The Supreme Court’s recent take on interpreting arbitration clauses: Striking the right chord

Adopting a pro-arbitration stance in interpreting arbitration clauses, the Supreme Court of India (“Supreme Court”) allowed an application for appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“the Act”). In doing so, the apex court set aside the impugned judgment[1] (“Impugned Judgement”), which held that the “optional” arbitration clause could not be acted upon.

The dispute arose from a partnership deed of M/s. Dhameja Home Industries (“the Firm”) between Mr. Boolani (Deceased), Mr. Dhameja and another (“Deed”).  The arbitration clause[2] in the Deed inter alia stated that disputes between partners, their heirs, or successors “shall be referred to arbitration”. However, it also provided that “Arbitration shall be optional”. Tarun Dhameja (“Appellant”), the son of a deceased partner, who sought to be inducted as a partner in the firm, filed an application under Section 11(6) of the Act before the Madhya Pradesh High Court (“High Court”).

The Impugned Judgment considered (i) whether the arbitration clause could be invoked by a non-signatory to the Deed i.e., the Appellant, and (ii) whether arbitration was optional. Referring to Section 40 of the Act, the High Court held that the arbitration agreement was enforceable against the legal representatives of the deceased and can be invoked for adjudication of their claims. On the second issue, the High Court concluded that arbitration was optional, and an arbitrator had to be appointed by mutual consent of the partners only.  Aggrieved by this, the Appellant filed a special leave petition before the Supreme Court.

The Supreme Court aligned with the High Court that arbitration was rightly invoked by the deceased partner’s legal heir. With respect to the arbitration clause being optional, the Supreme Court observed that:

• Vidya Drolia[3] reflected on interpretation of arbitration clauses by referring to Fili Shipping Co. Ltd. [4]and Oriental Insurance[5]. Vidya Drolia, inter alia, held that whether the court adopts a broad, narrow, or strict approach depends on the facts. However, in pure commercial disputes, a liberal interpretation would be appropriate, as there is a “presumption in favor of one-stop adjudication”.
• The first part of the clause, which mandates that disputes “shall be referred to arbitration,” demonstrated the mutual agreement and intent of parties to arbitrate. The provision for an arbitrator to be appointed by mutual consent did not invalidate the clause, and if necessary, the court could appoint an arbitrator as per the Act.
• The term “arbitration shall be optional” and that the arbitrator will be appointed by mutual consent, must be read in context of the first half of the clause, and not in isolation.
• In Wellington Associates Ltd.[6] and Jagdish Chander[7], the arbitration clauses were different differently worded and hence, could be distinguished.
• It cannot be said that the arbitration clause is non-existent and therefore optional.

The Supreme Court held that use of the word “optional” could not be construed to mean that the disputes could be arbitrated only if all parties mutually agreed to do so.

The High Court, however, viewed the arbitration clause as optional and therefore not enforceable without mutual consent of the parties. In doing so, it inter alia distinguished Zhejiang Bonly Elevator^[8], and relied on Trbex Impex[9].   In Trbex, the court considered a clause[10] that used both “may” and “shall”. It concluded that “the respondent cannot be compelled to opt for arbitration when the agreement itself stated that it was at the parties’ discretion to refer the dispute to arbitration, and they may or may not choose to do so.”  Since the clause’s composition was different, the court had observed that when an option is given, the other party cannot be compelled to arbitrate.

In the present case, while the first and second halves of the arbitration clause sound discordant, the Supreme Court placed emphasis on the phrase “shall be referred to arbitration” to confirm parties’ intent to arbitrate. However, it is worth noting that the word “shall” also features in the latter part, to state that “arbitration shall be optional”. This creates some ambiguity given that in the case of Jagdish Chander[11], the Apex Court found that the use of the words “shall be referred for arbitration if the parties so determine” changed the complexion of the clause. The latter part pivoted the clause to hold that only if parties mutually decided, would the dispute be referred to arbitration.

Poorly drafted optional arbitration clauses can lead to confusion regarding the parties’ intentions and if the clause is not clearly defined, it may be interpreted differently, resulting in disputes over whether arbitration or litigation should be pursued. This can be avoided by exercising care and precision at the time of drafting these arbitration clauses. While Led Zeppelin found thatHrav “there are two paths you can go by, but in the long run, there’s still time to change the road you’re on”[12], in arbitration, having one path (i.e., to arbitrate only) emanate from the agreement itself will avoid prolonging the process further.

[1] Yeshwant Boolani v. Sunil Dhameja, AC No. 19 of 2024.

[2] “23. Arbitration: That if at any time either during the continuance of the partnership or after the retirement of any partner, any dispute or difference shall arise between the partners or their respective heirs or any one claiming through or under them, the same shall be referred to arbitration. Arbitration shall be optional & the arbitrator will be appointed by partners with their mutual consent. In any case of dispute arise then the Jurisdiction of Indore Civil Court shall be applicable & acceptable by the partners.”

[3] Vidya Drolia v. Durga Trading Corpn, (2021) 2 SCC 1.

[4] Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd, 2007 UKHL 40.

[5] Oriental Insurance Co. Ltd. v. Narbheram Power & Steel (P) Ltd., (2018) 6 SCC 534; The Court in Fili Shipping Co. Ltd. found that an arbitration clause should be interpreted liberally, while Oriental Insurance held that an arbitration clause is required to be strictly construed and any expression in the clause must unequivocally express the intent of arbitration.

[6] Wellington Associates Ltd. v. Mr. Kirit Mehta, (2000) 4 SCC 272.

[7] Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719.

[8] Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Components, (2018) 9 SCC 774.

[9] Trbex Impex (P) Ltd. v. Ashok Fine Spun, 2024 SCC OnLine MP 2936.

[10] “14.7 DISPUTE RESOLUTION

“If any dispute, difference or claim arises between the Parties hereto in connection with this Agreement or the validity, interpretation, implementation or breach of this Agreement or anything done or omitted to be done pursuant to this Agreement, the parties shall make a good faith effort in the first instance to resolve the same through negotiation. If the dispute is not resolved through negotiation within (3) days after commencement of discussions or within such longer period as the Parties may mutually agree to in writing, then the Parties may refer the dispute for resolution to a panel of three Arbitrators – one each appointed by the Parties and the third appointed by the two arbitrators. The arbitration shall be in accordance with the provisions of the Arbitration and Conciliation Act, 1996, or any statutory modification or re-enactment for the time being in force and shall take place in Indore. The award of arbitration shall be final and binding on the Parties, and the Parties shall comply with/carry out all directions and orders of the arbitrators.”

[11] Jagdish (Supra 8)

[12] “Stairway to Heaven”, Led Zeppelin IV, Led Zeppelin (1971), Atlantic Records.