Section 8 Of A&C Act Can’t Be Invoked Based On A Non-Binding Arbitration Agreement: Karnataka High Court

[08 July 2022] The Karnataka High Court has ruled that since the agreement between the parties provided for a ‘non-binding’ arbitration, there was absolutely no intention of the parties to enter into an arbitration agreement and that the said agreement could not be termed as an arbitration agreement.
The Single Bench of Justice Sachin Shankar Magadum held that since under the relevant clause in the agreement, the parties were at a liberty to initiate litigation before the Civil Court, therefore, the said clause clearly detracted from an arbitration agreement and hence, the recovery suit instituted by the petitioner before the lower Court was very much maintainable, and the lower court could not invoke Section 8 of the Arbitration and Conciliation Act, 1996 (A&C Act).
The Court observed that the relevant clause contained in the agreement between the parties provided for the reference of the dispute to a non-binding arbitration under the A&C Act. The Court noted that the term ‘non-binding’, as defined in the Advanced Law Lexicon, means a document that carries no formal legal obligations, but which may carry moral obligations.
The Court observed that the Supreme Court in the case of Jagdish Chander versus Ramesh Chander and Ors. (2007) had held that a mere clause in an agreement would not make it an arbitration agreement, if a further clause in the said agreement indicates the requirement of obtaining a further fresh consent of the parties for referring the dispute to arbitration. The Supreme Court had ruled that the main attribute of an arbitration agreement is the consensus of the parties to refer the dispute to arbitration.
The Court noted that the relevant clause in the said agreement between the parties provided that if the parties were unable to satisfactorily resolve the disputes pursuant to a non-binding arbitration, either party may initiate litigation. Hence, the Court ruled that the said agreement could not be termed as an arbitration agreement. The Court held that since the relevant clause clearly demonstrated that the parties were at a liberty to initiate litigation before the Civil Court, therefore, the said clause clearly detracted from an arbitration agreement. Thus, the Court ruled that the said agreement which is the subject matter of the suit before the District Court could not be treated as an arbitration agreement.
The Court, thus, ruled that there was no arbitration agreement between the parties and that the relevant clause incorporated in the said agreement did not contain the attributes required to be present for an agreement to be considered as an arbitration agreement. Hence, the Court held that the District Court had grossly erred in returning the plaint filed by the petitioner by invoking Section 8 of the A&C Act.
The Court thus, set aside the order passed by the District Court and restored the plaint filed by the petitioner to the file of the Additional City Civil and Sessions Judge, Bangalore.