Delhi High Court Holds 'May Be Referred To Arbitration' Clause Binding Where Agreement Prescribes Binding Process

The Delhi High Court has held that a dispute resolution clause in an arbitration agreement between Lifewell Diagnostics Private Limited and Micron Laboratory, which states that disputes “may be referred to arbitration”, can constitute a valid and binding arbitration agreement where the same clause prescribes a detailed procedure for arbitration and provides that the arbitral award shall be final and binding.

A single bench of Justice Mini Pushkarna observed that the use of the word “may” does not render the clause non-binding when the clause, read as a whole, reflects a clear intention to arbitrate.

“The dispute resolution clause, by elucidating the detailed procedure for conduct of arbitration and using the terminology that, 'arbitration shall be conducted as follows', as also by stipulating the governing law and making the arbitration award final and binding on the parties, strongly points towards the unambiguous intention of the parties to refer the disputes to arbitration.”

The Court further held:

“Mere use of the prefix 'may', which is followed by a detailed binding adjudicatory mechanism, shall not make the dispute resolution clause in the present case as a non-binding Arbitration Clause.”

The petition was filed under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of a sole arbitrator on the basis of disputes having arisen between Lifewell Diagnostics Private Limited and Micron Laboratory in relation to a Revenue Sharing Agreement dated September 1, 2023.

Under the agreement, Lifewell Diagnostics Private Limited was granted the right to operate the pathology laboratory of Micron Laboratory at Green Park, New Delhi.

Lifewell Diagnostics Private Limited said the dispute stemmed from Micron Laboratory's alleged failure to meet its payment obligations, leaving dues of ₹23,93,916 outstanding.

Micron Laboratory, on its part, maintained that the agreement had already been brought to an end on May 3, 2024. It said both sides had agreed to treat their accounts as settled, with neither party retaining any claims.

It also challenged the very basis of the proceedings, arguing that Clause 29 did not amount to a binding arbitration agreement. According to Micron Laboratory, the use of the phrase “may be referred to arbitration” showed there was no mandatory intention to arbitrate.

Rejecting this contention, the Court held that the intention of the parties must be gathered from a comprehensive and harmonious reading of the clause and not from isolated expressions.

The court noted that although the clause uses the word “may” while referring disputes to arbitration, it also lays down a detailed procedure for the conduct of arbitration, stipulates that the award shall be final and binding, and specifies the seat and other aspects of the arbitral process.

The Court found that the clause, read as a whole, reflects a clear intention to resolve disputes through arbitration and meets the requirements of a valid arbitration agreement under Section 7 of the Act.

It also made it clear that imperfect wording or drafting cannot defeat what the parties plainly intended, especially in commercial arrangements. Arbitration clauses, the Court noted, should be interpreted in a manner that makes them workable rather than ineffective.

On the issue of pre-arbitral steps, the Court observed that processes such as amicable settlement are only directory in nature and do not stand in the way of appointing an arbitrator once disputes have arisen.

In view of this, advocate Amrit Pal Gambhir was appointed as the sole arbitrator to adjudicate the disputes between Lifewell Diagnostics Private Limited and Micron Laboratory.

Both Lifewell Diagnostics Private Limited and Micron Laboratory have been asked to approach the arbitrator within two weeks. The Court clarified that all issues, including arbitrability and the merits of the claims, remain open for consideration before the tribunal.

For Petitioner (Lifewell Diagnostics Private Limited): Advocates Nawaz Sherif, Rishabh, Arun Prakash.

For Respondent (Micron Laboratory): Senior Advocate Akshay Makhija; Aayushman Shukla.