The Bombay High Court on June 5, 2020 in the case of Quick Heal Technologies Limited vs. NCS Computech Private Limited & ors., while determining a petition for appointment of a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“the Act”), discussed upon the mandatory nature of pre-arbitration clauses and examined if an arbitration clause, which provides a discretion to the disputing parties to invoke arbitration, would qualify as an arbitration clause.
Facts of the case:
The parties had entered into a Software Distribution Agreement (“said Agreement”) wherein, clause 17 of the said Agreement, enumerated a dispute resolution clause as mentioned as follow:
“17. Dispute Resolution :
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.
Disputes under this Agreement shall be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. The place of arbitration shall be at Pune and language shall be English. The arbitral tribunal shall comprise one arbitrator mutually appointed, failing which, three (3) arbitrators, one appointed by each of the Parties and the third appointed by the 2 so appointed arbitrators and designated as the presiding arbitrator and shall have a decisive vote.
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.” (emphasis in original)
Decision of the court:
1. Mandatory Nature of Pre-Arbitration clause
The Bombay High Court observed that it is clear from clause 17 (a) of the Agreement that the parties have agreed to a specific procedure/mode of settlement of all the disputes between them under the said Agreement, i.e. they have agreed to designate/appoint their respective personnel to amicably resolve/ settle all their disputes by discussion, and if the disputes are not amicably settled within 30 days, the next step would be that they may refer their disputes to arbitration as set-out under clause 17 (b) of the Agreement.
Whilst the court acknowledged the mandatory nature of a pre-arbitration mediation clause, it also placed reliance on the judgment rendered by the Supreme Court in the case of Visa International Limited vs. Continental Resorts (USA) Limited (2009) 2 SCC 55, wherein it was held that if from the correspondence between the parties, it becomes clear that both parties do not intend to come to any kind of settlement, then a pre-condition for amicable discussion for resolution which is mandatory/binding on the parties, will not hinder furtherance of the dispute resolution process. The court, thus, on consideration of the facts and circumstances of the instant case held that since, there was no scope for an amicable settlement between the parties, the invocation of arbitration without complying with pre-arbitration mediation clause was not fatal.
2. Determination of whether a clause containing a discretion to refer to arbitration is an arbitration clause
The court, thereafter, while examining if the clause was a valid arbitration clause held that, in the instant case there was no pre-existing agreement between the parties which stated that they “should” or they “will” refer their disputes to arbitration or to the court and observed that the clause in question was not an arbitration clause, by observing as follows:
“12…….Under sub-clause (a) of Clause 17, the parties have first agreed that all disputes under the Agreement “shall” be amicably discussed for resolution by the designated personnel of each party, thereby making it mandatory to refer all disputes to designated personnel for resolution/settlement by amicable discussion. It is thereafter agreed in Sub-Clause (a) of Clause 17 itself, that if such dispute/s cannot be resolved by the designated personnel within 30 days, the same “may” be referred to Arbitration, thereby clearly making it optional to refer the disputes to Arbitration, in contrast to the earlier mandatory agreement to refer the disputes for amicable settlement to the designated personnel of each party. (emphasis in original)
The court further, while refuting the argument that clause 17(a) and 17(b) of the Agreement are distinct and clause 17(b) of the Agreement envisages a distinct procedure, independent to that under clause 17(a) of the Agreement, held that:-
“15…. Clause 17(a) categorically provides for “all disputes”, which clearly indicates that any dispute/s between the parties which arise under the Software Distribution Agreement has to mandatorily follow the mechanism suggested in Clause 17(a). Arbitration under Clause 17(b) refers to a situation where under Clause 17(a) parties have agreed, through a fresh consent to refer their disputes to arbitration, after failure of the amicable settlement process. Clause 17(b) thus cannot operate independently and cannot be used to initiate an arbitration process, if both the parties did not agree to refer their disputes to arbitration under Clause 17(a).” (emphasis supplied)
This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).
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