Definition of Arbitration Agreement : Supreme Court

Justice Swatanter Kumar
Supreme Court of India

The Supreme Court in Powertech World Wide Ltd. v. Delvin International General Trading LLC has examined the definition of an 'arbitration agreement' in the light of various judicial pronouncements. The question posed to the Court in this case was whether the clause in the  agreement between the parties constituted a valid and binding arbitration agreement or not? While answering the question in the affirmative, the Supreme Court held as under;

9. When the matter was being heard, a question had been raised as to whether the arbitration agreement as contained in the Purchase Contract and reproduced supra, was a binding arbitration agreement enforceable in terms of Section 11(6) of the Act?

10. The learned counsel appearing for the petitioner contended that from the language of the arbitration clause itself, it is unambiguously clear that there is a binding arbitration agreement between the parties. The respondent having failed to act despite notice, the petitioner is entitled to the relief prayed for. It is further the contention of the petitioner that the words `shall' and `or' appearing in the arbitration clause have to be given their true meaning. The expression `shall' has to be construed mandatorily while the expression `or' has to be read as disjunctive. Upon taking this as the correct approach, the arbitration agreement would be binding upon the parties as the expression `settled amicably between both the parties' cannot be construed as a condition precedent to the invocation of the arbitration agreement and the reference to arbitration being an alternative and agreed remedy, the petitioner may unequivocally be allowed to invoke the arbitration agreement.

11. The aforesaid contentions have been raised by the advocates for the petitioner in view of the judgment of this Court in the case of Jagdish Chander v. Ramesh Chander & Ors. [(2007) 5 SCC 719] wherein this Court had taken the view that such an arbitration clause would not have satisfied the pre-requisites of a valid arbitration reference. In that case, this Court was concerned with Clause 16 of the contract between the parties that read as under:

(16) If during the continuance of the partnership or at any time afterwards any dispute touching the partnership arises between the partners, the same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine. (emphasis supplied)

12. The Court felt that the main attribute of an arbitration agreement, namely, consensus ad idem to refer the disputes to arbitration, is missing in Clause 16 relating to settlement of disputes. Therefore, it is not an arbitration agreement as defined under Section 7 of the Act. In absence of an arbitration agreement, the question of exercising power under Section 11 of the Act to appoint an arbitrator does not arise.

13. A similar view was expressed by this Court in the case of Wellington Associates Ltd. v. Kirit Mehta [AIR 2000 SC 1379] though the arbitration clause in that case was different.

14. Now, I may refer to the pre-requisites of a valid and binding arbitration agreement leading to an appropriate reference under the Act. Section 2(1)(b) defines `arbitration agreement' to be an agreement referred to in Section 7. Section 7 of the Act states that an `arbitration agreement' is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement and shall be an agreement in writing. An arbitration agreement is in writing if it is contained in any of the clauses i.e. clauses (a) to (c) of Sub-section (4) of Section 7 of the Act. Once these ingredients are satisfied, there would be a binding arbitration agreement between the parties and the aggrieved party would be in a capacity to invoke the jurisdiction of this Court under Section 11(6) of the Act.

15. In the case of K.K. Modi v. K.N. Modi & Ors. [(1998) 3 SCC 573], this Court, while differentiating an `arbitration agreement' from a `reference to an expert' for decision, contained in an MOU recording a family settlement, enumerated the essential attributes of a valid arbitration agreement:

1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement,

2. that the jurisdiction of the tribunal to decide the rights of parties must be derived either from the consent of the parties or from an order of the Court or from a statute, the terms of which make it clear that the process is to be an arbitration,

3. the agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal,

4. that the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides,

5. that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly,

6. the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal.

16. Also in the case of Smita Conductors Ltd. v. Euro Alloys Ltd. [(2001) 7 SCC 728], where no contract, letter or telegram confirming the contract containing the arbitration clause as such was there, but certain correspondences which indicated a reference to the contract containing arbitration clause for opening the letter of credit addressed to the bank, were there. There was also no correspondence between the parties disagreeing either with the terms of the contract or the arbitration clause. The two contracts also stood affirmed by reason of their conduct as indicated in the letters exchanged between the parties. This Court construed it to be an arbitration agreement in writing between the parties and referred to Article II Para 2 of the New York Convention, which is pari materia to Section 7 of the Act and observed as under: "what needs to be understood in this context is that the agreement to submit to arbitration must be in writing. What is an agreement in writing is explained by Para 2 of Article II. If we break down Para 2 into elementary parts, it consists of four aspects. It includes an arbitral Clause (1) in a contract containing an arbitration clause signed by the parties, (2) an arbitration agreement signed by the parties, (3) an arbitral clause in a contract contained in exchange of letters or telegrams, and (4) an arbitral agreement contained in exchange of letters or telegrams. If an arbitration clause falls in any one of these four categories, it must be treated as an agreement in writing.

17. This Court, in the case of Bihar State Mineral Development Corporation v. Encon Builders[(2003) 7 SCC 418] has also taken the view that the parties must agree in writing to be bound by the decision of such Tribunal and they must be ad idem.

18. The next question that falls for consideration is what should be the approach of the Court while construing a contract between the parties containing an arbitration agreement. In the case of Rickmers Verwaltung GMBH v. Indian Oil Corp. Ltd. [(1999) 1 SCC 1], this Court took the view that `it is the duty of the court to construe correspondence with a view to arrive at a conclusion whether there was any meeting of minds between the parties, which could create a binding contract between them. Unless from the correspondence, it can unequivocally and clearly emerge that the parties were ad idem to the terms, it cannot be said that an agreement had come into existence between them through correspondence.' Still in the case of Unissi (India) Pvt. Ltd. v. Post Graduate Institute of Medical Education and Research [(2009) 1 SCC 107], where the appellant had given his tender offer which was accepted by the respondent and the tender contained an arbitration clause, this Court, considering the facts of the case, the provisions of Section 7 of the Act and the principles laid down by it, took the view that though no formal agreement was executed but in view of the tender documents containing the arbitration clause, the reference to arbitration was proper. In the case of Shakti Bhog Foods Ltd. v. Kola Shipping Ltd. [(2009) 2 SCC 134], this Court held that from the provisions made under Section 7 of the Act, the existence of an arbitration agreement can be inferred from a document signed by the parties or exchange of e-mails, letters, telex, telegram or other means of telecommunication, which provide a record of the agreement.

19. In a recent judgment of this Court in the case of VISA International Ltd. v. Continental Resources (USA) Ltd. [(2009) 2 SCC 55], this Court was concerned with an arbitration clause contained in the memorandum of understanding that read as under:

Any dispute arising out of this agreement and which cannot be settled amicably shall be finally settled in accordance with the Arbitration and Conciliation Act, 1996.

20. The disputes having arisen between the parties, the respondent, instead of challenging the existence of a valid arbitration clause, took the stand that the arbitration would not be cost effective and will be pre-mature. In view of the facts, this Court held that there was an arbitration agreement between the parties and the petitioner was entitled to a reference under Section 11 of the Act and observed:

No party can be allowed to take advantage of inartistic drafting of arbitration clause in any agreement as long as clear intention of parties to go for arbitration in case of any future disputes is evident from the agreement and the material on record, including surrounding circumstances.

21. It is in light of these provisions, one has to construe whether the clause in the present case, reproduced above, in Para 1, constitutes a valid and binding agreement. It is clear from a reading of the said clause that the parties were ad idem to amicably settle their disputes or settle the disputes through an arbitrator in India/UAE. There was apparently some ambiguity caused by the language of the arbitration clause. If the clause was read by itself without reference to the correspondence between the parties and the attendant circumstances, may be the case would clearly fall within the judgment of this Court in the case of Jagdish Chander (supra). But once the correspondence between the parties and attendant circumstances are read conjointly with the petition of the petitioner and with particular reference to the purchase contract, it becomes evident that the parties had an agreement in writing and were ad idem in their intention to refer these matters to an arbitrator in accordance with the provisions of the Act. Vide their letter dated 30th March, 2008, the respondent had raised certain claims upon the petitioner and had also repelled the threat extended by the petitioner to take steps before the ECGC. This notice had been responded to by the petitioner vide letter dated 4th April, 2008 wherein it had raised its claims demanding payment of money within seven days and also stated that any default thereto would constrain it to take legal action. Finally, vide letter dated 30th May, 2008, the petitioner had invoked arbitration clause between the parties and, in fact, had even nominated an arbitrator calling upon the respondent to concur to the said appointment. Replying to this letter vide letter dated 27th June, 2008, the respondent had neither denied the existence nor the binding nature of the arbitration clause. On the contrary, it had requested the petitioner not to take any legal action for appointment of an arbitrator, as they wanted to suggest some other name as an arbitrator, that too, subject to consent of the petitioner. This letter conclusively proves that the respondent had admitted the existence of an arbitration agreement between the parties and consented to the idea of appointing a common/sole arbitrator to determine the disputes between the parties. However, thereafter there had been complete silence from its side, necessitating the filing of present petition under Section 11(6) of the Act by the petitioner. Thus, any ambiguity in the arbitration clause contained in the purchase contract stood extinct by the correspondence between the parties and the consensus ad idem in relation to the existence of an arbitration agreement and settlement of disputes through arbitration became crystal clear. The parties obviously had committed to settle their disputes by arbitration, which they could not settle, as claims and counter claims had been raised in the correspondence exchanged between them. In view of the above, even the pre- condition for invocation of an arbitration agreement stands satisfied. The arbitration agreement does not provide for any specific mode/methodology to be adopted while appointing an arbitrator. The learned counsel appearing for the petitioner contended that keeping in view the extent of claims, it will be highly expensive if an Arbitral Tribunal consisting of two arbitrators and a presiding arbitrator is constituted. He further contented that the parties in their correspondence have already agreed to the appointment of a sole arbitrator. He prayed for appointment of a sole arbitrator as both the parties in their respective letters had agreed to appoint an arbitrator with common concurrence. Thus, in the afore- mentioned circumstances, this petition is allowed and Mr. Justice D.R. Dhanuka (Retired) Judge, Bombay High Court, is appointed as Sole Arbitrator to adjudicate upon the disputes. The parties are at liberty to file claims/counter claims before the appointed Arbitrator, which shall be decided in accordance with law.