1. BACKGROUND OF THE CASE

In the recent decision of Alchemist Hospitals Ltd. v. ICT Health Technology Services India Pvt. Ltd.¹ , the Hon’ble Supreme Court of India addressed the issue whether a particular clause in a commercial contract, “Clause 8.28”, could be treated as a valid arbitration agreement under Section 7 of the Arbitration and Conciliation Act, 1996 (“the Act”). Companies often insert “dispute-resolution clauses” in their contracts using words like negotiation, mediation, and arbitration, without clearly defining whether they truly intend to submit disputes to arbitration. This judgment highlights how loosely drafted clauses can create confusion, delay, and litigation, defeating the purpose of dispute resolution mechanisms. In the present case, the Alchemist Hospitals (‘The Appellant’) had approached the Hon’ble Supreme Court after the Punjab & Haryana High Court refused to appoint an arbitrator under Section 11(6) of the A&C Act.

2. FACTS OF THE CASE

The Appellant is a private healthcare institution. On 1 November 2018, the Appellant entered into a “Software Implementation Agreement” with the Respondent, “ICT Health Technology Services”, a tech company specialising in healthcare software.

Under this agreement, the Respondent agreed to implement its proprietary hospital management product “HINAI Web Software”, a software designed for the purpose of billing, diagnostics, patient management, and managing hospital operations.

Initially, the Appellant stated that the software, after the implementation, started facing several issued, which lead to delays and technical failures such as system slowdown, the billing modules malfunctioned, and reports did not integrate properly.

The Respondent then agreed to attempt a second implementation. The software was again made and implemented on 1 January 2020. But the Appellant was still facing operational issues, and the Appellant eventually stopped using the software on 1 April 2020.

The Appellant then, invoking clause 8.28 of the agreement, requested the Respondent through email for mediation. The Respondent requested for cooperation and suggesting that the project could still be revived if one final trial were undertaken.

Finally, on 29 June 2020, the Appellant sent a formal notice under Sections 11 and 21 the Act, proposing the appointment of a sole arbitrator. The Respondent acknowledged receipt of the notice, then responded by requesting another attempt to make the project functional. The Appellant then approached the Punjab & Haryana High Court by filing a petition under Section 11(6) seeking the appointment of an arbitrator.

3. HIGH COURT’s DECISION

The Hon’ble High Court dismissed the application, holding that Clause 8.28 did not amount to an arbitration agreement. The clause, according to the High Court, the clause only provided a three-step internal resolution mechanism: First, negotiation between senior management; Second, a meeting between the Chairman of both the companies, described as “mediation”; and Lastly, if nothing worked within fifteen days, the complaining party could then go to court.

“Clause 8.28 of the Agreement — The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives, who have authority to settle the controversy and who are at a higher level of management, than the persons with direct responsibility for administration of this Agreement. If the matter is not resolved by negotiation pursuant to paragraph above, then the matter will proceed to mediation as set forth below:

Any dispute, controversy or claim arising out of or relating in any way to the Agreement/the relationship, including without limitation, any dispute concerning the construction, validity, interpretation, enforceability or breach of 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 demand for arbitration should be made within a reasonable time (maximum 60 days) after the dispute or matter in question has arisen.”

It was observed that although the clause repeatedly used the word “arbitration,” but it was loosely drafted and without any intention to create a binding adjudicatory process. The Hon’ble High Court therefore refused to appoint an arbitrator under Section 11(6), holding that the clause did not amount to a valid arbitration agreement.

Aggrieved by the High Court’s judgment, the Appellant filed a Special Leave Petition before the Hon’ble Supreme Court.

4. ISSUE

• Whether Clause 8.28 of the Agreement can be considered to be a valid arbitration agreement under the A&C Act?

SUPREME COURT’s ANALYSIS

1. Interpretation of Section 7 of the A&C Act

The Hon’ble Supreme Court explained that Section 7 of the Act provides three essential requirements to satisfy the essential requirements of the arbitration agreement:

• Existence of an agreement to submit disputes to arbitration
• The disputes must arise from a defined legal relationship
• The agreement must be in writing

In the present case, the main issue lies with the first requirement, under section 7 of the Act i.e., whether the parties have agreed to have the disputes resolved through arbitration in terms of clause 8.28 of the Agreement. The Hon’ble Supreme Court emphasized that arbitration is a form of contract and depends entirely on party autonomy. Thus, unless the parties clearly intended to arbitrate, courts cannot refer parties for arbitration.

To clarify what constitutes a valid Arbitration Agreement, the Hon’ble Supreme Court referred to its landmark ruling in K.K. Modi v. K.N. Modi,²wherein the Supreme Court laid down the essential elements for determining whether parties intended submit their disputed to arbitration. These include:

• The decision of the tribunal must be binding on the parties
• The Jurisdiction of the tribunal to decided by the consent of the parties
• The tribunal must decide substantive rights of the parties.
• The tribunal must be impartial and fair to both sides
• The agreement to arbitrate must be enforceable in law
• The tribunal must decide disputes that is already formulated at the time of reference.

The Court then relied upon the case of Jagdish Chander v. Ramesh Chander,³wherein the Hon’ble Supreme Court held that “the intention of the parties to enter into an arbitration agreement is to be understood from the language of the agreement itself” thus, mere reference to “arbitration” is not enough. It was observed that if a clause contains expressions that dilutes or negates the binding nature of arbitral adjudication or allows parties to approach civil courts directly then it cannot be treated as a valid arbitration agreement. In the present case, Clause 8.28 explicitly permitted the disputing party to seek remedies before civil courts “if the dispute remained unresolved within fifteen days”. This, by itself, was fundamentally inconsistent with a binding arbitration process.

The Hon’ble Apex Court also considered its ruling in case of Mahanadi Coalfields v. IVRCL AMR Joint Venture⁴ where it held that mere use the word “arbitration” in the title of the clause should not be considered as a valid arbitration agreement under Section 7 of the Act.

Based on the above precedents, the Hon’ble Supreme Court concluded that that mere use of the word “arbitration” in a clause of an agreement is not a valid arbitration agreement, as the act acknowledges the existence of the arbitration agreement based on the substance and the intention of the parties.

2. Whether the parties intended to arbitrate or not?

The Hon’ble Supreme Court then examined whether Clause 8.28 of the Agreement reflected the parties intention to arbitrate. Relying upon the case of Bangalore Electricity Supply Co. Ltd. v. E.S. Solar Power⁵ the Court reiterated that the intention of the parties must be understood from the language used in the contract.

The Hon’ble Supreme Court is of opinion that is that there is no indication that the proposed “arbitration” was supposed to be final and binding. The individuals designated as “arbitrators” under the clause are the respective Chairmen of the parties themselves. The clause expressly allowed the complaining party to “seek remedies through the courts of law” if the dispute was not resolved within fifteen days. Such an unrestricted right to litigate is fundamentally inconsistent with the concept of binding arbitration. The Hon’ble Court held, that the arbitration agreement should have an element of the nature of finality to refer matters to arbitration.

3. The non-denial of the arbitration agreement by the respondent in the correspondence between the parties post notice?

It was argued by the appellant that since the respondent did not explicitly deny the existence of an arbitration agreement in its response to the notice, this should support the that an arbitration agreement existed.

The Hon’ble Supreme Court observed that there has indeed been no denial of the existence of an arbitration agreement by the respondent in its response to the notice issued by the appellant. However, here, when there has indeed been no arbitration agreement in the first place, therefore, subsequent correspondence between the parties cannot displace the original intention.

The Hon’ble Supreme Court therefore, dismissed the petition and concluded that the Clause does not reflect an intention to refer disputes to arbitration and hence cannot be considered as a valid arbitration agreement.

CONCLUSION

The Supreme Court’s decision stands as an important precedent on how arbitration clauses must be interpreted, reinforces party autonomy and protects the integrity of the arbitral framework. The ruling clarifies that:

• A Clause is not a valid arbitration agreementif it lacks a clear, binding intention to submit disputes to an arbitral process.
• Internal mechanisms such as negotiation and mediation structure between company executives and the Chairman, without any neutrality, finality, or enforceability cannot be construed as a valid arbitration agreement.
• The mere presence of the word “arbitration” is not determinative courts must look at the substance of a clause.
• Businesses shall not intentionally convert internal dispute resolution steps into arbitration.

Analysis done by: Shubhangi Dengre (Associate)