Calcutta High Court: Clause Empowering Signatories To Decide Disputes Not An Arbitration Agreement

The Calcutta High Court has held that a clause empowering the signatories to a contract to resolve disputes does not amount to a valid arbitration agreement under the Arbitration and Conciliation Act, 1996.

The Bench observed, "The application is dismissed upon this court coming to a conclusion that Clause 16 is not a valid arbitration clause as contemplated under the Arbitration and Consolation Act, 1996...A common sense approach by a common business man, will not lead this Court to hold that Clause 16 is a valid arbitration clause under the applicable Indian law."

The Single Bench of Justice Shampa Sarkar dismissed a petition filed under Section 11 of the Arbitration Act seeking the appointment of an arbitrator.

While referring to Jagdish Chander v. Ramesh Chander and ors. (2007), the Court observed, "...the words ‘arbitration’ and ‘arbitral tribunal' were not required to be incorporated in a valid arbitration clause. As long as the other features or elements of an arbitration agreement were present in the said clause, the same would be construed as a valid arbitration clause."

The Court emphasized that merely providing a mechanism to resolve disputes does not establish an intention to refer the matter to arbitration, especially when the mechanism lacks impartiality and independence. The clause in question empowered the very individuals who executed the contract, namely, the Managing Director of the petitioner and the Designated Partner of the respondent to resolve any arising disputes.

Background

The dispute arose out of an agreement dated February 19, 2019, between Balasore Alloys Limited (Petitioner) and Flynt Mining LLP (Respondent No.1), wherein the latter was engaged to carry out mining services, including the extraction of chromite ore.

The petitioner alleged that Respondent No.1 had failed to perform in accordance with the contract by deploying unskilled workers and neglecting modern mining techniques. This allegedly led to structural collapses at the mining site and the eventual abandonment of work.

Following the alleged breach, the petitioner issued a notice invoking arbitration on May 9, 2024, under Clause 16 of the agreement and proposed a retired Judge of the Bombay High Court as the sole arbitrator. As the Arbitral Tribunal could not be constituted, the petitioner approached the High Court under Section 11 for appointment of an arbitrator.

Arguments

The petitioner contended that Clause 16 was a valid arbitration clause that envisaged a clear mechanism for dispute resolution and, in the event of failure of amicable settlement, referred disputes to the Managing Director of the petitioner and the Designated Partner of the respondent. It was further argued that the clause should be read as an arbitration agreement despite not using the term "arbitration", citing Punjab State vs. Dina Nath (2007).

Conversely, the respondent submitted that Clause 16 failed to fulfill the essential elements of an arbitration agreement under the Act and merely created an internal dispute resolution mechanism, lacking the neutrality and independence required of a proper arbitral forum.

Court’s Observations

The Court reiterated that the absence of the word "arbitration" in a clause is not, by itself, fatal to the creation of an arbitration agreement. However, it must reflect a clear intention to submit disputes to an impartial and binding private tribunal.

Referring to Jagdish Chander vs. Ramesh Chander and Ors. (2007), the Court noted that such intention was absent in the present case. Instead, the dispute was to be resolved by individuals directly involved in the contract, which is contrary to the principles of impartial adjudication mandated under Sections 10 and 12(5) of the Arbitration Act, especially after the 2015 amendments.

The Court drew a distinction between such clauses in private contracts and those involving government undertakings or PSUs, where higher officials not directly involved in the contract are appointed as arbitrators. "This is a contract between two private entities and they were represented by their Managing Director and the designated partner, respectively, who were intrinsically with the execution of the contract and who would also be involved in the disputes and differences which had arisen. In railway contracts or contracts with the PSUs, the departments through a particular official is the signatory, but the named arbitrator is usually a higher authority or an official who was neither representing the department by signing the contract on behalf of the department nor obliged to perform the contract," the Court said.

It also noted that in previous proceedings under the Insolvency and Bankruptcy Code, 2016, the petitioner had not invoked the arbitration clause, indicating inconsistency in its stance.

Conclusion

Finding no intention to refer disputes to an impartial arbitral tribunal and noting that the mechanism amounted to an internal arrangement rather than a valid arbitration agreement, the Court dismissed the petition under Section 11 of the Arbitration and Conciliation Act, 1996.

The application was accordingly dismissed.

Cause Title: Balasore Alloys Limited v. Flynt Mining LLP [AP-COM/896/2024]

Appearance:-

Petitioner: Senior Advocate Ratnanko Banerjee, Advocates Sandeep Ladda, Tanvi Luhariwala, Aman Agarwal, Ashutosh Singh

Respondent: Advocates Sourojit Dasgupta, Shourjya Mukherjee, Vishwarup Acharyya, Akash Dutta

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