When in doubt, arbitrate

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When in doubt, arbitrate

Citing an earlier Supreme Court decision, Delhi High Court has ruled that courts must lean towards referring matters to arbitration when one party seeks to negate an arbitration agreement by citing other provisions of a contract that require detailed interpretation.

Petitioner Shristi Infrastructure Development had entered into an agreement with the respondent, Ircon International. After disputes arose, the petitioner invoked the arbitration clause contained in the general conditions of the contract and filed a petition with Delhi High Court under section 11 of the Arbitration & Conciliation Act, 1996, seeking appointment of an arbitrator.

Ircon International submitted that the parties had signed a special conditions of contract (SCC), and per the relevant clause, if any of the conditions contained in the SCC conflicted with or were inconsistent with any of the general conditions, the special conditions prevailed. Ircon argued that the SCC contained a dispute settlement clause providing for amicable settlement of disputes between the parties through discussion, negotiation and deliberation.

It added that the dispute settlement clause contained in the SCC specifically provided that it superseded the relevant clause contained in the general conditions, i.e., clause 72, which included the dispute settlement clause as well as an arbitration agreement.

The court observed that although the SCC had an overriding effect over the general conditions, this effect was restricted to a conflict or inconsistency between the two provisions. The court added that there was no evident conflict or inconsistency between the arbitration clause comprised in the general conditions of the contract and any other provision contained in the special conditions of the contract.

The court ruled that the question of whether the dispute settlement clause contained in the SCC overrides only the relevant clause contained in the general conditions, or also the specific arbitration agreement contained in the general conditions of the contract, requires a detailed interpretation of the contract’s provisions, which could not be decided by the court in the proceedings initiated under section 11.

The high court observed that the Supreme Court, in Intercontinental Hotels Group (India) Pvt Ltd & Anr versus Waterline Hotels Pvt Ltd (2022), had relied upon the supplementary opinion rendered by the former chief justice NV Ramana in Vidya Drolia & Ors v Durga Trading Corporation (2020). The opinion said if the validity of the arbitration agreement cannot be determined on a prima facie basis, the court should refer a matter to arbitration, i.e., the principle of “when in doubt, do refer”.

The court ruled that the arbitration agreement embedded in a contract was always considered a separate and severable clause and its supersession must not be lightly inferred. It further held that if there was an arbitration agreement between the parties, which was sought to be negated by one side by citing other provisions of a contract that requires the contract’s interpretation, the courts must lean towards referring the matter to arbitration.

The high court added that even after the matter has been referred to arbitration, the arbitrator must be free to decide on his or her own jurisdiction, including the existence of the arbitration agreement, under section 16 of the Arbitration & Conciliation Act. The court appointed a sole arbitrator and referred the parties to arbitration.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.