The Uncertain Nature of Symmetrical Optional Arbitration Clauses in India

[Ayushi is a student at Dr Ram Manohar Lohiya National Law University.]

The recent judgement delivered by the Supreme Court of India (SC) in the case of Tarun Dhameja v. Sunil Dhameja (Tarun Dhameja) has resurfaced the discourse on optional arbitration clauses in India. An optional arbitration clause gives parties different options for resolving their disputes. It typically leaves it upon the parties to decide whether to adjudicate their dispute through arbitration or litigation, thus making arbitration “optional”. These clauses are of two kinds – symmetrical and asymmetrical, also known as bilateral and unilateral, respectively. An asymmetrical optional clause hands upon the power to decide the mode of dispute resolution to only one party. It is up to that party to unilaterally decide if they wish to opt for arbitration or not. They are the more commonly used optional clauses universally, though the use of unilateral optional arbitration clauses has not been upheld yet by courts in India. On the other hand, a symmetrical optional clause requires both parties to decide the mode of adjudication mutually. Thus, both parties together must decide whether to opt for arbitration or litigation once the dispute arises. In this article, we will be focusing on the latter form of optional arbitration clauses, i.e. symmetrical optional arbitral clauses.

Indian Judiciary’s Approach 

The saga of Indian courts analysing symmetrical optional arbitrational clauses can be traced back to Wellington Associates Limited v. Kirit Mehta. In this case, the SC addressed a clause stating that any dispute or difference arising from the contract may be referred to arbitration. The SC concluded that the term "may" should not be interpreted as "shall" Instead, this clause was deemed an enabling provision that required additional consent before proceeding to arbitration. This was reaffirmed in Jagdish Chander v. Ramesh Chander and Others (Jagdish Chander) where the clause provided that any dispute that arises relating to the contract shall be mutually decided by the parties or shall be referred for arbitration if the parties so determine. The Supreme Court ruled that the clause could not be considered an arbitration agreement under Section 7 of the Arbitration and Conciliation Act 1996 (Act). The phrase "shall be referred for arbitration if the parties so determine" indicates that the parties must first mutually agree to refer disputes to arbitration, which was absent in this clause. Therefore, their consent is necessary before arbitration can proceed.

Following this, a different approach was taken in the case of Zhejiang Bonly Elevator Guide Rail v. Jade Elevator Components. Here, the clause stated that if consultations failed, disputes could be resolved either through arbitration or in court. The SC ruled that since there was an option to settle the disputes through arbitration after the failure of consultation, the petitioner was right in exercising this option. As a result, the court allowed for the appointment of an arbitrator. In Quickheal Technologies v. NCS Computech, the clause provided that all disputes under the agreement shall be amicably discussed for resolution and if not done within 30 days, may be referred to arbitration. The Bombay High Court ruled that the word "may" suggests both parties have the option to resolve disputes through arbitration, but a valid arbitration agreement does not exist. This aligns with earlier judgments that require clear consent from both parties to initiate arbitration.

In the recent decision of the SC in the case of Tarun Dhameja, an arbitration clause stating that disputes “shall” be referred to arbitration was assessed. While it mentioned arbitration as optional, the court clarified that this should not be read in isolation. The use of "shall" indicated a requirement to refer disputes to arbitration, allowing an aggrieved party to invoke the arbitration clause.

International Scenario 

Internationally, there has been an inclination to assume that there is a valid and binding arbitration agreement when dealing with optional arbitration clauses. The United States follows a pro-arbitration approach and the courts opt for a more liberal interpretation favouring arbitration when dealing with optional arbitration clauses. The English Courts, too, recognise the validity of optional arbitration clauses and construe them to be binding in nature. In cases like Lobb Partnership Limited v. Aintree Racecourse Company Limited, the word “may” was interpreted to mean granting the parties an option to arbitrate, and it was laid down that once that option is exercised, a binding arbitration agreement comes into existence. In Anzen Limited and Others v Hermes One Limited, the clause contained that parties “may” submit a dispute to arbitration. When one of the parties commenced litigation, the Privy Council (British Virgin Islands) held that though the commencement of litigation did not violate the optional arbitration clause, the other party, which had not yet commenced arbitration proceedings, was entitled to a stay of the litigation pending arbitration. It was further highlighted that one party should not be able to gain an advantage over the other using optional arbitration clauses by “jumping the gun” and commencing litigation.

A similar approach has also been taken by the Canadian Courts. In Mind Star Toys Inc. v. Samsung Co. Ltd., the contract contained a reference to arbitration as well as a clause which granted a party the “right to sue”. When one of the parties moved to the Court and the other requested the stay of proceedings, claiming that the reference to the “right to sue” would not precede the parties’ choice for arbitration, The Ontario Court upheld the choice to arbitrate, and the court proceedings were stayed. The Hong Kong Courts have also ruled in favour of arbitration being construed as mandatory, where an option to arbitrate has been provided. In Kinli Civil Engineering Limited v Geotech Engineering Limited, the Hong Kong Court of First Instance held that arbitration was mandatory, despite the dispute resolution clause providing the use of the word "may".

Thus, internationally, several leading arbitration jurisdictions have recognized the need for the construction of arbitration agreements liberally and have ruled in favour of arbitrability to support the one-stop adjudication approach. A pro-arbitration policy is applied to optional arbitration clauses, and any ambiguity, if created, is usually resolved in favour of allowing for arbitration.

Utility of a Symmetrical Optional Arbitration Clause 

The courts in India have taken varied stances on symmetrical optional clauses. The differing factor highlighted by the courts is the manner in which the clauses have been drafted. Whether it is specified that the arbitration is optional, the usage of phrases like “if decided by parties” and words like “shall” and “may” are crucial in determining the existence of a valid arbitration agreement under Section 7 of the Act. 

In several cases, though the courts reiterated the importance of deciphering parties’ intent, the uncertain nature of such clauses coupled with ambiguous and unclear drafting have often created confusion as to what is the exact intent of the parties was when inserting an optional arbitration clause. Further, the utility and purpose of such a clause can often be unclear. If a clause is merely giving the parties the option to go for arbitration which requires seeking fresh consent of the parties, it can be said to have very little to no commercial value whatsoever. Parties can enter into an arbitration agreement at any point, even after a dispute has arisen. It can then be argued that not only does such a clause lack utility but also adds complexities by giving room for judicial inference and being contrary to the purpose of arbitration, which is to be an efficient and time-saving mode of dispute resolution process. Some might argue that the aim of such a clause would be to encourage the parties to opt for an amicable settlement of disputes. However, in the event of failure of an amicable resolution of disputes, parties end up tussling between approaching courts and opting for arbitration and may not agree on one thing, further, adding to the differences. Moreover, “med-arb” clauses and pre-conditions to arbitration clauses mandating an attempt for an amicable resolution of disputes already serve such a purpose in a more defined and unequivocal manner. It is extremely important that parties be careful and particular about the language of an optional arbitration clause when drafting it. If the parties wish to insert it, they must keep in mind the legal consequences and the purpose to be served. 

Need for Stricter Interpretation 

The SC ruling in favour of arbitration in Tarun Dhameja aligns with the pro-arbitration policy and the arbitration hub India aims to be. The SC relied on cases like Vidya Drolia v. Durga Trading Corporation and Oriental Insurance Company Limited v. Narbheram Power and Steel Limited and explained the merit in opting for a stricter interpretation of the clause that makes arbitration mandatory. A pro-arbitration interpretation normally applied to international instruments, and commercial transactions is based upon the approach that the arbitration clause should be considered as per the true contractual language and what it says, but in case of doubt, the assumption is that disputes are encompassed by the agreement. The SC further elaborated that which approach as to the interpretation of an arbitration agreement should be adopted in a particular case would depend upon various factors, including the language, the parties, the nature of the relationship, the factual background in which the arbitration agreement was entered, etc. In the case of pure commercial disputes, a more appropriate principle of interpretation would be the one of liberal construction as there is a presumption in favour of one-stop adjudication. 

This approach is the call of the hour. When different interpretations are possible for an optional clause and it is difficult to decipher the parties’ intentions, a stricter interpretation recognizing a valid and binding arbitration agreement is in line with international standards and adds utility to the clause. It is likely that parties may not agree on the same forum for adjudication of dispute after there has been a breach and some breakdown of the contractual relationship. An optional clause shows that parties while drafting the contract had some intention to pursue arbitration and thought it to be an appropriate forum. Thus, recognizing this intent to opt for arbitration and upholding the same when a clause has been inserted allows for the one-stop adjudication approach, helps de-clogging of courts and also gives parties a firm direction. This need is further computed when one of the parties wants to invoke arbitration and exercises the option. 

Conclusion 

Navigating symmetrical arbitration clauses can be challenging, but the judgement in Tarun Dhameja is a positive development. Although Jagdish Chander has not been overruled yet, it is crucial for courts to embrace the pro-arbitration guidance from Tarun Dhameja. This approach is essential for positioning India as a leading arbitration hub, especially as other jurisdictions adopt pro-arbitration policies. Careful drafting of arbitration agreements is also essential to ensuring their validity and avoiding prolonged litigation. By interpreting clauses liberally and resolving ambiguities in favour of arbitration, we can ensure consistency and efficiency, minimizing the need for court battles over forum selection. A consistent pro-arbitration judicial approach will strengthen arbitration in India and alleviate the judiciary's burden.