Party Autonomy or Judicial Construction? The Bombay High Court’s Take on Business Efficacy

Kashish Jumani*

Introduction: Opening Section 11(6A) Determinations To Business Efficacy

After Interplay, the scope of enquiry under Section 11(6A) of the Arbitration and Conciliation Act (hereinafter ‘the Act’) has been strictly limited, excluding a laborious or contested inquiry. However, even after such purported clarity, courts have taken varied approaches.

On 11 February 2025, in Lords Inn Hotels and Resorts v. Pushpam Resorts LLP, the Bombay High Court held that the business efficacy test applies while interpreting arbitration clauses and read an implied arbitration clause into the contract between the parties, despite the absence of any specific clause.

The Petitioner, Lords Inn Hotels and Developers Ltd. and Respondent No. 1, Pushpam Resorts LLP entered into a Hotel Franchisee and Management Agreement (‘the Agreement’). After certain disputes and differences between the parties, a termination notice was issued by Respondent No. 1. Subsequently, the Petitioner responded by denying the existence of a valid arbitration agreement in conformity with Section 7 of the Arbitration and Conciliation Act, 1996 (‘the Act’). Article XXIV of the Agreement i.e., the Governing Law and Jurisdiction Clause read as follows:

“This Agreement shall be governed and interpreted in accordance with the laws of India and subject to the provisions of Clause (Arbitration) below, the Parties submit to the exclusive jurisdiction of the courts at Mumbai, India.”

However, there was no provision titled ‘Arbitration’ or any conventional arbitration clause below. The Petitioner contended that Article XXIV was sufficient indication that parties intended to resolve their disputes through arbitration. In support of this, the Petitioner referred to Sections 23.3 and 28.8 of the Agreement, these marginally referred to the word ‘arbitration’. The Sections read as follows:

Section 23.3

“The determination, as to whether the portion of the Resort taken is an essential portion or not, shall be made by mutual agreement of the Company and the Operator, and in default of such agreement by reference to Arbitration pursuant to Article XXIV.”

Section 28.8

“Whether in a proceeding for injunctive relief or in arbitration, to the extent that the provisions of this Agreement do not violate the public policy or general principles of the legal system, this Agreement shall be governed by and construed in accordance with Indian Laws of land.” (Emphasis supplied)

In contrast, the Respondent contended that the Agreement does not contain a valid and enforceable arbitration clause. Article XXIV only provides for governing law and jurisdiction and provides that the jurisdiction of the courts of Mumbai would be subject to a clause on arbitration, but there is no arbitration clause in the Agreement.

On a combined reading of Sections 23.3 and 28.8 and Article XXIV of the Agreement, the Court held that the parties intended to refer disputes and differences to arbitration. Despite taking cognizance of the fact that Article XXIV refers to a non-existent arbitration clause and the evident and manifest ambiguity in the Agreement, the Court applied the ‘business efficacy test’ to reach its conclusion.

In applying the test, the Court examined the three previous drafts of the Agreement and negotiations between the parties. One of the drafts contained an express arbitration clause in Article XXV. This clause along with marginal inclusions of the word ‘arbitration’ in Sections 23.3 and 28.8 of the Agreement were, however, later replaced in a subsequent draft. The key fact, which turned the case in favour of the Petitioner here, was the marginal inclusions to ‘arbitration’ in Sections 23.3 and 28.8 and Article XXIV being re-introduced in the final draft. This re-introduction was deemed sufficient to show that the non-inclusion of the express arbitration clause signified drafting oversight, rather than intentional exclusion. Notably, the Court alluded to previous drafts and negotiations despite the presence of an Entire Agreement Clause in Section 28.5 of the Agreement.

The business efficacy test answers five questions: (a) is it reasonable and equitable; (b) is it necessary to give business efficacy to the contract; (c) does it go without saying (the officious bystander test); (d) is it capable of clear expression; and (e) does it contradict any express term of the contract. Courts are required to undertake a balancing exercise since they cannot rewrite the terms of the contract. The Court held that to rule out three provisions of the Agreement that refer to ‘arbitration’ i.e., marginal references across Article XXIV and Sections 23.3 and 28.8, as being “utterly meaningless, appears absurd” and this necessitates the application of the test.

As for reasonability, the Court held that the mere fact that after a wholesale removal of the arbitration clause and the word ‘arbitration’ in a previous draft, the re-insertion of marginal references to ‘arbitration’ in the final draft shows the intention of the parties to refer disputes to arbitration.

As for efficacy, the fact that three of four references to ‘arbitration’ were reintroduced, albeit in the absence of an express arbitration clause was sufficient for the Court to rule that the parties intended to have the fourth provision back in the Agreement.

As for the official bystander test, since three out of four references to ‘arbitration’, were reintroduced in clauses and the only provision left out was the express arbitration clause, the Court held that one can reasonably state that the omission was an unintended error in handling the draft.

As for the clear expression of implied terms, the Court held that the express arbitration agreement was clearly meant to be included (given the use of the word ‘below’ in Article XXIV of the Agreement) and it was missed in the flurry of drafts.

As for intention to arbitration, the Court held that the implied inclusion of an arbitration clause only ensures a legitimate and harmonious completion of the otherwise inchoate Agreement and resolves commercial absurdities of having meaningless references to the word ‘arbitration’ in three places.

In light of the penta-test being fulfilled, the Court added that it was not logical or commonsensical that arbitration would be reintroduced in the Agreement marginally, without anything expressly providing for arbitration. The Court appointed a sole arbitrator.

Evolving Interpretations Of The Business Efficacy Test: A Comparative Analysis

Different strands of jurisprudence across common law countries have given rise to a range of interpretations of the business efficacy test.

The test owes its origin to Bowen LJ’s dictum in The Moorcock, wherein the Court held that business efficacy must not be invoked if the contract makes business sense without the term. This was later reiterated by Lord Hoffman in Belize, the leading modern authority on the test. The Court held that the only question to be asked to construe an implied term is whether the instrument, read as a whole against the relevant background, would reasonably be understood to mean (‘Reasonability Test’).

Parallelly, the Privy Council in Australia birthed a narrower conception of the test in B. P. Refinery (Westernport) Proprietary Ltd. The Supreme Court of Victoria added the requirement that it must be necessary such that “no term will be implied if the contract is effective without it”. These principles were confirmed in Mosvolds Rederi A/S,[1] Steyn J held that business efficacy can only be invoked when the contract is rendered unworkable in the absence of implied terms (‘Unworkability Test’).

In Indian jurisprudence, from the days of A Ayyaswamy, the Indian Supreme Court has consistently invoked the test to strengthen India’s stance as a pro-arbitration regime. However, the scope and width of the test have been continually modified. The test has been extensively applied in deciding challenges to arbitration awards under Section 34 of the Act and questions of fraud maligning arbitration clauses, which entail a broader factual enquiry, it has seldom been applied at the more limited Section 11(6) stage.[2]

Beyond its limited use in interpreting arbitration clauses, the test has been widely applied in contractual disputes. In Adani Power (Mundra) Ltd., the Indian Supreme Court held that the test must only be invoked to fit in implied terms when the plain and literal meaning of the terms fails to reflect the parties' true intent. It is not sufficient for the court to conclude that the term would have been accepted by the parties as reasonable men had it been suggested. Instead, it must be a term that was so obvious it went without saying, one necessary for business efficacy, and one that, though tacit, is inherently part of the contract (‘Necessity Test’). The general presumption is always titled against implying terms into a written contract. Traditionally, the Indian Supreme Court has applied the Necessity and Unworkability Test, only implying terms that are essential to the functioning and workability of a contract. The threshold for ‘unworkability’ was elaborated by the Delhi High Court in Calcom Cement India Ltd., Hari Shankar J held that unworkability is different from harshness, even an unduly harsh provision cannot be, ipso facto, deemed unworkable. One of the limited circumstances where courts have applied the business efficacy test to interpret arbitration clauses was examined in Ved Prakash Mithal v. Union of India. The Delhi High Court while applying Section 20(4) of the erstwhile Arbitration Act, 1940 (court-ordered appointment of arbitrators) held that the Court has the power to appoint an arbitrator in case of a failure of the machinery between parties to appoint one. The clause herein barred arbitration completely if the Chief Engineer or administrative head of the CPWD were unable to appoint an arbitrator. The Court held that it must give business efficacy to the arbitration clause, which is a part of a business document. It would be a great injustice to one of the parties if they simply held that the Chief Engineer had destroyed the clause, and the judiciary was powerless to redress his grievances. By implication, here too, the Court reiterated the Unworkability Test. The Court intervened only because the arbitration clause, as drafted, could become entirely ineffective due to the failure of the appointment mechanism. 

The Necessity Test has been reiterated by Singapore courts. In Hiap Hong & Co Pte Ltd., Prakash J reiterated that the test is only used for repairing obvious oversight, not merely terms which could have been reasonably added. Further, the test must not be used indiscriminately. Therefore, Singapore, Australian and Indian courts have differed from English courts. Unlike in England, where the test for implying a term, read against the background of the contract, is what it is reasonably understood to mean, these courts require that a term only be implied according to what it is necessarily understood to mean.[3]

Reading the Necessity and Unworkability Test together, the application of the business efficacy test to Section 11(6A) of the Act leads to an absurdity. A contract is, more often than not, likely to be workable and make business and commercial sense even without an arbitration clause. In Lords Inn Hotels, the Agreement was workable without an arbitration clause since disputes could be resolved through litigation as per the governing law and jurisdiction clause. While arbitration clauses provide for more efficient dispute resolution, the business efficacy test is concerned with ensuring that the contract functions commercially, in the manner envisaged by parties at the time of contracting. Thus, implying an arbitration clause may not have been necessary for the Agreement's business efficacy, potentially extending the test beyond its intended scope. It also risks conflating business efficacy i.e., commercial workability with procedural flexibility.

Bidding Adieu To Entire Agreement Clauses: Inferring Intention To Arbitrate

In Jagdish Chander, the Indian Supreme Court laid the requirements of a valid arbitration agreement to include (a) an agreement in writing; (b) an agreement between parties to refer disputes (present or future) to the decision of a private tribunal; (c) an adjudication by a private tribunal in an impartial manner; (d) an agreement between parties that the decision of the private tribunal in respect of the disputes shall be binding on them. The mere use of the terms ‘arbitration’ or ‘arbitrator’ is not sufficient to constitute an arbitration clause. In Pure Diets India Limited, which was referred to by the Petitioner in Lords Inn Hotels, the Delhi High Court held that the ‘intention’ inquiry when the arbitration clause is ambiguous and unclear must “evidence an unambiguous, explicit and unequivocal intention to refer the disputes to arbitration, leaving no room for doubt that parties chose arbitration as their only mode of resolution of disputes”. Indian courts have broadened the scope of the ‘intention’ inquiry under Section 7(4)(b) of the Act, allowing advertence to prior correspondence between the parties. This approach undermines the very purpose of entire agreement clauses, diluting their practical effect. 

In Thyssen Krupp Materials AG, the Delhi High Court extensively referred to English case law and admitted that the Indian legal position is not developed in this context. It was held that the object of the insertion of such a clause is to prevent either party from raising any claim on the basis of a collateral contract entered into during negotiations or after the conclusion of the contract. In Joshi Technologies International Inc., the Indian Supreme Court held that the preclusion of even prior ‘understanding’ between the parties enlarges the scope of an entire agreement clause. In the context of a specific performance claim, the Calcutta High Court denied the invocation of the business efficacy test on the grounds that an entire agreement clause was included in the agreement between the parties.

Common law jurisdictions have taken conflicting approaches when resolving the discord between entire agreement clauses and the business efficacy test. The Supreme Court of Canada refused to imply a good faith duty in a contract using the business efficacy test because of the presence of an entire agreement clause. The Court of Appeal (England and Wales) held that an entire agreement clause does not preclude terms which must be implied in order to give business efficacy, since implied terms are intrinsic to the agreement and constitute true implications. The English High Court in Exxonmobil Sales and Supply Corp. held that if implied terms need to be read to make express terms work, an entire agreement clause cannot exclude the same because the implied term is already part of the contract. Singapore courts have taken a similar approach to the discord, holding that entire agreement clauses cannot have the effect of making a contract unworkable. However, a difference must be maintained between implied terms of fact and implications by way of customs and usages. While the former can be read into the contract based on necessity, the latter may nevertheless be excluded from the contract.

The Bombay High Court’s decision in Lords Inn Hotel highlights a clear tension between a pro-contractual and pro-arbitration approach, highlighting the Indian court’s growing willingness to dilute contractual law principles to undertake a more purposive, arbitration-friendly interpretation. The Court ignored Section 28.5 of the Agreement i.e., the Entire Agreement Clause, typically a bulwark against implying terms, to further arbitration. This Clause was broad enough to override and supersede all prior discussions and understandings, whether written or oral. Given the uncertainty regarding the discord between entire agreement clauses and the employment of the business efficacy test to imply terms by referring to previous drafts of an agreement or prior negotiations, this decision sets a precedent where courts may override such clauses, reducing their practical effect in contractual certainty. The Court’s inference that marginal references to ‘arbitration’ were sufficient to revive a non-existent arbitration clause runs contrary to contract interpretation principles, where deliberate removal of a term signifies an intentional exclusion, rather than mere drafting oversight.

This takes the business efficacy test a step beyond its original intended use in the contractual realm (for instance, interpretation of the term ‘cost’ for the purpose of reimbursement of cost incurred by a successful bidder/power supplier in a power procurement project and ‘monthly energy charges’ formula, contractual payments to be made to the Income Tax Authorities, interpretation of the term ‘fuel’ in a Power Purchase Agreement among other cases) by inserting an entirely missing arbitration clause. Implying an ancillary term in a contract vis-à-vis an arbitration clause is a significant departure. The most dangerous risk of the business efficacy test is the fact that courts may take on a wholesale exercise of rewriting contracts and replacing the intentions of the party with their own. This will be particularly problematic at the Section 11(6) stage, where courts must strictly avoid a mini-trial or elaborate review of facts and law (notably, this standard has even been applied to claims of novation, which, similar to the business efficacy test, entails an examination of past drafts and negotiations between parties). While the Bombay High Court’s approach was intended to strengthen party autonomy, it may lead to the dilution of the same, by reading terms parties intended to exclude. In effect, Lords Inn Hotels risks blurring the line between contractual interpretation and contractual creation.

Conclusion: The Way Forward

Lords Inn Hotels shows how the absence of an express arbitration clause does not necessarily preclude arbitration. However, the deliberate removal of the clause could very well lead to the opposite inference. In the absence of the marginal references to ‘arbitration’ being reintroduced, the Bombay High Court could have very well led to the conclusion that the express removal of the arbitration clause in Article XXV in the subsequent drafts signified that parties did not intend to refer their disputes to arbitration. Thus, applying the business efficacy test in another scenario, the removal of an express clause could just as easily imply decisive rejection, rather than an inadvertent omission.

No doubt, the Bombay High Court’s decision reaffirms India’s pro-arbitration stance, however, it unintentionally opens doors for subjectivity in Section 11(6) proceedings. The ‘existence’ query under Section 11(6A) of the Act is gradually turning into an ‘inference’ query. Ironically, the increased litigation over the existence of arbitration clauses defeats one of the core objectives of arbitration—time and cost efficiency—forcing parties into long-drawn court battles before arbitration can even commence.  This highlights the need for clearer drafting of commercial contracts and begs the question of whether party autonomy is merely an illusion if one party explicitly denies that arbitration reflects their intended agreement.

---

*Kashish Jumani is a B.A., LL.B. (Hons.) student at National Law University, Delhi

---

[1] Mosvolds Rederi A/S v. Food Corporation of India [1986] 2 Lloyd's Rep 68. [2] Union of India, Ministry of Railways, Railway Board v. Jindal Rail Infrastructure Limited, 2022 SCC OnLine Del 1540; Reliance Industries Ltd. v. Gail (India) Ltd., 2020 SCC OnLine Del 2041; SAIL v. HTC Engineering (1958) (P) Ltd., 2023 SCC OnLine Cal 4816; Jawaharlal Nehru Port Trust v. Seatrans Shipping Ltd., 2020 SCC OnLine Bom 641; PTC India Ltd. v. Tamil Nadu Electricity Board, 2019 SCC OnLine Mad 34196.  [3] Sundaresh Menon, ‘The Somewhat Uncommon Law of Commerce’ [2014] 26 SAcLJ 30.