The Supreme Court on September 07, 2022 in the matter of Babanrao Rajaram Pund v. Samarth Builders & Developers held that an arbitration clause has to be given effect even if it does not expressly state that the decision of the arbitrator will be final and binding on the parties and that the deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.

In the instant matter an appeal was filed against an order of the High Court dismissing an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) on the ground that that the arbitration clause of an agreement lacked essential ingredients of a valid arbitration agreement as it does not mandate that the decision of the arbitrator will be final and binding on the parties. Thus, the issue raised before the Supreme Court was whether an arbitration clause not mandating the decision of the arbitrator final and binding on the parties constitutes a valid arbitration clause for the purpose of invoking powers under Section 11 of the Act?

The court observed that Section 7 of the A&C Act does not mandate any particular form for the arbitration clause. The essential elements of an arbitration agreement are as follows: (1) There must be a present or a future difference in connection with some contemplated affair. (2) There must be the intention of the parties to settle such difference by a private tribunal. (3) The parties must agree in writing to be bound by the decision of such tribunal. (4) The parties must be ad idem. It was further observed that

“It is thus imperative upon the courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them. The intention of the parties that flows from the substance of the Agreement to resolve their dispute by arbitration are to be given due weightage. It is crystal clear to us that Clause 18, in this case, contemplates a binding reference to arbitration between the parties and it ought to have been given full effect by the High Court.”

Thus, the court held that even if the subject-clause lacks certain essential characteristics of arbitration like “final and binding” nature of the award, the parties have to abide by the decision of the tribunal if the same have evinced clear intention to refer the dispute to arbitration.