The Quick Heal Judgment: Optional versus Mandatory Reference to Arbitration

[Rohan Deshpande practices as a Counsel at the Bombay High Court, and Karan Kamath is a 2020 B.A. LL.B. (Hons.) graduate from Symbiosis Law School, Pune]

The Bombay High Court in its judgment dated June 5, 2020 in Quick Heal Technologies Ltd. v. NCS Computech Pvt. Ltd. was concerned with an application for appointment of an arbitrator. The central question for determination was as to the existence of a valid arbitration agreement. The relevant clause was as under:

17. Dispute Resolution:

a. All disputes under this Agreement shall be amicably discussed for resolution by the designated personnel of each party, and if such dispute/s cannot be resolved within 30 days, the same may be referred to arbitration as stated below.

b. Disputes under this Agreement shall be referred to arbitration as per the Arbitration and Conciliation Act, 1996 as amended from time to time. The place of arbitration shall be at Pune and language shall be English. The arbitral tribunal shall comprise one arbitrator mutually appointed, failing which, three (3) arbitrators, one appointed by each of the Parties and the third appointed by the 2 so appointed arbitrators and designated as the presiding arbitrator and shall have a decisive vote. 

c. Subject to the provisions of this Clause, the Courts in Pune, India, shall have exclusive jurisdiction and the parties may pursue any remedy available to them at law or equity.” [emphasis added]

The Court concluded that there was no reasonable possibility of any amicable resolution between the parties despite recourse to discussions not have having been made, and proceeded to decide whether an arbitration agreement existed. The Court held that the employment of ‘may’ and ‘shall’ in the language of the same clause signified that the reference to arbitration was optional and not mandatory, and dismissed the application.

Adopting a two-pronged analysis, it is respectfully the view of the authors that the decision is erroneous.

Emphasis upon intention of parties

When construing an agreement for reference to arbitration, the primary emphasis must be upon the intention of parties, and whether they were ad idem on resolution of disputes through arbitration. In Powertech World Wide v. Delvin International General Trading, the Supreme Court emphasised that in case of apparent ambiguity caused by the language of the arbitration clause, the clause must not be read by itself, but must be read conjointly with correspondence between the parties and attendant circumstances.

It cannot be disputed that there was an ambiguity in context of the language of the clause in Quick Heal. Despite the relevant paragraph from Powertech World Wide being reproduced in the Quick Heal judgment, there is no further discussion on the correspondence between the parties after invocation of arbitration by the applicant, if any, and whether the respondent refuted the existence of the arbitration agreement prior to the filing of the application.

Similarly, there is no discussion as to the attendant circumstances. If such attendant circumstances were looked into by the Court, the fact that clause 17(b) provided for venue, language, composition and appointment procedure of the arbitral tribunal, in addition to stating that “Disputes under this Agreement shall be referred to arbitration” (emphasis added) would hint at a greater presumption in favour of a valid arbitration agreement than the absence thereof.

The Bombay High Court also failed to appreciate that the clause before the Supreme Court in Zhejiang Bonly Elevator v. Jade Elevator Components was similar to the one in Quick Heal. The clause in Zhejiang Bonly Elevator was as under:

15. Dispute handling:

Common processing contract disputes, the parties should be settled through consultation; consultation fails by treatment of to the arbitration body for arbitration or the court.” [emphasis added]

From the above, it is evident that the mandatory nature of the clause evidenced by the term ‘should’ was applicable to settlement of disputes through consultation. The latter part of the clause was preceded by a semi-colon, and provided for “arbitration or the court” without the use of any term which sets forth its mandatory nature. Yet, the Supreme Court proceeded to appoint an arbitrator holding that an appointment was justified once there was an option between arbitration and litigation, and the petitioner had invoked the arbitration clause.

The decision in Indtel Technical Services v. Atkins Rail Ltd. was referred, wherein an arbitrator was appointed in context of a similar clause stating that disputes “will be referred to the adjudicator or the courts” (emphasis added). Emphasis was laid upon the intention of parties.

These decisions in Zhejiang Bonly Elevator and Indtel Technical Services were relied upon in Quick Heal, but were distinguished. The rationale for the same, however, is without basis. The Bombay High Court held that the Supreme Court cases employed the terms ‘should’ and ‘will’ in their arbitration clauses, respectively. The absence of any of these in Quick Heal, which indicated mandatory reference to arbitration, was held as amounting to a lack of a pre-existing agreement for arbitration.

In doing so, the Court failed to appreciate that merely using ‘should’ or ‘will’ in a clause would not convert it into a clause for mandatory arbitration, especially if the disjunctive phrase ‘or’ was used in a manner indicating ‘arbitration or court’. Such an approach is anomalous and lends unjustified preference to mandatory arbitration over litigation simply by the usage of ‘should’ or ‘will’; whereas a literal reading casts equal emphasis on both ‘arbitration’ and ‘court’. Thus, the Bombay High Court ought to have applied the rationale followed in Zhejiang Bonly Elevator and Indtel Technical Services and allowed the application.

‘May’, ‘shall’, and regard to business efficacy

Secondly, the finding in Quick Heal that existence of ‘may’ and ‘shall’ in the same clause conclusively supported the interpretation that the two are intended to have different meanings is a simple generalisation, which conflicts the following judgments of the Supreme Court. Such construction of the arbitration agreement also frustrates the business efficacy of the underlying contract.

The ordinary understanding of these words is that ‘may’ imports discretion while ‘shall’ has an obligatory essence. However, these may differ contextually. When the two words occur in the same clause, there are two distinct views of interpretation. The first, laid down by the Supreme Court in Mahaluxmi Rice Mills v. State of UP has been applied in Quick Heal – proximate occurrence suggests ordinary meanings and that draftspersons were mindful of their different connotations.

However, several decisions of the Supreme Court advocate a cautionary approach. In context of the Protection of Human Rights Act, 1993 providing that state governments ‘may’ establish State Human Rights Commission, while the centre ‘shall’ establish the national counterpart, after assessing the overall legislative intent, it was held that even states were to mandatorily form the commissions. Similar reasoning has been used to interpret rent control legislations and civil procedure. Although these decisions are conscious of the aforesaid interpretation in Mahaluxmi Rice Mills, they hold that efficient reading requires the same not to be deemed conclusive. Thus, in the course of interpretation, a court must consider wider context and purpose behind the clause.

Additionally, while interpreting commercial contracts, courts can imply unexpressed terms, if express terms are uncertain and if it is ‘necessary to give business efficacy’ to the contract. The Privy Council observed in BP Refinery v. The President Councillors that apart from being rooted in the necessity of commercial potency, an implied term must be equitable and reasonable; obvious; capable of clear expression; and not contrary to the overall contract. Further, the Privy Council in Belize Telecom held that these were not independent tests for implying terms, but must collectively convey the idea that implied terms spell out what the contract actually means.

The Supreme Court has referred to both BP Refinery and Belize Telecom with approval. Similarly, in Ayyasamy v. Paramasivam, the need to impart business efficacy to arbitration agreements was recognised, holding:

The basic principle which must guide judicial decision-making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge of the efficacy of the arbitral process. The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy.

In this backdrop, considering the detailed and unambiguous nature of clause 17(b), coupled with the usage of the word ‘shall’, an implied construction of ‘may’ in clause 17(a) to mean a mandatory reference to arbitration would have been reasonable, commercially expedient and furthered the intentions of the parties. Another relevant aspect in this regard was that the recourse to courts under clause 17(c) was expressly made “subject to the provisions of” the entirety of clause 17, whereas the arbitration sub-clause was not contingent in any manner.

Conclusion

Thus, upon consideration of the arbitration agreement in Quick Heal vis-à-vis the aforesaid analysis, it is the view of the authors that the presumption in favour of a mandatory recourse to arbitration was stronger, and the Bombay High Court should have given due regard to the intention of parties and appointed an arbitrator.

Rohan Deshpande and Karan Kamath

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