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An optional arbitration clause which states that a party “may” arbitrate should not be construed as an invalid arbitration agreement. Doing so would definitely hamper India’s march towards being a pro-arbitration regime.
Pre-existing state of play in India
Optional arbitration clauses are those which usually provide the option to one or both parties to an agreement, the option to adjudicate their disputes by arbitration or litigation. Such a clause is symmetric if it gives both parties equal rights to exercise the option, whereas it is asymmetric if it gives such right to only one party. The focus of this article is on the former.
Such symmetric optional clauses usually prefix the option by either of the parties to arbitrate by the terms “shall”, “will” or “may”. It is usually a straight-forward conclusion for the court to arrive at the finding of a binding arbitration agreement if the term “shall” or “will” (or their derivative) is used to qualify the right to arbitrate.
Nevertheless, the current Indian legal position in this respect was set out by the 2018 decision of the Supreme Court in Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Components. In Zhejiang Bonly, the Court was dealing with an optional dispute resolution clause which stated:
“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.”
The Court interpreted the above clause to mean that objective intention of the parties flowing from the clause was that if amicable settlement could not be reached, the parties had both options readily available to them – either pursue arbitration or litigation – without any further qualification.
In my view, Zhejiang Bonly is not in conflict with the previous decision of the Supreme Court in Jagdish Chander v. Ramesh Chander & Ors, since the dispute resolution clause in Jagdish Chander explicitly provided for the need for fresh consent/determination by the parties before proceeding for arbitration. The dispute resolution clause stated:
“If … any dispute touching the partnership arises between the partners, the same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine."
Indian court decisions prior to Quickheal had held that the use of the word “may” in optional arbitration clauses indicates that there is no valid arbitration agreement at the outset and that any party electing to go for arbitration instead of litigation needs to seek fresh consent of the other. See for example, Wellington Associates v. Kirit Mehta.
Adding Quickheal to the mix
Against the above backdrop, let us turn to the decision in Quickheal. The relevant dispute resolution clause dealt with by this decision stated:
“17. Dispute Resolution:
a. All disputes under this Agreement shall be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.
b. Disputes under this Agreement shall be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. …
c. Subject to the provisions of this Clause, the Courts in Pune, India, shall have exclusive jurisdiction and the parties may pursue any remedy available to them at law or equity.”
The Court interpreted the above clause to mean that there was no valid arbitration agreement at the outset. In doing so, the Court drew an artificial distinction between clauses which grant an option to both parties to arbitrate their dispute (without explicitly referring to the option to litigate in the same breadth); vis-à-vis clauses which specify that the parties “shall” resolve their dispute by either arbitration or litigation.
The effect of the Court’s decision is such that in the first scenario, a party needs to obtain fresh consent of the other party before commencing arbitration. Whereas in the second scenario, there is presumed consent granted by both the parties for arbitration as well as litigation, and a party simply needs to choose either option to make it binding on the other.
Common Law Position
The established common law position with respect to clauses such as the one in Quickheal is to assume pre-existing consent for arbitration, deemed to be granted by the parties at the time of agreeing to the clause. Therefore, a party can exercise the choice to arbitrate at its will, subject to fulfilling any necessary pre-condition (such as a mandatory conciliatory period).
In fact, a closer look at some precedents from established common law jurisdictions show that in similar instances of dispute resolution clauses stating that the parties “may” opt for arbitration, courts have gone over and above treating such clauses as validly giving the right to arbitrate without fresh mutual consent.
For instance, the Privy Council in Anzen Ltd & Ors v. Hermes One Ltd decided that a clause providing that “any [p]arty may submit the dispute to binding arbitration” was not only permissive of arbitration, but also granted the right to the defending party to stay litigation if the claiming party did not opt for arbitration.
Such a purposive interpretation provided the option to arbitrate to the claiming as well as the defending party, given that under the construction preferred by Anzen, a party wishing that a dispute be arbitrated,could either commence arbitration by itself or simply insist that the other party commence arbitration, by applying for an anti-suit injunction.
In this vein, an Australian decision is also worth noting. In Pipelines Services WA Pty Ltd v. ATCO Gas Australia Pty Ltd, the Supreme Court of Western Australia was tasked with interpreting a clause which stated that “either party may, by notice to the other party, refer the dispute to arbitration”. It noted that the clause did not even contemplate that the parties had the right to opt for litigation; and the word “may” merely signified the choice of a party to either resolve their dispute through arbitration, or to simply withdraw/not pursue their claim through any further dispute resolution process.
It may well be debatable if the Indian judiciary should also stretch the objective intent of entering into optional arbitration clauses to such extents as in the case of the Commonwealth decisions cited above, specially in the absence of definitive wordings such as “shall” or “will” in the clause itself.
However, at the least, an optional arbitration clause which states that a party “may” arbitrate should not be construed as an invalid arbitration agreement (absent any further consent from the other party). Doing so would definitely throw a spanner in India’s march towards being a pro-arbitration regime, and would also run counter to the global judicial trend of trying to save pathological arbitration clauses, to the extent possible under the four corners of law.
However, till such time the Indian judiciary gives a relook at this issue, parties should be well-advised to draft their arbitration clauses couched in definitive language, and in case such clauses provide for any optionality, the parties should avoid the term “may” and/or clearly set out if any further consent of the other party is required before exercising such option.
The author is a Senior Associate with the international arbitration team at P&A Law Offices, Delhi. Views expressed are personal.