Arbitration Can’t Be ‘Optional’ When Agreement Provides Arbitration Clause : Supreme Court

Summary:

[1]In a recent judgment, the Hon’ble Supreme Court of India allowed the appeal of Tarun Dhameja, the legal representative of the deceased partner Yeshwant Boolani, by overruling the lower court’s dismissal of his arbitration petition. The primary issue involves the interpretation of the arbitration clause in a Partnership Deed, which the lower court had deemed “optional”, which further led to the rejection of the arbitration petition. However, the Hon’ble Supreme Court clarified that the arbitration clause was mandatory and enforceable for dispute resolution. It further ruled that legal representatives of a deceased partner could validly invoke the clause. It was directed that if the parties failed to mutually agree on an arbitrator, the Madhya Pradesh Arbitration Centre or the High Court of Madhya Pradesh should appoint one.

Facts:

• The dispute arose from the arbitration clause in the Deed of Partnership dated 16.07.2016. The clause stipulated that in case of any dispute or difference arising during the continuance of the partnership or after a partner’s retirement, the matter would be referred to arbitration.
• However, the arbitration clause contained a provision that suggested arbitration would be “optional” and that the arbitrator would be appointed by mutual consent of the partners. This led to confusion regarding the enforceability of the clause.
• After the death of one of the partners, Yeshwant Boolani, his legal representative, Tarun Dhameja, invoked the arbitration clause, seeking the appointment of an arbitrator to resolve the dispute.
• The lower court dismissed the petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, interpreting the arbitration clause as optional, which led to the appeal in the Supreme Court.
• The Appellant contended that the arbitration clause was mandatory and should be enforced, and the legal representative of the deceased partner had the right to invoke it.

Issue:

1. Whether the arbitration clause in the Deed of Partnership was mandatory or optional, and whether it could be invoked by the legal representative of the deceased partner, Yeshwant Boolani?
2. Whether the failure to mutually agree upon an arbitrator meant that the arbitration clause could not be enforced?

Judgment:

• Mandatory Nature of the Clause

The Hon’ble Supreme Court set aside the impugned judgment and allowed the appeal, ruling that the arbitration clause in the Partnership Deed was mandatory, not optional. The Hon’ble Supreme Court further emphasized the first portion of the clause which states that the disputes are to be referred to arbitration unequivocally. The second portion, which mentioned mutual consent for appointing an arbitrator, did not override this mandatory requirement. If the parties could not agree on an arbitrator, the court could appoint one under Section 11 of the Arbitration and Conciliation Act, 1996.

• Rights of Legal Representatives to Attribute

It was further held that Yeshwant Boolani’s legal representative had the right to invoke the arbitration clause. This was based on the explicit provision in the clause, which allowed disputes involving legal representatives or heirs of the partners to be referred to arbitration.

•  Key Legal Precedents Emphasizing Arbitration

The Court relied on precedents such as Vidya Drolia v. Durga Trading Corpn. (2021) 2 SCC 1, Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd. (2007 UKHL 40), and Oriental Insurance Co. Ltd. v. Narbheram Power & Steel (P) Ltd.(2018) 6 SCC 534. These cases emphasized the mandatory nature of arbitration clauses in commercial agreements and the need to interpret them broadly to favor arbitration, ensuring efficient and neutral dispute resolution.

• Directions for Arbitration Proceedings

It was directed to the Madhya Pradesh Arbitration Centre or the High Court of Madhya Pradesh to appoint an arbitrator if the parties failed to agree on one. The appointed arbitrator was to file their declaration under Section 12 of the Arbitration and Conciliation Act within 15 days. The arbitrator’s fees were to be determined by the Arbitration Centre or as per the Fourth Schedule of the Act. The Court clarified that it expressed no opinion on the merits of the claims raised by the parties.

Analysis:

The Hon’ble Supreme Court emphasized the mandatory nature of arbitration clauses, reinforcing their role in ensuring efficient and neutral dispute resolution in commercial partnerships. The said arbitration clause was broadly interpreted, enlarging the scope of arbitration in India, by directing the appointment of an arbitrator through the Madhya Pradesh Arbitration Centre, the Court ensured fairness and upheld the principle of enforcing arbitration agreements.

[1]https://api.sci.gov.in/supremecourt/2024/29264/29264_2024_1_31_57801_Judgement_06-Dec-2024.pdf

BEFORE THE HON’BLE SUPREME COURT OF INDIA

Tarun Dhameja v. Sunil Dhameja & anr.

CIVIL APPEAL NO. 14005 OF 2024

Order dated 06th December 2024