Can Arbitration Clause be Invoked in Dispute Arising after Parties Compromise? – By Clarion Legal

It’s always advisable to have an alternative and what could be better than an alternative for litigation? Arbitration is one such alternative. Whenever a dispute arises between parties, rather than approaching a court and initiating litigation, they can seek a remedy like compensation for breach of contract by either side through arbitration. Arbitration has become the preferred mode of dispute resolution as it reduces time and expenses. Arbitration involves an arbitrator, which is always in an odd number and are always determined or decided by both parties’ mutual consent. They are expected to be impartial with rationale thinking. Arbitrator’s decision is binding on all the parties.

In India arbitration plays very vital role in the entire judiciary system. With a plethora of cases pending in courts, it’s becoming very challenging for the judiciary to hear all these cases. One such way to overcome this challenge would be through arbitration. In India, it is governed through the Arbitration and Conciliation Act, 1996 (hereinafter refer as ‘the Act’).  Where arbitrator is an impartial third party whose role is to adjudicate and give the final decision which is binding on both parties while conciliation objective is to help the party to arrive at a negotiated settlement. 

But prior to arbitration, parties have the option of settling the claim through mediation and negotiation as per the agreement between them. Mediation involves third party which aids two or more disputants in reaching their agreement. It is an easy negotiable process where third party acts as mediator in order to resolve disputes using appropriate communication and negotiable technics. Mediator doesn’t impose his view and makes no decision about what a fair decision should be, while negotiation involves simple settlement between the parties through offer and cross offer. All of these become part of pre-arbitration settlement as arbitration led to more stringent form of settlement which is binding. Basically, pre-arbitration provides parties a chance to resolve their dispute on an easier note and helps them to prove their innocence in order to lead amicable negotiation in good faith between the parties. So, parties usually before going through arbitration seek another dispute resolution system. Here it should be noted that except arbitration all the mentioned dispute resolution mechanisms can be sought for assistance at any time. Which means arbitration clause is usually made for future disputes and can only be claimed when there is pre-existent contract between the parties but the rest can be claimed at any instant and it wholly depends on parties to opt or not. In addition to that the most amazing part of these settlements is their grounds which are not specific, i.e., it wholly depends on parties to decide whether to go for arbitration or for pre-arbitration. Usually at first instance they prefer pre-arbitration mechanism as it is quicker, less expensive, more private and the party retains much more control over the outcome than arbitration [1]. All of these pre-arbitration mechanisms become part of federal arbitration dispute resolution and so after settlement by any of these mechanisms, if dispute arises then parties can go for arbitration in order to make a decision that is binding. The decision given by pre-arbitration mechanism is not binding.

The Hon’ble Supreme Court has given various opinions regarding this and it can be seen through its various judgments. In the case of ‘Demerara Distilleries Private Limited v Demerara Distillers Limited’ [2],the Hon’ble Court said that under the agreed mechanism, the parties had decided that the differences would be resolved first by mutual discussions, followed by mediation, and only if mediation failed would they arbitrate. The court inferred from the correspondence between the parties that any attempt at that stage to resolve disputes by mutual discussions and mediation would be an empty formality and proceeded to appoint an arbitrator [3]. While in ‘Tulip Hotels Private Limited v Trade Wings Limited’ [4], the Hon’ble Bombay High Court dismissed a petition for the appointment of an arbitrator where the parties had failed to follow the prescribed pre-arbitral step of conciliation. The court held that where the parties agree to a specific procedure and mode for settling their dispute by way of arbitration and prescribe certain preconditions for referring the matter to arbitration, they must comply with those pre-conditions and only then can they refer the matter to arbitration. It is noteworthy that the specified pre-arbitration step in this case was conciliation under the act. It should be noted that if the parties do not get satisfied by the decision of mediation, conciliation or negotiation then they can opt for arbitration on the condition that they have a pre-existing arbitration contract between them.

Further, one more question arises that what will be the situation if the parties compromise not through pre-arbitration process and then claim for arbitration clause. To overcome this situation the Supreme Court have laid down a landmark judgment in the case of ‘Zenith Drugs and Allied Agency Ltd v M/S Nichola Piramal India Ltd’ [5],in which Hon’ble Supreme Court of India held that no arbitration clause can be claimed in disputes arising after the parties compromise on the condition that in the compromise deed there is no such arbitration clause. Further, it said that parties can file an application for arbitration under section 8 of the Act only if the subject matter of the action before the judicial authority relates to the disputes which is the subject matter of the arbitration agreement. As per section 8 of the Act, the following conditions must satisfied in order to refer parties for an arbitration.

Or in other words prima facie those disputed matters which are agreed to be resolved through arbitration can become subject matters of arbitration agreement. 

Referring to the case ‘Yogi Agrawal v Inspiration Cloth’ [6], the Hon’ble Court said that it is possible to enter different contracts at different points of time or may enter a series of unrelated transactions which may provide for arbitration or may not. In the instant case there was no arbitration clause entered into by the parties at the time of compromise deed. Hence, parties can’t claim arbitration clause it was a dispute arising after compromise.

Earlier, the same contention was submitted by the learned counsel on the side of appellant before the Hon’ble High Court and Trial court respectively. In which counsel placing reliance upon the ‘Yogi Agrawal v. Inspiration Cloth’ [7] and ‘Sukanya Holding (P) Ltd v. Jayesh H. Pandya and Another’ [8], that the dispute must relate to the contract upon which the parties have agreed for arbitration i.e., subject matter of action must be same as subject matter of arbitration agreement.  Also, in the case of ‘Nathani Steels Ltd v. Associated Construction’ [9],the Defendant cannot invoke arbitration clause pertaining to the same dispute.

Further Hon’ble Supreme Court in the case of ‘Union of India v. Kishorilal Gupta & Bros’ [10] dealt with the question that whether arbitration clause in the contract will cease to have effect, when the contract stood discharged as a result of settlement? The three-judge bench answered in the affirmative and laid down the following general principle to show when arbitration agreement operates and when it does not operate:

In a nutshell, it can be concluded that claiming of arbitration clause after dispute varies according to situation. If the parties are not satisfied with the decision of mediation, conciliation or negotiation than they can opt for arbitration.  But the things get changed when compromise between the parties has been made through judiciary irrespective of their pre-existing arbitration clause, i.e., after the decision given by the court, the arbitration clause can’t be claimed on that previous contract. Moreover, section 62 of Indian Contract Act, 1872 states that if the parties to a contract agree to substitute a new contract for it, or to rescind it or alter it, the original contract need not be performed. The agency agreement, therefore, necessarily became inoperative, unenforceable and ceased to exist and as a corollary, the arbitration clause in the agency agreement also perished with the substitution of agency agreement.

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[1]  International Trade Law, Dr. S.R Myneni, 3^rd ed. Allahabad Law Agency, pg-341

 [2] AIR 2015 (13) SCC 610

[3] https://www.lexology.com/library/detail.aspx?g=d9570dd8-3a0a-4207-92f1-c14b9ad4fa04

 [4] AIR 2010 (1) Mh LJ 73

 [5] AIR 2019 SC 3785

 [6] AIR (2009) 1 SCC 372

 [7] ibid

 [8] AIR (2003) 5 SCC 531

 [9] AIR 1995 Supp (3) SCC 324

 [10] AIR 1959 SC 1362

Disclaimer: The views or opinions expressed are solely of the author.