The Madras High Court on August 25, 2022 in the matter of Innovators Facade Systems Ltd. v. Larsen & Toubro Limited held that where the parties have agreed to give only supervisory powers to a third party with respect to the disputes arising between them, and a clause which does not disclose the intention of the parties to give any adjudicatory powers to the third party, does not qualify as an ‘arbitration agreement’, as defined under Section 2(1)(b) read with Section 7 of the Arbitration and Conciliation Act, 1996 (“A&C Act”).

In the instant matter a petition for appointment of a sole Arbitrator under Section 11 (6) of the A&C Act was filed before the court, after the petitioner invoked the relevant clause in the ‘Letter of Intent’ (LOI) signed by the parties, as a consequence of disputes between the parties. It was contented by the respondent that the relevant clauses contained in the LOI did not qualify as an ‘arbitration agreement’ within the meaning of Section 2(1)(b) read with Section 7 of the A&C Act since the use of the term ‘arbitration’ by itself does not make the clause an arbitration agreement. It was contented by the petitioner that the term ‘reference’ need not necessarily be mentioned in a clause for that clause to qualify as an arbitration agreement and that the two clauses, which provided for settlement of disputes through mutual discussion have to be read disjunctively.

The Court held that the adjudicatory process is an essential feature of arbitration, in contra-distinction to mediation, and hence, when there is nothing to demonstrate that the contracting parties intended to put an adjudicatory mechanism in place, an arbitration agreement cannot be said to exist. It was held that as per the provisions of Section 11(6A) of the A&C Act, the Court, while considering any application under Section 11(6) for appointment of an arbitrator, shall confine itself to the examination of the existence of an arbitration agreement and unlike Section 8 of the A&C Act where the court is statutorily required to examine whether a ‘valid’ arbitration agreement exists, Section 11 (6A) of the A&C Act does not refer to a ‘valid’ arbitration agreement.