Option for arbitration in agreement not binding on parties: HC observation

Court ruling relates to dispute between two parties over non-payment of invoices for operation and maintenance

The Calcutta High Court has held that merely having an option of arbitration in an agreement between two parties does not bind them to go for arbitration.

Hearing petitions by Blue Star Ltd against Rahul Saraf and two others filed separately by Blue Star, the court pronounced the common observations.

In the case called Blue Star Ltd versus Rahul Saraf, the two entered into a memorandum of understanding (MoU) according to which the former was to render its operation and maintenance services from January 1, 2019 to December 31, 2021 to the latter.

Services were provided by the petitioner, in lieu of which invoices were raised and even paid by Saraf. However, disputes arose between the parties with respect to non-payment of a few invoices.

The petitioner raised requests for payments via letters. On the respondent’s failure to pay the amount demanded, the petitioner invoked the alleged arbitration clause and nominated an arbitrator vide notice dated August 29, 2022, which was received by the petitioner on September 1, 2022.

After expiry of a period of 30 days, the respondent issued a letter dated November 4, 2022, refusing to accept the appointment of the arbitration appointed by the petitioner and disputed the existence of any valid arbitration clause. Consequently, the petitioner filed the application, requesting for appointment of an arbitrator.

According to clause 7 in the MoU, the performance of the agreement should not be stopped in case of any dispute or pendency of litigation or arbitration between the parties.  

Another clause in the MoU—13—stated that in case of any dispute, no party will be entitled to claim any interest on the principal sum and that the arbitrator should not entertain any claim for interest.

While the petitioner claimed that there is a binding arbitration clause in the agreement, the respondent said there is no valid arbitration clause as clause 7 does not make it mandatory for the parties to refer the dispute to arbitration but merely provides for a possibility of it.

The High Court observed that no arbitration agreement exists between the parties and therefore it cannot appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act.

The court held that clauses 7 and 13 in the MoU meant that if the parties opt for arbitration, then in that limited scenario, the arbitrator is precluded from granting interest. But, arbitration is a possibility which may unravel itself, if and only if the parties choose to opt for it, post occurrence of disputes.

It is conditional, not a mandatory obligation between the parties to refer the dispute to arbitration, the court observed and dismissed the petition.

S K Singhi, managing partner at S K Singhi & Partners, who represented the respondent, said the court has held that an option to resolve dispute through arbitration is not a binding arbitration clause.