Arbitration in Commercial Contracts: Supreme Court’s Ruling on Zhejiang Bonly vs. Jade Elevator

The case of M/s. Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. vs. M/s. Jade Elevator Components was a commercial dispute regarding the appointment of an arbitrator under the Arbitration and Conciliation Act, 1996. The Supreme Court’s judgment on September 14, 2018, addressed whether a contractual clause providing for both arbitration and court litigation constituted a valid arbitration agreement.

Background of the Case

The dispute arose between two companies:

• The Petitioner: Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd., a company incorporated under the laws of China, engaged in the business of manufacturing and exporting elevator guiderails and accessories.
• The Respondent: Jade Elevator Components, an Indian partnership firm based in Ahmedabad, Gujarat, supplying elevator components for modernization and new designs.

The parties had entered into a Commission Processing Contract on September 11, 2014, for the supply of elevator components. However, disputes arose during the execution of the contract.

Contractual Dispute and Invocation of Arbitration

As per the contract, disputes were to be resolved through consultation, and if unresolved, they could be referred to arbitration or court. The key clause in the contract stated:

“15. Dispute handling: Common processing contract disputes, the parties should be settled through consultation; consultation fails by treatment of to the arbitration body for arbitration or the court.”

When disputes arose, Zhejiang Bonly invoked arbitration and appointed Justice V.S. Agarwal, a retired Judge of the Delhi High Court, as the sole arbitrator. The company sent a notice to Jade Elevator on March 30, 2018, seeking their consent for arbitration.

Jade Elevator received the notice on March 31, 2018, and responded on April 5, 2018, refusing to agree to arbitration, arguing that:

• The claims were beyond the provisions of the contract.
• The dispute resolution clause allowed for either arbitration or litigation in court, not a mandatory arbitration.

Following this refusal, Zhejiang Bonly filed an arbitration petition before the Supreme Court under Section 11(5) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitral tribunal.

Arguments of the Parties

Petitioner’s Arguments (Zhejiang Bonly)

The petitioner contended:

• The dispute resolution clause provided two options—arbitration or court proceedings—but did not exclude arbitration.
• The intention of the parties was to allow arbitration, as the clause specifically mentioned an “arbitration body.”
• The rejection of arbitration by the respondent was invalid as there was no mandatory preference for litigation over arbitration.

Respondent’s Arguments (Jade Elevator)

The respondent countered:

• The contract did not contain a clear and binding arbitration clause.
• The phrase “arbitration or the court” meant that litigation in a court was equally valid.
• The petitioner had no right to unilaterally impose arbitration without the respondent’s consent.

Supreme Court’s Observations

The Supreme Court examined the language of the contract and noted:

• The clause provided two dispute resolution options—arbitration or court litigation.
• The presence of an arbitration option indicated that the parties contemplated arbitration as a valid means of resolving disputes.
• The choice between arbitration and litigation lay with the parties, and since the petitioner had invoked arbitration, the respondent could not refuse it.
• Referring to INDTEL Technical Services Private Limited vs. W.S. Atkins Rail Limited (2008) 10 SCC 308, the Court reaffirmed that the intention of the parties to arbitrate is critical in determining the validity of an arbitration clause.

Final Judgment

Based on these findings, the Supreme Court ruled:

• The petition was allowed, confirming that the contract contained a valid arbitration clause.
• Justice Prakash Prabhakar Naolekar, a former Supreme Court judge, was appointed as the sole arbitrator.
• The arbitration proceedings were to be conducted as per the Arbitration & Conciliation (Amendment) Act, 2015.
• The arbitrator was directed to complete the proceedings within a reasonable time.
• The Registry was instructed to send a copy of the judgment to the appointed arbitrator.

Implications of the Judgment

This Supreme Court ruling has significant implications for commercial contracts:

• Interpretation of Dispute Resolution Clauses: If a contract provides for both arbitration and court litigation, parties cannot arbitrarily reject arbitration once invoked.
• Clarity in Arbitration Agreements: Businesses must ensure that arbitration clauses explicitly state whether arbitration is mandatory or optional.
• Role of Party Autonomy: If a party opts for arbitration under a dual-option clause, the opposing party cannot deny it unless there is a clear contractual bar.
• Encouragement of Alternative Dispute Resolution: The ruling strengthens arbitration as a preferred method of resolving commercial disputes efficiently.

This judgment reaffirms the principle that arbitration-friendly interpretations should be preferred in cases of ambiguity in dispute resolution clauses.

Petitioner Name: M/s. Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd..
Respondent Name: M/s. Jade Elevator Components.
Judgment By: Justice Dipak Misra, Justice A. M. Khanwilkar, Justice D.Y. Chandrachud.
Place Of Incident: Ahmedabad, Gujarat.
Judgment Date: 14-09-2018.

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