To read the article on Mondaq, click here

Intent combined with commitment brings clarity of thought, which is a prerequisite for drafting an error-free arbitration clause in an agreement or contract. In cases where judges have to deal with an ambiguous arbitration clause, it poses a number of interpretive challenges. In a recent case of Mahanadi Coalfields Ltd. and Another v. IVRCL AMR Joint Venture1, the Court rendered an excellent judgment on the relevance of “words” and “meaning” in interpreting an arbitration agreement. The crux of the matter is, that it is quintessential for the courts to examine the validity of an arbitration clause as it helps determine whether the parties are permitted or prohibited from exercising their freedom to subsequently invoke arbitration proceedings.

In the present case, Mahanadi Coalfields Ltd., a subsidiary of Coal India Limited, agreed with IVRCL AMR, a Joint Venture of engineering contractors, upon improving the surface area and quality of a road used for carrying coal at the Talcher Coalfields in Orissa. However, for three years from the date of the signing of the contract agreement, Mahanadi Coalfields sent several notices to IVRCL to adhere to the work schedule and guidelines. Two years later, Mahanadi Ltd. finally decided to terminate the work contract as IVRCL could not ensure its timely completion.

The issue resurfaced three years later with IVRCL citing delays and omissions on the part of Mahanadi Coalfields Limited. The company claimed a hefty amount of Rs.128, 65, 12,688, which was rejected by the Appellant i.e. Mahanadi Coalfields Ltd. Thereafter, the Respondent i.e. IVRCL AMR JV issued the notice invoking arbitration in terms of Clause 15 of the Contract Agreement and called upon the Appellant to give its consent for the appointment of a retired jurist as a sole arbitrator. As no consent was received from the Appellant, the Respondent filed a petition under Section 11 (6) of the Arbitration and Conciliation Act, 1996 before the Hon’ble High Court of Orissa. The Hon’ble High Court vide its order dated 29.11.2019 and by placing reliance upon Clause 15 of the Contract Agreement allowed the petition and appointed a sole arbitrator.

Before the Hon’ble Supreme Court in SLP filed by Mahanadi Coalfields Ltd. laying challenge to the order dated 29.11.2019, the intricacies of the dispute deepened when a discrepancy of interpretation arose between Clauses 15 and 19 of the Contract Agreement and the contract letters.

Clause 15 of the Contract Agreement describes the procedure to be followed by the parties in case disputes arise. The provision states as follows:

It is incumbent upon the contractor to avoid litigation and disputes during the course of execution. However, if such disputes take place between the contractor and the department, effort shall be made first to settle the disputes at the company level. The contractor should make request in writing to the Engineer-in-Charge for settlement of such disputes/claims within 30 (thirty) days of arising of the case of dispute/claim failing which no disputes/claims of the contractor shall be entertained by the company. If differences still persist, the settlement of the dispute with Govt. Agencies shall be dealt with as per the Guidelines issued by the Ministry of Finance, Govt. of India in this regard. In case of parties other than Govt. Agencies, the redressal of the disputes may be sought in the Court of Law.

Clause 19 reads as follows:-

“That matters relating to any dispute or difference arising out of the tender, work order and subsequent contract agreement entered into, based on this tender and work order shall be subject to the jurisdiction of district Court, Angul only.”

At the outset, Clause 15 indicates that it is the Contractor’s responsibility to avoid litigation and disputes during execution. However, when such disputes arise, an attempt should be first made to resolve the disputes at the enterprise level. It is relevant to add here that this clause was contended by the Appellants, Mahanadi Coalfields Ltd., on the grounds of its wording such as “the dispute must first resolve at the company level”. The appellants argued that this clause fails to fulfil all the elements of a valid arbitration agreement stipulated under Section 7 of the 1996 Act.

Moreover, the said clause further stipulates that the Contractor should submit a written request to the engineer responsible for the resolution of such dispute/claim within 30 (thirty) days of the occurrence of the dispute/claim, failing which the Company shall not accept any dispute/claim from the Contractor. Finally, the ending phrase of the clause highlights that the disputes will be resolved as per the guidelines issued by the Ministry of Finance, Govt. of India in this regard. Also, for parties which are not government agencies, the disputes may be resolved through the Court of Law.

The Hon’ble Supreme Court vide its judgment had also recorded the stand adopted by the Respondent before the Hon’ble High Court of Orissa. The Respondent had relied upon Clause 19 as contained in the letter dated 14.12.2011 (reproduced above). The issue before the Hon’ble Supreme Court was thus to analyze and deconstruct various expressions used in Clause 15 so as to conclude whether the meaning and intent behind the words indicate a clear intention of the parties to resort to arbitration proceedings.

On behalf of the Appellants, the Attorney General urged that Clause 15 of the Contractual Agreement does not constitute a valid arbitration agreement. There is an absence of an arbitration agreement within the meaning of Sections 2(b) and 7 of the 1996 Act. As a result, the invocation of jurisdiction under Section 11(6) proves invalid. While dealing with the submission made by the Ld. Attorney General on behalf of the Appellant, the Court had outlined the relevant provisions of the 1996 Act to ensure literary clarity of interpretation. The main provisions highlighted by the Court were Section 2(b), which defines an arbitration agreement, along with sub-sections (1), (2), (3) and (4) of Section 7 of the 1996 Act, which contain the essential elements of a valid arbitration agreement.

The Supreme Court undertook the exercise of considering the words and their meaning carefully in the light of the judgments pronounced in the earlier related judgments. In addition, it also examined the elements of intent, determination and obligation of the parties to reasonably conclude the validity of the arbitration clauses.

The Supreme Court re-visited the principles governing the idea behind what constitutes an arbitration agreement by referring to Jagdish Chander v. Ramesh Chander, K.K. Modi v. K.N. Modi, Bharat Bhushan Bansal v. U.P. Small Industries Corpn. Ltd., Bihar State Mineral Development Corpn v. Encon Builders (I) (P) Ltd. and State of Orissa v. Damodar Das. These cases validate the relevancy of the premise that the meaning of the words put down in an arbitration clause must reveal a substantive commitment of the parties to refer disputes to arbitration. The Supreme Court particularly reproduced the principles contained in Para 8(i) to (iv) in the judgment titled Jagdish Chander v. Ramesh Chander to examine the components of an agreement which may be construed as an arbitration agreement.

Further, IB Valley Transport v. Mahanadi Coalfields Ltd. is a case which involved a similar Clause to Clause 15 in the present case. In this case, the same clause holds the interpretation as an alternative company-level recourse that must be exhausted before resorting to other appropriate recourses. The Court also found that the communication between the parties merely showed CIL’s desire to resolve disputes related to employment contracts through arbitration.

In other words, the parties did not commit to taking up the arbitration process as their preferred dispute resolution mechanism, which was evident through a plain reading of the arbitration clause. The clause also requires both parties to further agree to resort to arbitration if the dispute arises. Subsequently, given the principles set out in Jagdish Chander, the Court ruled that the above clause could not be construed as an arbitration agreement under Section 7 of the 1996 Act as the words used did not signify a proper meaning to compel the complainants to appoint an arbitrator.

Thus, the Supreme Court held that a mere possibility of arbitrating is a clear indication that the clause lacks the vital ingredients of determination and obligation. In order to further the ends of justice, the courts look to enforce these elements as the foundation of an authentic clause.

To sum it up, in the Mahanadi Coalfields case, the court held that the terms used in an arbitration clause must indicate a specific and direct expression of the parties’ intent to settle their disputes through arbitration. Hon’ble Justice D.Y. Chandrachud explains the practical approach the courts take when interpreting arbitration clauses. When evaluating the meaning of words in arbitration clauses, it is particularly relevant to consider parameters such as the determination of the parties and their subsequent commitment towards the arbitration process. The Court observed that the substantive portion of the provision makes it tremendously clear that there is no arbitration agreement between the parties agreeing to make arbitration a possible course of action for any present or future dispute to arbitration. The Supreme Court categorically observed that a clause indicating the parties to enter into a further agreement or to arrive at a consensus to refer the disputes to arbitration would not fall within the definition of ‘arbitration agreement’ contained in Section 7 of the Act.

This SC judgment also emphasizes that the words used in an arbitration clause cannot be vague to display the parties’ weak sense of determination. Moreover, a composite dispute resolution clause incorporates the parties’ resolution and obligations as part of the fundamental legal principles governing an arbitration agreement. Then, it is only fair to state that a poorly drafted arbitration clause wastes the courts’ time and delays justice. In contrast, arbitration clauses that merely contemplate referring disputes to arbitration are invalid according to this judgment; as such, they are non-binding and, therefore, non-enforceable.

End-notes

1 Civil Appeal No 4914 of 2022 (Arising out of SLP(C) No 1098 of 2020, Decided on: July 25, 2022