Cases With Deliberately Misleading Arbitration Clauses Must Be Thrown Out Of Court: Supreme Court

In a judgment, dealing with the practice and procedure of arbitration, the Supreme Court has said the courts or judicial fora of our country, as a matter of judicial best policy must show an unwavering tendency towards rejecting shoddily drafted clauses at the very threshold.

"Such cases, which prima facie disclose mala fides woven into the very agreement they seek adjudication over, must be thrown out of the court, as they have been indulged for far too long. We would complementarily urge the courts to invoke their suo moto powers in appropriate cases wherein legal firms or counsel are found designing ‘arbitration clauses’ which deliberately mislead and misguide," a bench of Justices Surya Kant and N Kotiswar Singh said.

Sounding a note of caution, the court said, the time is not far when personal liability must be assigned for such unscrupulous acts, along with the sanctioning of the harshest punitive measures against the actors.

"We are confident that these steps are vital to infuse probity, transparency, and professionalism into Indian arbitration. Needless to say, to uphold the integrity of the arbitral process, the sanctity of such agreements must be preserved," the bench said.

Dealing with a batch of petitions filed by South Delhi Municipal Corporation of Delhi and others, the court pointed out, the facts of these appeals clearly illustrated, the drafting of arbitration clauses in commercial agreements in India leaves much to be desired.

"Despite arbitration being introduced as a means of ensuring speedy and effective dispute resolution, it is evident and ironic that, in certain cases, the process has been misused to further complicate and prolong the resolution of disputes. The manner in which ambiguity is embedded into such agreements raises serious concerns. Whether this stems from administrative oversight or deficient legal advice is a matter best left for separate consideration," the bench said.

The bench further said, what is most shocking to our judicial conscience is the incontrovertible reality that the parties in the present cases have spent nigh a decade acrimoniously litigating over the method of dispute resolution itself, while their actual qualms against each other remain deeply buried under the surface, effectively stuck in limbo.

"A legal dispute that lingers for years over the mere mode of adjudication, before even touching the merits, is akin to a traveller stranded at a crossroads, endlessly debating which path to take while the journey itself remains unbegun. Justice, like the destination, recedes further into the horizon, not for lack of resolution but for want of a decision on how to resolve," the bench said.

The court opined, this willful and wanton wastage of judicial time is similarly a practice that is highly deplorable, to say the least.

"It is high time that arbitration clauses are worded with piercing precision and clarity, and that they are not couched in ambiguous phraseology. This is a responsibility and onus that every legal counsel, advisor, and practitioner must shoulder most dutifully. We would, in fact, take this opportunity to advise, if not caution and warn, the legal fraternity against engaging in such practices which result in a criminal wastage of precious judicial time. Indeed, their professional credentials will not earn any stripes if they indulge in such juggling of words," the bench said.

In the case, the court held Article 20 of the concession agreements executed in all the three appeals does not form an arbitration agreement, and thus cannot be brought under the purview of the Arbitration Act. It set aside the impugned judgments of the Delhi High Court in the cases of SMS Ltd and CCC Ltd. The court, however, upheld impugned judgment of the High Court in the case of DSC Ltd.

"Article 20 lacks the judicial element that lends arbitration its distinct credibility as an adjudicatory mechanism. It is not an arbitration clause either in letter, or in spirit and effect. Its ambiguity and lack of procedural integrity have, if anything, resulted in greater litigation rather than expeditious resolution, thereby undermining the very purpose of arbitration," the bench said.

Referring to Section 7 of the Arbitration and Conciliation Act 1996, the bench said, a dispute resolution clause may only rise to the level of a valid arbitration clause or agreement when it signifies a clear intent to arbitrate, entails a binding adjudicatory process, and contemplates compliance with general arbitral norms.

The court pointed out the agreement must reflect a definitive and mutual intention to refer disputes to arbitration, excluding the jurisdiction of civil courts in respect of such matters. Consensus ad-idem or ‘meeting of the minds’ of the respective parties towards settling any disputes that may arise between them through the process of arbitration must be made out from the form and substance of the legal agreement or contract, it said.

This ideally entails the parties reducing their intention of entering into an arbitration agreement into some tangible medium, the bench emphasised.

The court also emphasised the arbitration agreement must contemplate a binding and enforceable resolution of disputes. The process must culminate in a final and conclusive award, not a non-binding recommendation or mediation outcome. In essence, the result of the arbitral process should be final and binding on both the parties, it said.

The court also pointed out, while the statutory minimums do not universally require specification of seat, venue, or applicable procedural rules, best practices and several foreign jurisdictions encourage clarity in these respects to ensure legal certainty.

The agreement should allow for party autonomy in the appointment of arbitrators and procedural conduct, subject to statutory safeguards. The adversarial process, which inheres in the institution of arbitration, must also be given due credence via provision for an impartial adjudicatory body, whose decisions involve deference to the principles of natural justice, the bench said.

"These elemental test is a conjunctive one, and not a disjunctive one. All the elements thus identified must co-exist, apart from being duly proven by the party which seeks to assert that an arbitration agreement subsists. While it is true that an arbitration clause must result in a conclusive determination, finality alone does not equate it to arbitration," the bench said.

Case Title: South Delhi Municipal Corporation of Delhi Vs SMS Ltd.