Mere Use of the Word ‘Arbitration’ Does Not Create an Arbitration Agreement Unless Parties Clearly Intend To

Legal Insight: A clear intention is essential for forming an arbitration agreement, as highlighted by adrEdge, emphasizing that merely using the term 'arbitration' isn't sufficient.

Introduction

Arbitration, as a mechanism of alternate dispute resolution, derives its strength solely from the consent and intention of the contracting parties. The recent Supreme Court judgment in M/s Alchemist Hospitals Ltd. v. M/s ICT Health Technology Services India Pvt. Ltd. (decided on 6 November 2025 by a Bench comprising Justice Dipankar Datta and Justice Augustine George Masih) has once again reaffirmed this cardinal principle. The Court held that mere use of the word “arbitration” in a contractual clause does not automatically constitute a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 (“A&C Act”). What is paramount is the clear and unambiguous intention of the parties to refer disputes to a private, impartial tribunal whose decision will be final and binding.

This decision is particularly significant in the context of commercial agreements where dispute resolution clauses are often loosely drafted or ambiguously worded, resulting in avoidable jurisdictional challenges. The ruling underscores the necessity for precision, intent, and finality in arbitration clauses and offers vital guidance for both drafters and practitioners in arbitration law.

Background of the Case

The dispute arose out of a Software Implementation Agreement dated 1 November 2018 between the appellant, Alchemist Hospitals Ltd., and the respondent, ICT Health Technology Services India Pvt. Ltd. Under the agreement, ICT was to implement its proprietary software “HINAI Web” at the appellant’s hospital. The implementation faced technical failures and operational issues, leading to disputes regarding system functionality and performance.

Following repeated unsuccessful attempts to rectify the software defects, the appellant invoked Clause 8.28 of the agreement, titled “Arbitration,” and requested mediation through senior management. The appellant subsequently issued a notice under Sections 11 and 21 of the A&C Act, proposing the appointment of an arbitrator. The respondent’s reply did not agree to arbitration but suggested another trial of the project.

Aggrieved by the lack of response, the appellant approached the Punjab & Haryana High Court under Section 11(6) for appointment of a sole arbitrator. The High Court dismissed the petition, holding that Clause 8.28 did not amount to an arbitration agreement. This led to an appeal before the Supreme Court.

Clause 8.28: The Disputed Provision

Clause 8.28, although titled “Arbitration,” provided for a multi-tier dispute resolution mechanism: first, negotiations between senior executives; second, mediation between the Chairmen of both parties described as “Arbitrators”; and finally, the option to approach courts if disputes were not resolved within fifteen days. The clause also required that a demand for “arbitration” be made within sixty days of the dispute arising.

The primary question before the Court was whether this clause demonstrated a clear intention to submit disputes to arbitration, thereby satisfying the requirements of Section 7 of the A&C Act.

Issue Before the Supreme Court

The principal issue was whether Clause 8.28 constituted a valid and enforceable arbitration agreement under Section 7 of the A&C Act. Specifically, the Court had to determine whether the use of the term “arbitration” and “arbitrators” in the clause indicated the parties’ intention to refer disputes to a binding arbitral process, or whether it was merely an internal mechanism for negotiation and mediation prior to litigation.

Legal Framework and Precedents

Section 7 of the A&C Act defines an arbitration agreement as one where parties agree to submit disputes to arbitration concerning a defined legal relationship, whether contractual or not. The Supreme Court examined established jurisprudence on what constitutes a valid arbitration agreement, reiterating principles from K.K. Modi v. K.N. Modi (1998) 3 SCC 573, Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719, and Mahanadi Coalfields Ltd. v. IVRCL AMR JV (2022 SCC OnLine SC 960).

In K.K. Modi, the Court laid down essential attributes of arbitration: a binding decision by a neutral adjudicator, jurisdiction deriving from consent, the existence of a formulated dispute, and a process that includes an opportunity to present evidence and arguments. Jagdish Chander further clarified that if a clause allows parties to approach courts after the so-called “arbitration” process, it cannot be considered a true arbitration agreement, as finality is a sine qua non for arbitration.

Additionally, in Bangalore Electricity Supply Co. Ltd. v. E.S. Solar Power Pvt. Ltd. (2021) 6 SCC 718, the Court emphasized that the parties’ intention to arbitrate must be inferred from the language used, read in context and purpose. Ambiguity in a dispute resolution clause will not be construed as a valid arbitration agreement.

Court’s Analysis

The Supreme Court analyzed Clause 8.28 meticulously and observed that although the word “arbitration” appeared multiple times, the clause lacked essential elements of a true arbitration agreement.

First, the clause expressly allowed the complaining party to seek remedies before courts of law if disputes remained unresolved within fifteen days of the “arbitration” between Chairmen. This provision effectively negated any final or binding nature of the process. The Court reiterated that arbitration must culminate in a decision binding on both parties; an option to litigate post-process shows that the mechanism was not intended as arbitration but as an internal settlement procedure.

Second, the “arbitrators” were identified as the Chairmen of the respective companies. Such a mechanism does not satisfy the neutrality requirement envisaged under Sections 12 and 18 of the A&C Act. Arbitration presupposes an impartial adjudicator, not representatives of the disputing parties themselves.

Third, the Court distinguished the precedents relied upon by the appellant, particularly Powertech World Wide Ltd. v. Delvin International General Trading LLC (2012) 1 SCC 361 and Visa International Ltd. v. Continental Resources (USA) Ltd. (2009) 2 SCC 55, noting that in those cases, the respondents had expressly admitted to arbitration or had corresponded in a manner that manifested mutual consent to arbitrate. In the present case, the respondent’s correspondence showed no such consent but merely reflected a willingness to renegotiate or reattempt implementation.

Court’s Findings and Ratio Decidendi

The Court held that Clause 8.28 lacked the core attributes of an arbitration agreement. There was no clear intention to refer disputes to arbitration, no provision for a binding decision, and no neutral arbitral forum. The process contemplated negotiation and mediation, not adjudication.

Consequently, the Court concluded that Clause 8.28 did not meet the requirements of Section 7 of the A&C Act. Upholding the High Court’s view, the Supreme Court dismissed the appeal, leaving the appellant free to pursue remedies before competent civil courts. The Court also observed that if limitation issues arose, the civil court could consider exclusion under Section 14 of the Limitation Act, 1963.

Judicial Significance

This judgment reinforces the fundamental principle that arbitration is a product of consent, not compulsion or assumption. Drafting precision is vital, especially in commercial contracts where loosely worded clauses can create procedural hurdles. The Supreme Court’s insistence on finality and intention aligns with its consistent jurisprudence from K.K. Modi through Mahanadi Coalfields, ensuring that arbitration remains a consensual and binding alternative to litigation.

The case also highlights that titles such as “Arbitration” in a clause are immaterial unless supported by substantive language reflecting intent to arbitrate. The ruling serves as a warning against superficial drafting and reaffirms that courts will not stretch interpretation to fabricate an arbitration agreement where none was intended.

Conclusion and Author’s Opinion

The judgment in Alchemist Hospitals Ltd. serves as a vital precedent in maintaining the sanctity of arbitration as a consensual dispute resolution mechanism. The Supreme Court’s approach is commendable for reinforcing the boundaries between negotiation, mediation, and arbitration. It ensures that arbitration is reserved for cases where parties have consciously chosen a private, final, and binding adjudicatory mechanism.

In the author’s opinion, this decision is a timely reminder for corporate counsels, arbitrators, and drafting professionals to pay scrupulous attention to the language and structure of dispute resolution clauses. The case underlines the importance of clarity in defining the process, neutrality of arbitrators, and the finality of awards. Only when these essential features are present can arbitration truly serve as an effective and reliable mechanism for commercial justice.

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