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Ruling in favour of arbitration

It is natural to look for an arbitration clause when a dispute arises. However, it can be problematic if the clause has an element of ambiguity. Shourav Lahiri, a partner in the international law firm Pinsent Masons LLP, considers a recent decision of the Supreme Court – involving two companies engaged in the mining industry – to find a way out.

W hen a dispute arises between the parties to a construction contract, one immediately turns to the contract to check if there is an arbitration clause. What if a clause looks like an arbitration clause but when scrutinised has just that element of ambiguity? Will it be upheld? To find the answers, let us consider a recent Supreme Court decision which dealt with this issue.

In the Visa International Ltd v Continental Resources (USA), (Arbitration Petition No 16 of 2007), two companies engaged in the mining industry were eager to work together to set up an integrated aluminium complex.

They entered into a Memorandum of Understanding (MoU) and an agreement agreeing to incorporate a company and set up a joint venture. But, 18 months after the agreement was signed, Continental Resources wanted to change the terms of the agreement.

It felt that the initial agreement did not reflect the changes it wished were included. Visa International was having nothing of it. Unhappy with Visa’s response, Continental declared both the MoU and signed agreement as terminated.

Visa felt that this unilateral termination was unacceptable and sought to refer the dispute between them to arbitration. The arbitration clause in the agreement read as follows: “Any dispute arising out of this agreement and which cannot be amicably settled shall be finally settled in accordance with the ‘Arbitration and Conciliation Act 1996’.”

Continental’s position was quite simple: the dispute could not be referred to arbitration pursuant to this clause as the clause does not say that disputes are to be referred to arbitration.

Look again at the clause. Continental was right: the clause does not require disputes to be referred to ‘arbitration’ or to an ‘arbitrator’. It merely says that the disputes will be settled in accordance with the ‘Arbitration and Conciliation Act 1996’.

The Supreme Court, however, did not agree with Continental. Delivering the judgment of the Court, Justice B Sudershan Reddy acknowledged that the arbitration clause had not been properly drafted but held that the reference to the ‘Arbitration and Conciliation Act 1996’ was enough to indicate the parties’ intentions to refer disputes to arbitration.

The Apex Court also looked at correspondence between the parties leading up to the reference to arbitration – and noted that Continental had never argued that the arbitration clause itself was invalid.

The Court observed that the ‘Arbitration and Conciliation Act 1996’ does not set out any specific requirements as to language or form in order to create a valid and binding arbitration agreement. Just because an arbitration clause is not perfectly drafted, does not mean it will fail.

Continental also argued that the agreement (that contained the arbitration clause) was invalid. But, even if this was right, it would not have invalidated the arbitration clause as an arbitration clause is considered in law to be a separate agreement. It survives even if the agreement it is contained within is found to be invalid.

The law treats arbitration clauses in this way so that a party cannot avoid reference to an arbitration just by arguing that the agreement containing the clause is invalid. The arbitral tribunal, once appointed, can determine the issue of invalidity. 

Continental then argued that Visa had not properly commenced the arbitration because it had failed to attempt to “amicably settle” the dispute before proceeding to arbitration.

The Court did not give much consideration to this argument. It felt it was clear from the facts that there was no scope for such settlement. Accordingly, it was unnecessary to attempt such settlement before commencing arbitration. The Court appointed an arbitrator and referred the dispute to him.

The Court’s decision indicates a robust approach in support of arbitration. This is comforting, particularly for participants in the construction industry, where large value and complex disputes are probably best resolved in arbitration through specialist arbitrators.

However, while a poorly drafted arbitration clause prevailed in the Visa International Ltd v Continental Resources (USA) case, it is no excuse to ignore the proper drafting of such clauses.

An arbitration clause is probably the most important provision in a contract as an improperly drafted clause could be the difference between a prompt resolution of a dispute in arbitration or years of it finding its way through the courts.

The author wishes to thank his colleague Ms Laura Wilson for her assistance with this article. The author can be reached at shourav.lahiri@pinsentmasons.com

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