INTERPRETING DISPUTE RESOLUTION CLAUSES – A Liberal view
Keerthana B – Student Intern, Dispute Resolution Practice
While considering commercial contracts and the business relationships borne out of them, on certain occasions, parties to the contract or agreement continue their business relationship even after the formal expiry of its term. In such scenarios, there is often a conundrum on if and could the parties be held accountable to fulfil their obligations under the continuous business relationship, despite the formal expiry of the term of the Contract and the mode of dispute resolution to be adopted in the scenario that the said Contract has an Arbitration clause.
The question concerning the arbitrability of the dispute is often debated as parties contest the arbitrability of the disputes that arise after the term of the Contract, as being outside the ambit of the Arbitration clause contained therein and hence non-arbitrable. This article discusses in brief the validity of such disputes that arise after the period mentioned in the Contract and the implications in the context of being non-arbitrable.
Examining the intent of the Agreement and the parties to submit to Arbitration
In commercial arrangements, it is suggested that before the Courts begins to adjudicate on the substantial question of whether or not the dispute comes within the term period prescribed in the Agreement, it should endeavour to examine the true intent of the parties that existed during the time of signing of the Agreement. If an Agreement contains an arbitration resolution clause, it would be correct to infer that the parties have collectively decided to submit their disputes arising out of the provisions of the Agreement to be arbitrated by a competent arbitrator. The role of Alternative Dispute Resolution mechanisms (“ADR mechanisms”) in the context of commercial agreements and businesses must be prodded upon. The economical and efficient methods of ADR mechanisms ensure that commercial disputes involving huge sum of monies and complex technicalities can be resolved expeditiously which would otherwise potentially take years to be decreed. Hence, to preserve the commercial nature of the business and to ensure further monetary losses are not met, ADR mechanisms are considered to be the preferred mode of dispute settlement for commercial disputes.
In this context, when parties enter into a commercial arrangement where ADR is elected to be the mode of dispute resolution by the parties at the time of entering into a binding agreement, such contracts ought to be read in favour of arbitration. Even the Court have reinforced the said interpretation in numerous cases such as in the case of Govind Rubber Ltd. v. Louids Dreyfus Commodities Asia (P)Ltd (1), wherein it was held that “a commercial document having an arbitration clause has to be interpreted in such a manner as to give effect to the agreement rather than invalidate it”. This judgement was based on the precedent set in the case of Astro VencedorCompaniaNaviera S.A. v. Mabanaft GmbH (2), where the Court of Appeal urged that “that the court should, if the circumstances allow, lean in favour of giving effect to the arbitration clause to which the parties have agreed”.
Further, the Court ought to comprehensively read the Arbitration clause, to understand the kinds of disputes that the parties have decided to submit to Arbitration. In cases where arbitration clauses are all encompassing, reading as “Any and all disputes arising out or in connection with or surrounding the subject matter of this Agreement…shall be referred to Arbitration” and would require the parties to fall back on the Contract and the clauses therein to resolve disputes or ascertain the rights and obligations of the parties, then the disputes falling outside the term of the Contract, ought to be read as being arbitrable.
Further, even in scenarios where the parties continue their business dealings in accordance with the contractual arrangement, on the same terms, mode and manner, even after the formal expiry of the “Term” of the Contract, then the dispute pertaining the obligations under the contract or any period thereafter ought to be brought under the all-encompassing ADR clause of Contract, and tilt towards resolution by the said mode and manner of dispute resolution.
Arguendo, a dispute arises between the parties to the Contract whose term has ended formally, and the parties have failed/omitted to renewed the Contract, but continue to act on the same terms, the said disputes ought to be interpreted in favour of enabling the parties to resort to the mode of dispute resolution agreed to under the Contract, despite its formal expiry. This is for the reason that the parties carried out the continual obligations set forth under the Contract, long after term mentioned under the Contract and having not changed the business arrangement, the intent of resolution by ADR also survives. Further, since the underlying rights and obligations of the dispute stem from the clauses of the said Contract, the parties must eventually fall back on the clauses of the Contract including the clause for dispute resolution by ADR Mechanism under the Contract.
It must however be noted that this liberal interpretation would be effective only if the dispute resolution clause is broad enough to cover all the aspects, as discussed above.
When the Agreement continues to be executed after the term
When it comes to commercial agreements such as a Dealership Agreement, franchisee agreement etc, the obligations relating to the subject matter of these agreements survive the formal expiry of the “Term of the Agreement.” For instance, scenarios where the Agreement governs obligations that would have a continuing effect, such as warranties, post-sales servicing, incentives, rewards, payment of royalties etc. When the nature of business is continuing and the obligations arising out of such an Agreement has surviving obligations, and when such obligations continue to be performed by the parties to the Contract, even after the formal expiry of the term of the Agreement, it ought to be considered as an implied consent by way of conduct on their part to continue to be bound by the all the obligations, rights, duties and mode of dispute resolution, envisaged under the Agreement.
This view has been reiterated by the Courts as well and it has been held that when the original agreement has expired, but the parties carried out business on the same terms, it can be concluded that the agreement has been renewed impliedly. The conduct of the parties, carrying out business between them, until a dispute arose between them on the same condition and terms, as agreed in the original agreement reinforced the fact that the agreement has been mutually renewed(3). What ought to be observed is if there existed an element of mutuality between the parties and that the parties continued to claim and act as envisaged in the Agreement, even after its formal expiry.
According to the doctrine of implied terms, it has been established that even after the formal expiration of an agreement containing an arbitration clause, the arbitration agreement can persist as an implied term within the ongoing relationship between the parties(4). The Court have also been careful in noting that the implied continuation of the terms of the agreement, and the consequent validity of the arbitration clause therein, would be dependent on the facts and circumstances of each case.
Hence, in cases, where the parties have consented impliedly by way of conduct or otherwise to be bound by the terms of the Contract, in such cases, the scope and applicability of the dispute resolution clause ought not to be challenged on the ground that the Contract was not renewed. If the said interpretation and practice is permitted the intent of the parties to be bound by the same business arrangement, and resolving disputes through ADR mechanisms as being quick and efficient modes of dispute resolution, would stand defeated. This could also lead to multiplicity of proceedings despite the parties deriving their rights from the same Contract and a possibility of conflicting finding by two different forums of adjudication.
Hence, on a coherent and conjoint reading of the intent of the commercial arrangements, ADR Mechanisms and judicial interpretations, it is evident that the Courts have always been in favour of validating Arbitration Agreements, if it meets the requisites under the Arbitration and Conciliation Act, 1996 and if the subject matter of the Agreement is arbitrable in nature. It is hence suggested that in cases where in an agreement, the dispute resolution clause is all encompassing, the nature of business has obligations that survive the term of the contract, and the parties continued to act on same terms as that the contract even after the formal expiry of the term of the Agreement, any and all disputes arising out of the subject matter of the Agreement ought to be arbitrated for the reason that parties fall back on the expired Contract, having ADR as a dispute resolution mechanism, to ascertain their rights and obligations.
References.
- Govind Rubber Ltd. v. Louids Dreyfus Commodities Asia (P)Ltd; (2015) 13 SCC 477
- Astro VencedorCompaniaNaviera S.A. v. Mabanaft GmbH ; [1971] 1 Lloyd’s Rep 502
- M/S. The Waterbase Ltd vs Mrs. Madumita Giri; MANU/TN/7021/2021
- M/s Roshin Lal Gupta & Sons (P) Ltd V/s Delhi Tourism & Transportation Development Corporation & Anr; 2009 SCC OnLine Del 502