The Hidden Risks in Business Contracts: Have You Checked Your Arbitration Clause?

 

The Hidden Risks in Business Contracts: Have You Checked Your Arbitration Clause?

By Abhishek Jat, Advocate

In the world of business, contracts are the backbone of commercial relationships. They define the rights, obligations, and remedies available to parties in case of disputes. However, one often overlooked aspect of contracts is the arbitration clause. A recent case before the Andhra Pradesh High Court highlights the critical importance of understanding and carefully drafting arbitration clauses to avoid unforeseen legal complications.

The Case at Hand: A Lesson in Arbitration Clauses

In M/s. Kranthi Grand DKNV Hospitalities vs. M/s. Manasa Estates and Hospitality Pvt. Ltd., the Andhra Pradesh High Court dealt with a dispute arising from a sub-lease agreement dated January 6, 2018. The agreement included a clause naming a specific arbitrator, Sri Venu Gottipati, to resolve any disputes between the parties.

The applicant, M/s. Kranthi Grand DKNV Hospitalities, alleged that the respondents had forcibly dispossessed them from the leased property, violating the terms of the agreement. When the applicant invoked the arbitration clause, they sought to appoint a different arbitrator, citing a lack of trust in the pre-named arbitrator. The respondents, however, opposed this move, insisting on adhering to the originally agreed arbitrator.

The court, in its ruling, emphasized the sanctity of arbitration clauses and upheld the appointment of the pre-named arbitrator. The judgment reiterated that courts should generally respect the parties’ agreement to appoint a specific arbitrator unless there is clear evidence of bias, partiality, or misconduct.

Key Legal Principles Highlighted by the Court

1. Respect for Contractual Agreements:
   The court relied on the Supreme Court’s decision in Indian Oil Corporation Limited vs. Raja Transport Private Limited, which held that arbitration clauses are a "package deal." Parties cannot cherry-pick parts of the clause they wish to follow while ignoring others. If the agreement names a specific arbitrator, courts will typically enforce that provision unless there are valid reasons to deviate.
2. Bias Claims Require Substantial Proof:
   The applicant’s claim that they distrusted the named arbitrator was deemed insufficient to override the arbitration clause. The court noted that mere distrust, without concrete evidence of bias or partiality, does not justify appointing a different arbitrator.
3. Exceptions to the Rule:
   The court acknowledged that deviations from the named arbitrator are permissible only in exceptional circumstances, such as when the arbitrator is unavailable or there is a reasonable apprehension of bias. However, these exceptions must be supported by credible evidence.

Business Takeaways: Protecting Your Interests

This case serves as a stark reminder of the hidden risks in business contracts, particularly in arbitration clauses. Here are some key takeaways for businesses:

1. Review Before You Sign:
   Always scrutinize the arbitration clause in your contracts. Ensure that the mechanism aligns with your business interests and that you are comfortable with the named arbitrator, if any.
2. Arbitration Means Commitment:
   Once you agree to an arbitration clause, courts will typically enforce it. Attempting to deviate from the agreed terms without valid reasons can lead to unfavorable outcomes.
3. Bias Claims Need Proof:
   If you suspect bias or partiality in a named arbitrator, gather substantial evidence to support your claim. Mere distrust or dissatisfaction will not suffice.
4. Time is Money:
   A well-structured arbitration clause can save businesses from prolonged and costly litigation. Ensure that the clause is clear, fair, and enforceable.

Conclusion: Don’t Wait for a Dispute

The Andhra Pradesh High Court’s ruling underscores the importance of proactive contract review. Arbitration clauses are not mere formalities; they are binding commitments that can significantly impact your business in the event of a dispute.

Don’t wait for a conflict to arise—review your contracts now to ensure that your arbitration mechanism is fair, enforceable, and aligned with your business goals. If in doubt, consult a legal professional to help you navigate the complexities of arbitration clauses and safeguard your interests.

 

References

1.      M/s. Kranthi Grand DKNV Hospitalities & Anr. v. M/s. Manasa Estates and Hospitality Pvt. Ltd. & Ors., Arbitration Application No: 62 of 2023, Andhra Pradesh High Court, decided on 20.02.2025.

2.      Northern Railway Administration v. Patel Engineering Co. Ltd., (2008) 10 SCC 240.

3.      Indian Oil Corporation Ltd. v. Raja Transport Pvt. Ltd., (2009) 8 SCC 520.

4.      The Arbitration and Conciliation Act, 1996 (as amended).