Monday, November 21, 2011

Supreme Court on definition of an arbitration agreement

A three-judge bench of the Supreme Court, on 14 November 2011, in Powertech World Wide Limited v. Delvin International General Trading LLC, reiterated the law on existence of an arbitration agreement and also carved out an exception, in light of particular facts and circumstances of the case. 

The petitioner was an Indian company, and the respondent, incorporated in Dubai. A purchase contract entered into between the parties had the following arbitration clause: 
Any disputes arising out of this Purchase Contract shall be settled amicably  between both the parties or through an Arbitrator in India/UAE” 
On disputes regarding payments arising between the parties, a series of letters and legal notices were exchanged. On 30 May 2008, the petitioner invoked arbitration proceedings in Mumbai, India and appointed a retired judge of the Bombay High Court as sole arbitrator. The respondent was required to concur with the above appointment or nominate another arbitrator within 30 days from receipt of the petitioner’s notice. 

Respondent’s response on 27 June 2008 requested the petitioner not to approach or adopt legal proceedings for appointment of arbitrator as telephonically respondents were instructed to suggest some other name as an arbitrator subject to petitioner’s consent. 

Receiving no response from the respondent thereafter, the petitioner filed the present petition for appointment of arbitrator under section 11(6) of the Arbitration and Conciliation Act, 1996 [the "Act"], (read with section 11(12)(a), for an international commercial arbitration) on 20 March 2010. 

A question arose as to whether the arbitration clause quoted above was a binding arbitration agreement, enforceable under the Act. 

The prevailing legal position on definition of an arbitration agreement was then discussed. "Arbitration agreement" is defined in section 7 of the Act. It 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 agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement and is mandatorily 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 Section 7(4) of the Act. 

In the case of Jagdish Chander v. Ramesh Chander and Ors., (2007) 5 SCC 719, a similar clause, which mandated that a dispute "shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine", was held to be not a valid reference to arbitration. This was because there was an option given to the parties, to resort to arbitration. 

According to K. K. Modi v. K. N. Modi, (1998) 3 SCC 573, a valid arbitration agreement – 
- must contemplate that the decision of the tribunal will be binding on the parties to the agreement; 
- must contemplate that substantive rights of parties will be determined by the agreed tribunal; 
- 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; 
- 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; 
- 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; and 
- agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law. 

Smitha Conductors v. Euro Alloys Ltd., (2001) 7 SCC 728 held that even where only certain correspondences indicated a reference to the contract containing arbitration clause for opening the letter of credit addressed to the bank, and no correspondence between the parties disagreed with terms of the contract or arbitration clause, it was a valid arbitration agreement. 

As evident from Rickmers Verwaltung GmbH v. Indian Oil Corp. Ltd., (1999) 1 SCC 1 and Shakti Bhog Foods Ltd. v. Kola Shipping Ltd., (2009) 2 SCC 134, the Court has always striven to understand the true intention of parties and whether there existed consensus ad idem. Also, in VISA International Ltd. v. Continental Resources (USA) Ltd., (2009) 2 SCC 55, where the clause in question stated: "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", the Court held that in spite of the respondent contending that the arbitration would not be cost effective and will be premature, the 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, since no party could be permitted to take advantage of inartistic drafting of an arbitration clause when clear evidence of intention to proceed for arbitration was evident from the material on record. 

In the present case, too, the Court held that there was consensus ad idem between parties to amicably settle their disputes or settle through arbitration in India or UAE. Notwithstanding the judgment in Jagdish Chander, the correspondence between parties dated 30 May 2008 and 27 June 2008 indicated that the petitioner had invoked arbitration and the respondent, not denying the existence of the arbitration clause invoked, had in fact referred to appointment of arbitrator. 

Thus, the Court in this case, enumerated an additional factor to determine existence of an arbitration agreement – apart from the terms of the clause itself, the related documents indicating the intention of parties.

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