Blog Details

Arbitration is a form of alternative dispute resolution (ADR), where the dispute is decided by one or more arbitrators. An arbitral award is legally binding on all the parties to the arbitration and enforceable in the courts. A party to a contract can move to arbitration only when there is a pre-existing arbitration clause or arbitration agreement between the parties. According to section 7(1) of the Arbitration and Conciliation Act, 1996, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. 

According to Section 8 of the Act, if an action is brought in a matter before a judicial authority which is the subject of an arbitration agreement, the Court shall refer the parties to arbitration. In absence of an arbitration agreement, a party cannot claim arbitration as a matter of right. However the court has the power to refer a matter to ADR processes subject to certain conditions under section 89 of the Code of Civil Procedure, 1908.

According to Section 89(1) of the Code of Civil Procedure, 1908 -"Settlement of disputes outside the Court.-Where it appears to the Court that there exist elements of a settlement which may be acceptable to the parties, the Court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the Court may reformulate the terms of a possible settlement and refer the same for:

(a) arbitration;

(b) conciliation;

(c) judicial settlement including settlement through Lok Adalat: or

(d) mediation."

In Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd. and Ors. (2010) 8 SCC 24, Supreme Court held as under:-

"Even if there was no pre-existing arbitration agreement, the parties to the suit can agree for arbitration when the choice of ADR processes is offered to them by the court under Section 89 of the Code. Such agreement can be by means of a joint memo or joint application or a joint affidavit before the court, or by record of the agreement by the court in the order-sheet signed by the parties. Once there is such an agreement in writing signed by parties, the matter can be referred to arbitration under Section 89 of the Code; and on such reference, the provisions of the AC Act will apply to the arbitration, and as noticed in Salem Bar Bar Association, T.N. v. Union of India (I) (2003) 1 SCC 49, the case will go outside the stream of the court permanently and will not come back to the court. 

If there is no agreement between the parties for reference to arbitration, the court cannot refer the matter to arbitration under section 89 of the Code. This is evident from the provisions of AC Act. A court has no power, authority or jurisdiction to refer unwilling parties to arbitration, if there is no arbitration agreement. This Court has consistently held that though section 89 of the Code mandates reference to ADR processes, reference to arbitration under section 89 of the Code could only be with the consent of both sides and not otherwise."

Supreme Court, in the matter of Kerala State Electricity Board and Anr. Vs. Kurien E. Kathilal and Anr. (MANU/SC/0231/2018) held that the High Court should not have referred the parties to arbitration without a joint memo or a joint application of the parties, when there was no arbitration agreement between the parties. Thus, in the absence of an arbitration agreement between the parties, a written consent of parties by way of joint memo or joint application is necessary for the court to refer the parties to arbitration. Oral consent given by the counsel of the parties is not sufficient for the reference of the parties to arbitration.

Conclusion:

In the absence of an arbitration clause in the agreement, the parties to a suit may opt for arbitration. However, the parties must enter into a written joint agreement, which can be in the form of a joint memo, joint application, or joint affidavit before the court. Only then the court can refer the case to arbitration.

Reference:

https://www.mondaq.com/india/arbitration--dispute-resolution/695360/if-there-is-no-arbitration-agreement-between-the-parties-the-court-cannot-refer-the-parties-to-arbitration-without-a-joint-memo-or-written-application-by-the-parties