References not enough to compel arbitration

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References not enough to compel arbitration

The Supreme Court recently reiterated the principles laid down in Jagdish Chander v Ramesh Chander (2007), that an arbitration agreement should disclose a determination and obligation on behalf of parties to refer disputes to arbitration, and not merely contemplate the possibility of going for arbitration. Where there is merely a possibility of the parties agreeing to arbitration in the future, in contrast to an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.

An appeal was filed challenging the judgment passed by the High Court of Orissa, invoking its jurisdiction under section 11(6) of the Arbitration and Conciliation Act, 1996. The appellant, a subsidiary of the state-owned Coal India Limited (CIL), and the respondent were involved in a joint venture of engineering contractors engaged in the business of infrastructure development.

The appellant floated an e-tender for work to strengthen and widen a coal transportation road at the Talcher coalfields in Orissa. The respondent was the successful bidder and awarded a work order. A contract agreement was entered into between the parties with terms that the work order be executed between 16 January 2012 and 14 January 2015.

However, the CIL subsidiary terminated the work order on 15 May 2014, citing delays and the inability of the respondent to meet the work schedule.

The respondent in return claimed INR1.28 billion (USD16.1 million) citing delays on the part of the CIL subsidiary, which it rejected. Subsequently, the respondent issued a notice of arbitration to the appellant in terms of clause 15 of the contract agreement, calling on the subsidiary to give its consent to the appointment of a sole arbitrator. After receiving no response from the appellant to the arbitration notice within 15 days, the respondent filed an application under section 11(6) of the arbitration act before the High Court of Orissa, which was allowed, appointing a sole arbitrator.

Clause 15 of the contract agreement reads:

“15. Settlement of disputes/arbitration:

15.1 It is incumbent upon the contractor to avoid litigation and disputes during the course of execution. However, if such disputes take place between the contractor and the department, effort shall be made first to settle the disputes at the company level. The contractor should make request in writing to the engineer-in-charge for settlement of such disputes/claims within 30 days of arising of the case of dispute/claim failing which no disputes/claims of the contractor shall be entertained by the company.

15.2 If differences still persist, the settlement of the dispute with government agencies shall be dealt with as per the guidelines issued by the Ministry of Finance, government of India in this regard. In case of parties other than government agencies, the redressal of the disputes may be sought in the court of law.”

The Supreme Court held that although clause 15 of the contract agreement is titled “Settlement of disputes/arbitration”, the substantive part of the provision makes it abundantly clear that there is no arbitration agreement between the parties agreeing to refer either present or future disputes to arbitration. Clause 15.1 contains merely a reference to the steps to be taken for settlement of disputes between the parties and can be construed as a dispute resolution mechanism at the company level, rather than an arbitration agreement.

The court also observed that clause 15 does not comport with the essential attributes of an arbitration agreement in terms of section 7 of the act.

The respondent contended that the appellant is a subsidiary of CIL and on 7 April 2017, CIL issued a policy document to its general managers that contained a clause providing for the settlement of disputes or differences arising out of works and services contracts through arbitration. However, the bench was of the opinion that the communication issued by CIL referred to the possibility of a consensual resolution of disputes or differences through arbitration, as neither the CIL manuals nor the contract document, at the time, contained a clause regarding arbitration.

The bench further held that such clauses merely indicated a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. The bench held that a policy document cannot be construed as an arbitration agreement between the appellant and the respondent in terms of section 7 of the arbitration act so as to compel the appellant to appoint an arbitrator.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.