which is drafted with proper  application of mind.

In Court’s view, under sub-clause (a) of Clause 17, the parties have first agreed that all disputes under the Agreement “shall” be amicably discussed for resolution by the designated personnel of each party, thereby making it mandatory to refer all disputes to designated personnel for resolution/settlement by amicable discussion. It is thereafter agreed in Sub-Clause (a) of Clause 17 itself, that if such dispute/s cannot be resolved by the designated personnel within 30 days, the same “may” be referred to Arbitration, thereby clearly making it optional to refer the disputes to Arbitration, in contrast to the earlier mandatory agreement to refer the disputes for amicable settlement to the designated personnel of each party.

Again it is made clear in Sub- Clause (a) of Clause 17 that the parties may refer their disputes to Arbitration as stated below i.e. as stated in Sub-Clause (b) of Clause 17, meaning thereby that if the parties agree to refer their disputes to Arbitration, such Arbitration shall be as stated in sub-clause (b) of Clause 17, i.e. upon such agreement between the parties, the disputes under the said Agreement shall be referred to arbitration as per the Arbitration and Conciliation Act, 1996, as amended from time to time; the place of arbitration shall be at Pune and the language shall be English. The Arbitral Tribunal shall comprise of one Arbitrator mutually appointed by the parties, failing which there shall be three Arbitrators, one appointed by each of the parties and the third Arbitrator to be appointed by the two Arbitrators. Therefore, the words ‘shall’ and ‘may’ used in subclauses (a) and (b) of Clause 17 are used after proper application of mind and the same cannot be read otherwise.

Clause (c) therefore further makes it clear that if the disputes are not settled within 30 days by the designated personnel, the parties will have an option to refer the same to Arbitration ; if the parties agree to refer their disputes to Arbitration, the same shall be referred to Arbitration as per the Arbitration and Conciliation Act, 1996, as amended from time to time, as set out in Sub-Clause (b) of Clause 17 ; and if the parties decide not to exercise the option of Arbitration, the Courts in Pune, India, shall have the exclusive jurisdiction to enable the parties to pursue any remedy available to them at law or equity.

In view thereof, the Court concluded that Clause 17(b) thus cannot operate independently and cannot be used to initiate an arbitration process, if both the parties did not agree to refer their disputes to arbitration under Clause 17(a).

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

[1]  (1964)IILLJ426SC

[2] ( 1998 ) 6 SCC 590

[3] (2000) 4 SCC 272 : 2000 (4) ALT 5.3 (DN SC)

[4] (2007) 5 SCC 719

[5] (2008) 10 SCC 308

[6] (2009) 2 SCC 55

[7] (2012) 1 SCC 361

[8] (2018) 9 SCC 774

[9] Arb. P. 380/2018, Delhi High Court

[10] (2010) 6 Mh.L.J. 483

[11] (2010) 2 ArbLr 286

2 Comments Add yours

  1. gk says:

    Dear Sirs,

    I thought this was very well done.

    GK Ganesan gkjuris@gmail.com

    On Mon, 8 Jun 2020 at 02:11, Ananya Pratap Singh wrote:

    > Ananya Pratap Singh posted: ” In Quick Heal Technologies Limited v. NCS > Computech Private Limited Arb Pet. 43/2018 decided on 5 June 2020, the > dispute resolution clause provided that all disputes under the agreement > shall (‘First shall’) be amicably discussed for resolution by the de” >

    Like

    1. Ananya Pratap Singh says:

      Thank you Sir.

      Like

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