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The intention of Parties To Arbitrate Is Vital, even If The Dispute Resolution Clause Is Vague

By: Meenakshi Iyer

The Supreme Court of India has recently ruled that intention of parties to resolve disputes by arbitration is paramount when the contract does not provide a clear dispute resolution mechanism. This decision was rendered in the case of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd vs. Jade Elevator Components.

Facts:

The petitioner was a Chinese company named Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. (‘Zhejiang’), which deals in elevator guiderails, fish plates, accessories and allied goods. The respondent Jade Elevator Components (‘Jade’) is an Indian partnership firm.

Zhejiang and Jade entered into a Commission Processing Contract for the supply of certain products. When disputes arose between the contracting parties, Zhejiang appointed a sole arbitrator and asked Jade to consent to the appointment. Jade refused and Zhejiang approached the Supreme Court under Section 11(5) of the Arbitration and Conciliation Act, 1996 (’Act’). This provision allows parties who have agreed to resolve disputes by arbitration to approach designated courts where the parties cannot agree on the arbitrators.

Controversy before the Court:

The key question before the court was whether there is an arbitration clause for resolution of the disputes between the parties. Clause 15 of the contract, when translated in English, read as follows:

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”.

Contentions of parties:

Zhejiang contended that the disputes are to be settled through consultation and if consultation fails by treatment to the arbitration body for arbitration or Court and therefore the dispute has to be referred to arbitration. There is a choice available to the parties and Zhejiang has chosen arbitration. Jade countered that the dispute should be decided by a Court and not by an arbitrator in view of the option and that clause 15 cannot be regarded as an arbitration clause.

Ruling of the Supreme Court:

The Court noted that the clause was captioned “Dispute Handling”. It is undisputed that there are two options available for adjudication of disputes. The clause made reference to both arbitration and court for resolution of disputes.

The clause suggests the intention of the parties that two options are available to the contracting parties, namely arbitration or litigation in a court of law. An earlier judgment of the Supreme Court in the case of INDTEL Technical Services Private Limited v WS Atkins Rail Limited[1] dealt with a similar issue where the dispute resolution clause gave a choice to the parties either to refer the disputes to an adjudicator or the courts. The Supreme Court had held that the parties had intended to have their disputes resolved by arbitration and ruled in favour of arbitration. Relying on this previous judgement, the Court ruled that since clause 15 gave an option of arbitration or court and Zhejiang had chosen arbitration, the dispute shall be resolved by arbitration and proceeded to appoint a former judge of the Supreme Court as the sole arbitrator. The Supreme Court endorsed the view that intention of the parties to have their disputes resolved by arbitration was paramount.

Analysis:

This judgment clearly outlines the pro-arbitration stand of Indian courts, even in situations where the arbitration clause is not very clear. The Supreme Court has once again signaled that technical defences usually taken by parties to delay or stall the arbitration/appointment of arbitrators will no longer be encouraged. The Court has also emphasized that intention of parties to settle disputes by arbitration is paramount even where the dispute resolution clauses are vaguely worded or where there is an ambiguity in choice of the mechanism to be adopted.

[1] (2008) 10 SCC 308

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