Overview
In this case, the Madhya Pradesh High Court clarified whether the use of the word “may” in an arbitration clause made arbitration merely optional or whether it reflected the parties’ agreement to resolve disputes through arbitration.
The matter was dealt by the Court in an application filed under Section 11(6) of the Arbitration and Conciliation Act 1996, seeking the appointment of a sole arbitrator.
The applicant argued that once the negotiations failed, the arbitration clause came into operation and the respondent could not insist on obtaining fresh consent before the disputes were referred to arbitration.
The respondent, however, maintained that use of the word “may” gave both the parties freedom to either choose arbitration or decline it.
The Court was therefore required to determine whether the arbitration clause, when it was read in the context of the entire agreement, disclosed a clear intention to make arbitration the agreed method of resolving disputes.
Facts of the Case
JVS Foods Private Limited and M.P. State Agro Industries Development Corporation Limited entered into a Shareholders’ Agreement on 27 November 2012. Soon thereafter, disputes arose after the respondent decided to exit the arrangement. Under the agreement, the remaining parties were required to purchase the existing party’s shareholding. However, the parties failed to agree on the valuation of the shares.
The parties had to first resolve the disputes through negotiations as pet the agreement. When that failed, a notice was issued by the applicant in May 2024, invoking the arbitration clause and requesting the appointment of a sole arbitrator. The respondent refused while arguing that the clause only stated that disputes “may” be referred to arbitration and therefore arbitration could not proceed without mutual consent of the parties.
The applicant relied upon an earlier decision involving the same respondent and a similar agreement, where an arbitrator had already been appointed. It was also pointed out by the applicant that the respondent had previously relied upon the existence of the arbitration clause while opposing other legal proceedings.
Since the parties failed to agree on the appointment of an arbitrator, the applicant approached the High Court under Section 11(6) of the Arbitration and Conciliation Act 1996.
Legal Issues
- Whether the use of the word “may” in an arbitration clause makes arbitration optional.
- Whether the dispute as to the valuation of shares was capable of being resolved through arbitration.
- Whether the intention of the parties to resolve the dispute through arbitration should be the agreement as a whole.
- Whether the court should appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.
Decision
The Madhya Pradesh High Court allowed the application and appointed a sole arbitrator.
It was held that an arbitration clause cannot be treated as non-existent merely because it uses the word “may.” Instead, the agreement must be read as a whole to ascertain the true intention of the parties. It was observed that while the clause used the expression “may” at the stage of referring disputes to arbitration, the remaining provisions used mandatory expressions such as “shall” while prescribing the seat of arbitration and the applicability of the Arbitration and Conciliation Act, 1996.
This indicated that the parties intended arbitration to be the agreed mechanism for resolving disputes after negotiations had failed.
It was also noted by the Court that the respondent had earlier taken a stand that arbitration was the appropriate remedy under the same agreement. Considering the overall language of the agreement and the legal principles governing arbitration agreements, it was concluded by the Court that the dispute relating to share valuation was arbitrable. Accordingly, Shri Alok Verma, former judge of the Madhya Pradesh High Court, was appointed as the sole arbitrator to adjudicate the disputes between the parties at Bhopal.
