Judgment Name: Consolidated Construction Consortium Limited v. SDMC
Court: High Court of Delhi
Coram: Prateek Jalan, J.
Date: 2nd November, 2022.
Keywords: Mediation, Arbitration & Conciliation Act, 1996, Section 11, Arbitration Agreement, Delhi High Court
The mere fact that the dispute resolution clause between two parties does not contain the word arbitration, but contains the word meditation, will not extinguish the rights of the parties to refer any disputes arising under the contract to arbitration as long as all the elements of a valid arbitration agreement are present in the clause.
Upon a dispute having arisen between the parties, the petitioner sent a legal notice to the respondent to either pay INR 41,88,50,435/- with further interest as damages or, in pursuance of the dispute resolution clause (“DRC”) of the agreement, appoint an arbitrator to adjudicate over the dispute. The respondent, in their response, denied the existence of an arbitration agreement between the parties and stated that the DRC was tantamount to a mediation clause as the DRC failed to use the word “arbitration” in any of its subclauses and only used the word “mediation”. In response to the respondent rejecting a subsequent request for the appointment of an arbitrator, the petitioner approached the Delhi High Court (“Delhi HC”) to appoint an arbitrator under Section 11 of the Arbitration & Conciliation Act, 1996 (“the Act”).
Before the Delhi HC the respondents relied on South Delhi Municipal Corporation v. Tollways Pvt. Ltd. (“Tollways”), where the Supreme Court of India (“SC”) reversed the judgment of the Delhi HC in appointing an arbitrator under Section 11 and held that the clause amounts to a mediation clause. In the same vein, the Respondents argued that the extant DRC is similar to the DRC in Tollways, and the Delhi HC ought not to appoint an arbitrator.
There were two issues before the Delhi HC:
i. Whether the extant DRC was similar to the DRC in Tollways and hence the Delhi HC ought not to appoint arbitrators?
ii. If the answer to the above issue is in the negative, is the extant DRC an arbitration agreement or a mediation agreement?
While adjudicating over the first issue, the Delhi HC closely compared the DRCs in both cases and concluded that there exists a palpable difference between the two. The foregoing conclusion was premised on the existence of three subclauses in the extant DRC, which the Tollways DRC lacked.
I. First, on the submission of a notice of intention to refer matters to the Municipal Corporation of Delhi (“MCD”), within ten days, the counterparty must submit a counterstatement.
II. Second, the MCD Officer, who is to adjudicate over the dispute, may call for further evidence or interview persons to adjudicate over the dispute.
III. Third, the decision of the MCD Officer is binding on both parties.
The Delhi HC held that the existence of these ingredients significantly alters the effect of the Tollways DRC vis-à-vis the extant DRC. The former is akin to referring a dispute to an expert and the latter is akin to an arbitration agreement. Upon arriving at this conclusion, the Delhi HC deemed the ratio of Tollways inapplicable to the extant dispute.
Having answered the foregoing issue in the negative, the Delhi HC proceeded to answer the second issue. At the outset, the Delhi HC opined on the importance of taking a substance-over-form approach and made it clear that the mere presence of the word “arbitration” or lack thereof is not the determinative test of whether a clause is an arbitration agreement. The Delhi HC instead relied on two SC judgments, K.K. Modi vs. K.N. Modi & Ors. (1998) 3 SCC 573 and Jagdish Chander vs. Ramesh Chander & Ors. (2007) 5 SCC 719 to identify the basic ingredients that constitute an arbitration agreement. First, the court needs to determine whether the intention of the parties was to enter an arbitration agreement. This is a subjective test, and the intention will be construed from the construct of the DRC. Second, to answer the foregoing prong, courts must not place reliance on the form of the DRC; instead, the focus must be on the substance of the DRC. Thus, markers such as a written agreement, parties agreeing to refer all disputes to a private tribunal with the necessary jurisdiction to adjudicate over the matter and agree that the decision of the said tribunal will be binding on the parties are of greater significance. Third, whether the basic procedure of arbitration, such as collection of evidence, whether the tribunal is required to hear both parties or whether the tribunal is required to arrive at a decision based on the parties’ submission and not its personal opinions, will be checked. Fourth, even though clauses such as “parties, if they agree so, may resolve disputes through arbitration” use the word arbitration, the same only amount to an agreement to arbitrate in future and not an agreement to arbitrate as the clause only suggests arbitration as a mode of resolving disputes which the parties have then have to agree upon.
Having laid down the rationale for its decision, the Delhi HC then proceeded to scrutinise the extant DRC and found features therein that are the essential ingredients of an arbitration clause. The parties have a written agreement and the adjudicatory authority, the MCD, derives its powers from the consent of the parties, it has to consider submissions of both parties, the reference of disputes can be made by either party, the reference to the MCD is mandatory, the substantive rights of the parties are to be crystallised by the MCD, its decision will be legally binding on both the parties. Hence the extant DRC amounts to an arbitration clause even in the absence of the word “arbitration”.
The Delhi HC has added to existing jurisprudence by taking a substance-over-form approach and focusing on the intention of the parties when interpreting the legal effects of the arrangements made in their private contracts. Hence, as long as the substance of an arbitration agreement exists in a DRC, it is irrelevant whether the word arbitration is used.
[This case update has been authored by Ryan Joseph, an editor at Mapping ADR.]