Mere Use Of Word 'Arbitration' Does Not Create Arbitration Agreement Unless Parties Clearly Intend So: Supreme Court

The Supreme Court upheld the Punjab and Haryana High Court's decision refusing to refer the dispute to arbitration, observing that the mere use of the term “arbitration” in a clause is not sufficient to mandate reference to arbitration unless the parties clearly intended to resolve their disputes through arbitration.

“mere use of the word 'arbitration” is not sufficient to treat the clause as an arbitration agreement when the corresponding mandatory intent to refer the disputes to arbitration and the consequent intent to be bound by the decision of the arbitral tribunal is missing.”, the Court said.

A bench of Justice Dipankar Datta and Justice AG Masih heard the case where the Appellant-Alchemist Hospitals entered into a Software Implementation Agreement with ICT Health for a hospital management system. After disputes arose over alleged software defects, the controversy focused on Clause 8.28, titled “Arbitration,” which required dispute resolution by the companies' chairman, with recourse to civil courts if unresolved. The High Court dismissed Alchemist's Section 11(6) petition, holding the clause was not a valid arbitration agreement, prompting an appeal to the Supreme Court.

Dismissing the appeal, the judgment authored by Justice Datta observed that the arrangement between the parties to resolve the dispute was of an internal nature, having no intention to refer the dispute to an arbitration.

“In our view, Clause 8.28 of the Agreement does not evince an intention to refer disputes to arbitration, for the above-mentioned reasons.”, the court held.

The Court said that “when an agreement provides that the decision of the authority will not be final and binding on the parties, or that if either party is not satisfied with the decision of the authority, he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.” [Refer Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719]

“Arbitration being the creature of a contract, the ad idem intention of the parties is paramount to determine whether there exists a valid arbitration agreement. That being said, the invocation of the word “arbitration” nonetheless provides, at the very least, a discernible clue to the parties' underlying intention.”, the court added.

The Court reiterated the law laid down in K.K. Modi v. K.N. Modi, (1998) 3 SCC 573, which set out relevant factors to determine the existence of an arbitration agreement, i.e., 

"(1) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement,

(2) that the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration,

(3) the agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal,

(4) that the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides,

(5) that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly,

(6) the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal."

Accordingly, the appeal was dismissed.

Cause Title: M/S ALCHEMIST HOSPITALS LTD. VS. M/S ICT HEALTH TECHNOLOGY SERVICES INDIA PVT. LTD.

Citation : 2025 LiveLaw (SC) 1070

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Appearance:

For Petitioner(s) :Mr. Puneet Bali, Sr. Adv. Mr. Aditya Soni, AOR Mr. Gunjan Rishi, Adv.

For Respondent(s) :Mr. Shamik Shirishbhai Sanjanwala, AOR Mr. Rishab Gupta, Adv. Ms. Aakanksha Luhach, Adv. Mr. Aditya Tripathi, Adv. Ms. Aarushi Gupta, Adv.