In this case, the Supreme Court of India examined a crucial question concerning the validity of an arbitration clause under the Arbitration and Conciliation Act, 1996 (A&C Act). The judgment clarifies the legal distinction between clauses that merely employ the term “arbitration” and those that genuinely constitute binding arbitration agreements under Section 7 of the Act. The decision reinforces the principle that mere terminology cannot substitute for intention—what matters is whether parties truly agreed to submit disputes to a private adjudicatory forum with binding effect.
This ruling continues the Court’s jurisprudence in cases such as K.K. Modi v. K.N. Modi (1998), Jagdish Chander v. Ramesh Chander (2007), and Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture (2022), underscoring that an arbitration agreement must be unambiguous in reflecting the parties’ intent to be bound by arbitral adjudication.
Factual Background
1. The Parties and the Agreement
Appellant: M/s Alchemist Hospitals Ltd., a private healthcare institution based in Panchkula, Haryana.
Respondent: M/s ICT Health Technology Services India Pvt. Ltd., a Bengaluru-based software company specialising in digital health-management systems.
On 1 November 2018, the appellant and respondent entered into a Software Implementation Agreement for the deployment of ICT’s proprietary “HINAI Web Software”—a hospital management system designed to streamline billing, patient records, diagnostics, and other operations.
2. The Arbitration Clause
Clause 8.28 of the Agreement was titled “Arbitration” and prescribed a multi-tiered dispute-resolution process:
“The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement by negotiation between executives… If the matter is not resolved, it will proceed to mediation… Any dispute arising out of or relating in any way to the Agreement… shall be resolved by arbitration through senior management comprising respective Chairmen of the two parties (Arbitrators). Should the dispute not be resolved within fifteen (15) days after arbitration, the complaining party shall seek remedies through the courts of law.”
The clause further stated that the “demand for arbitration should be made within sixty days” of the dispute arising.
Emergence of Dispute
The respondent began implementation of the HINAI software in November 2018. However, the appellant alleged persistent technical failures, including billing errors, slow processing, and incomplete integration of diagnostic modules.
A second implementation attempt in January 2020 also failed, and the appellant rolled back the system on 1 April 2020. On the same date, Alchemist invoked Clause 8.28, requesting mediation between the Chairmen of both companies. The respondent replied, seeking cooperation but proposing further trials rather than mediation.
Subsequently, on 29 June 2020, the appellant issued a notice under Sections 11 and 21 of the A&C Act, proposing the appointment of a sole arbitrator (two retired Chief Justices were suggested). ICT Health acknowledged receipt but, instead of concurring, proposed another round of project testing.
Proceedings Before the High Court
The appellant approached the Punjab and Haryana High Court under Section 11(6) of the A&C Act, seeking the appointment of an arbitrator.
The High Court dismissed the application, holding that Clause 8.28 was not a valid arbitration agreement because:
- The process described—negotiation, mediation, and finally approaching courts—lacked any element of binding adjudication.
- The so-called “arbitrators” were merely the Chairmen of the two companies, who could not act as neutral adjudicators.
- The clause explicitly allowed parties to approach courts if the matter was unresolved within 15 days, showing that the “arbitration” process had no finality.
Issue Before the Supreme Court
The central issue before the Supreme Court was:
- Whether Clause 8.28 of the Software Implementation Agreement constitutes a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996.
Legal Framework and Precedents
Section 7 of the Arbitration and Conciliation Act, 1996
Section 7 defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes that have arisen or may arise between them concerning a defined legal relationship.
The Court emphasised that:
- An arbitration agreement must clearly indicate an obligation to refer disputes to arbitration.
- It need not follow a particular form, but it must reflect consent to binding adjudication by a private tribunal.
Relevant Judicial Precedents
- K.K. Modi v. K.N. Modi (1998) 3 SCC 573 – The Court identified six attributes of a valid arbitration agreement, including the requirement that the tribunal’s decision must be binding and independent.
- Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719 – The Court held that mere use of the term “arbitration” does not create an arbitration agreement if the clause merely contemplates the possibility of arbitration without a binding obligation.
- Mahanadi Coalfields Ltd. v. IVRCL AMR JV (2022) 20 SCC 636 – A clause titled “Settlement of Disputes/Arbitration” was held not to be an arbitration clause when the substantive content did not indicate a reference to arbitration.
- Bangalore Electricity Supply Co. Ltd. v. E.S. Solar Power (P) Ltd. (2021) 6 SCC 718 – The Court reiterated that the intention of the parties must be gathered from the words used, and courts must not read into a contract what is not expressed.
These decisions collectively formed the foundation for interpreting Clause 8.28.
Supreme Court’s Analysis
Justice Dipankar Datta, speaking for the Bench (also comprising Justice Augustine George Masih), undertook a detailed textual and contextual interpretation of Clause 8.28.
1. The Role of Party Autonomy
The Court reaffirmed that party autonomy is the cornerstone of arbitration. The Act is designed to give effect to the parties’ choice to resolve disputes privately rather than through courts. However, such autonomy must be expressed unequivocally—not presumed from loose language.
2. Elements of a Valid Arbitration Agreement
Referring to K.K. Modi and Jagdish Chander, the Court outlined that a clause qualifies as an arbitration agreement only if:
- It contemplates a binding decision by a private tribunal.
- The tribunal’s jurisdiction arises from consent.
- The process involves impartial and judicial determination.
- The tribunal’s decision is final and enforceable.
3. Examination of Clause 8.28
The Court noted that Clause 8.28 imposed a three-tier process: negotiation → mediation → arbitration (between Chairmen). However, the clause ended by explicitly allowing the complaining party to “seek remedies through the courts of law” if unresolved within 15 days.
This, the Court said, defeats the essence of arbitration. Arbitration implies finality and exclusion of ordinary civil jurisdiction, whereas the clause preserved the option of litigation.
4. Misuse of the Term “Arbitration”
The repeated use of the word “arbitration” in Clause 8.28 was found insufficient to transform it into an arbitration agreement. The Court reiterated that “mere use of the word ‘arbitration’ is not clinching or decisive” unless accompanied by an express intent to be bound by the arbitrator’s decision.
The clause, in substance, reflected only an internal settlement mechanism—a managerial-level attempt to amicably resolve disputes—rather than a private adjudication by an independent arbitrator.
5. Lack of Finality and Neutrality
Two critical deficiencies were identified:
Absence of Finality: The clause permitted recourse to courts after 15 days, implying that any decision by the Chairmen lacked binding force.
Lack of Neutrality: The designated “arbitrators” were the Chairmen of the two companies—interested parties without independence, violating the principle of impartiality under Section 12 and the Seventh Schedule of the A&C Act.
6. Correspondence Between Parties
The appellant argued that since the respondent did not deny the existence of an arbitration agreement in subsequent correspondence, it implied consent. The Court rejected this, clarifying that post-contractual conduct cannot create an arbitration agreement where none existed originally.
Cases like Powertech World Wide Ltd. v. Delvin International General Trading LLC (2012) and Visa International Ltd. v. Continental Resources (USA) Ltd. (2009) were distinguished because, in those cases, the correspondence clearly reflected a consensus ad idem to arbitrate—absent here.
Court’s Findings
After detailed examination, the Supreme Court held:
- Clause 8.28 is not a valid arbitration agreement under Section 7 of the A&C Act.
- The clause merely provides a structured process of negotiation and mediation, not arbitration.
- The absence of finality, neutrality, and binding effect makes the process non-arbitral.
Therefore, the High Court was correct in refusing to appoint an arbitrator under Section 11(6).
Decision
The Supreme Court affirmed the judgment of the Punjab and Haryana High Court and dismissed the appeal. However, it granted liberty to the appellant to seek remedies before the competent civil court.
Additionally, the Court clarified that if the appellant seeks exclusion of time spent in these proceedings under Section 14 of the Limitation Act, 1963, the concerned court may adjudicate that claim on the merits.
Each party was directed to bear its own costs.
Conclusion
The Supreme Court’s decision in M/s Alchemist Hospitals Ltd. v. M/s ICT Health Technology Services India Pvt. Ltd. is a significant reaffirmation of statutory precision and contractual intention in arbitration law. It underscores that arbitration is a creature of consent, and consent must be clear, conscious, and comprehensive.
Where a clause merely establishes a procedure for internal resolution, even if labelled “arbitration,” it cannot displace the jurisdiction of civil courts. The judgment thus protects the sanctity of arbitration by ensuring that only genuine, binding, and impartial agreements fall within its ambit.
The Court’s concluding note—granting liberty to approach civil courts with possible benefit under Section 14 of the Limitation Act—balances procedural fairness with substantive clarity.
Important Link
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