Introduction
Understanding pathological arbitration clauses is crucial in arbitration. Without a valid and enforceable agreement to arbitrate it may not be possible to constitute an arbitral tribunal, and even after constitution of arbitral tribunal, litigation relating to scope, validity and effectiveness of the arbitration clause is likely to arise, national courts seized of an action may refuse to refer the parties to arbitration. The term was coined by Frederic Eiseman in his seminal article. According to him, an arbitration agreement is pathological, if due to inappropriate drafting, it doesn’t support one or more of the arbitration agreement’s four essential functions. The four essential functions of arbitration, firstly to produce mandatory consequences between the parties, secondly to exclude the intervention of state courts in the settlement of disputes, at least before the issuance of the award, thirdly to give powers to the arbitrators to resolve disputes likely to arise between the parties; and to allow for an efficient and rapid procedure which will lead to an enforceable award.
But now pathology is not limited to what Frederic Eiseman understood, and the ambit of it has been widened by judicial interpretations. Reference to inoperable or non-existent tribunal is the most prominent form of pathology. Pathology in an arbitration clause can even render the clause invalid, which is a ground to set aside the arbitral award in many jurisdictions [§ 48(1)(a)ii in Singapore Arbitration Act and §34(2)ii in Indian Arbitration and Conciliation act] and under UNCITRAL model law [art. 35(2)(a)i]. Therefore, the pathology challenges the whole validity of arbitration.
Legal Provisions in India
The primary legislation governing arbitration in India is Arbitration and conciliation act, 1996. For domestic arbitrations, section 8(1) of the act provides that the court can refuse to refer parties to arbitration if its prima facie finds that no valid arbitration agreement exists. In Section 16, which provides competence-competence jurisdiction of arbitral tribunal, the tribunal is empowered to rule on the validity of arbitration agreement and can render the arbitral award. Furthermore, in Section 34(2)ii, the court is empowered to set aside the arbitral award if the arbitration agreement is not valid. For International arbitrations, the act under Section 48(1)(a) provides for refusal of enforcement of foreign awards, if the agreement is not valid. So, the invalidity of the arbitration agreement due to any defect can even restrain the arbitration to begin and even if it begins, can frustrate the whole purpose of it, either by setting aside of award or non- enforcement.
Restrictive Approach
On of the earliest case relating to pathological clause is Ganpatrai Gupta v. Moddy Brothers Ltd (1950) 85 Cal LJ 136. In this case, there were two arbitration clauses, one a printed clause and another type-written clause. In the printed clause it was provided that all disputes regarding the contract are to be settled by two arbitrators, one nominated by buyers and one by sellers respectively, in accordance with the Indian Arbitration Act. The type-written clause provided that all disputes whatsoever arising on or out of this contract shall be referred to arbitration under the rule of the Tribunal of Arbitration, Bengal Chamber of Commerce, or Indian Chamber of Commerce. The court while holding that the arbitration agreement is ambiguous and vague observed as follows:
Arbitration agreements should be strictly construed. Clear language should be introduced into any contract which is to have the effect of ousting the jurisdiction of the Courts and compelling the parties to have recourse to arbitration for decision of disputes.
The above case was relied by Calcutta High court in C.M. Karanji & Co. v. Indo-China Trading Co., Ltd, in which the arbitration clause provided for arbitration under the rules of the local chamber of commerce.After the dispute arose, the petitioner commenced arbitration under the rules of Bengal chamber of commerce, but respondent refused to submit to arbitration and contended that arbitration clause is vague and uncertain and therefore void. The court accepted the contention and observed that arbitration clause is vague, as the clause does not indicate under which local chamber of commerce is to arbitrate. The court reasoned that as there is no ad idem, which is the bedrock of any contract, and it is impossible to say as to what the parties meant and which person or body of persons the parties wanted to arbitrate in the matter of their disputes, therefore arbitration clause is not valid and legal [¶6 & ¶9].
In Jyoti Brothers v. Durga Mining Company, the arbitration clause provided that the dispute “can” be settled by arbitration. The court observed that “can” denotes that the parties may go to Arbitration as an alternative method of settling the dispute instead of going to the Courts. But that means that after the dispute has arisen, the parties will have to come to a further agreement that they shall go to Arbitration. In other words, the clause at best means that it is a contract to enter into contract. It denotes the possibility of arbitration in the event of a future dispute [¶4].
In Altos India Ltd. v. Goyal Gases Ltd, the arbitration clause was challenged on the ground that it was uncertain about the identity of the arbitrators and only mentioned the name of the arbitrators without disclosing any further particulars of the arbitrators. The court observed that there was no difficulty in mentioning the description of the arbitrators in the agreement. In the event of description being provided that the arbitrator was the auditor of the respondent, the petitioner may or may not have agreed to the appointment as an arbitrator [¶19].
In Middle East Trading Co., Bombay v. New National Mills Ltd. Ahmedabad, the arbitration clause provided that the dispute must be decided by the Arbitration board constituted by the Mahajan and the Millowners’ association but there was no arbitration board established by Maskati Market Mahajan and Millowner’s association. The court held that the arbitration was vague, and it was impossible to certain what parties meant, and held that arbitration cannot be commenced in accordance with the agreement [¶15].
Liberal Approach
In Union of India v. D.N. Revri & Co., the arbitration clause in the agreement between the appellant Union of India and respondent supplier of sugar provided that the single arbitrator would be nominated by the “Secretary to the Government of India in the Ministry of Food and Agriculture.” After the dispute and before the appointment of an arbitrator the ministry was bifurcated into the Ministry of Food and Ministry of Agriculture. Later both ministries were amalgamated as before with the difference that there was one Secretary for Food and one for Agriculture. The Secretary for Food who was concerned with the subject-matter of the contract appointed the sole arbitrator. The respondents filed their claim before the arbitrator and participated in the proceedings. The award went in favor of the appellant and filed the award in court. The respondent resisted the application, one of the grounds being that the arbitrator was not validly appointed since he was not “the” Secretary mentioned in the clause after the bifurcation of the ministry. The High Court accepted it and set aside the award.
However, in appeal, the Supreme Court took a liberal approach and opined that a contract is a commercial document between the parties, and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a common-sense approach and it must not be allowed to be thwarted by a narrow, pedantic, and legalistic interpretation. [¶7]
The court reasoned that under arbitration clause, the power to nominate an arbitrator was conferred on the Secretary in the Ministry of Food and Agriculture and not on a secretary in any other ministry, as at the date of the contract the Secretary in the Ministry of Food and Agriculture was the officer dealing with the subject-matter of the contract. If this object and reason of the provision of arbitration clause is kept in mind, it will become immediately clear that the “Secretary in the Ministry of Food and Agriculture” authorized to nominate an arbitrator was the Secretary in charge of the Department of Food who was concerned with the subject-matter of the contract and therefore, appointment made by Secretary in charge of the department of food was held valid. [¶7]
In Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia (P) Ltd., the reference to arbitration was challenged on the ground that the sales contract containing the arbitration clause was not signed and returned by the appellant and the purchase order contained the exclusive jurisdiction to Bombay high court which was accepted by the Respondent. The court observed that a written document which may not be signed by the parties even then it can be arbitration agreement and arbitration agreement can be culled out from an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement [¶15&16], and held the foreign award enforceable, as the email clearly corroborated that the appellant was acting in pursuance of the sales contract.
In R.K. Mineral Development Pvt. Ltd. v. Hindalco industries limited, the exclusive jurisdiction clause provided that courts at district lohardaga will have exclusive jurisdiction. The arbitration clause provided that arbitral tribunal to be composed of three arbitrators and place of arbitration to be Renukoot, but after the dispute arose, the respondent proposed sole arbitrator for adjudication with the name of arbitrator, which was not agreed by the petitioner and suggested different arbitrator, as no consensus could reach, therefore, petitioner approached court at Lohardaga for appointment of arbitrator. The maintainability was challenged by the respondent on the ground of lack of jurisdiction, by referring to arbitration clause, by which the parties have intended that the place of arbitration to be at Renukoot. The petitioner contended that exclusive jurisdiction has been conferred to the courts in the district of Lohardaga and, as such, the same being the contrary indicia and hence, the jurisdiction carved out by making reference of the place of arbitration to be at Renukoot will stand excluded.
The court reasoned that when the parties have intended for resolution of dispute/differences by resorting to the arbitration proceeding, fixing the place of arbitration at Renukoot, the intention of the parties is to be looked into and petitioner/applicant consciously have signed the agreement even knowing about the specific arbitration clause having its place at Renukoot [¶19]. Therefore, intent of the contract is to make available two recourses i.e., by pursuing the civil suit or by resolution of dispute through arbitration. Therefore, if the parties will take recourse to file civil suit, then the jurisdiction, has been carved out to the court, at Lohardaga but in case the parties will intend to adjudicate the dispute through arbitration mechanism, then the jurisdiction has been carved out of to the court, at Renukoot.
In Pricol Ltd. v. Johnson Controls Enterprise Ltd., in this case the arbitration clause provided as follows:
“The dispute shall be referred to sole arbitrator to be mutually agreed upon by the parties. In case the parties are not able to arrive at such an arbitrator, the arbitrator shall be appointed in accordance with the rules of arbitration of the Singapore Chamber of Commerce.” [¶2]
The reference to the “Singapore chamber of commerce” to be one to the “Singapore International Arbitration center” the respondent invoked arbitration and moved SIAC for appointment of Arbitrator [¶4].
The court observed that on a reasonable and meaningful construction, it would mean that in case the parties are not able to name a sole arbitrator by mutual agreement, the arbitrator is to be appointed by SIAC because the entity contemplated i.e., “Singapore Chamber of Commerce” is admittedly not an arbitration institution having its own rules for appointment of arbitrators. Given the circumstance, the most reasonable construction of the said clause would be to understand the reference to “Singapore Chamber of Commerce” as to the “SIAC” [¶10].
Conclusion
TOGETHER, it can be concluded that in the phase between the year 1950 to 1980, the courts have taken a restrictive approach and the judgment that was most cited was rendered by Calcutta High court in Ganpatrai Gupta v. Moddy Brothers Ltd, which advocated for strict construction but after the passing of the Arbitration and conciliation act, 1996 and the international focus shifted towards the promotion of arbitration, the attitude of the court also changed after the year 1996 and the court has adopted a liberal approach towards interpreting arbitration agreement. In this phase, the rule is laid down by Hon’ble Supreme Court in Union of India v. D.N. Revri & Co., which advocated the adoption of interpretation to give effect rather than invalidate the agreement.
Author(s)
Aadarsh Mittal
Student at UPES, Dehradun