This blog has been co-authored by Daksh Saroha and Lavanya Chawla. Lavanya and Daksh are students at Amity Law School Delhi, GGSIPU. They can be reached via their LinkedIn or emailed at lavanyachawla01@gmail.com and dx.saroha@gmail.com.
Facts of the Case
The Delhi HC rendered its opinion in APM Air Cargo Terminal Services v. Celebi Delhi Cargo Terminal in late 2019. Celebi Delhi Cargo Terminal (hereinafter, referred to as the ‘ Respondent ’) was granted a tender by Delhi International Airport Pvt. Ltd., for managing, upgrading and modernizing the cargo terminal. The Respondent subsequently entered into a contract with APM Air Cargo Terminal Services (hereinafter, referred to as the 'Petitioner') for manpower management, for a period of three years with a clause stipulating that all the disputes are to be referred to arbitration.
The work commenced from April 1, 2018 and regular payments were credited to the petitioner, but no written agreement stipulating the terms of agreement between the parties was provided. The petitioner’s concerns with certain clauses of the contract and its oral nature were repeatedly expressed via e-mails sent in March and October of 2018. The Petitioner sent a duly signed copy of the agreement to the respondent; but by an e-mail sent on 6 February, 2019 requested the respondent to hold further discussion on certain clauses of the agreement. However, due to increased friction between the parties the petitioner was requested to settle the dues of its employees and the contract between the parties was terminated within a year.
Issues
The bone of contention between the parties was the two bank guarantees for a total amount of 2.08 crore submitted by the petitioner as security to the Respondent for any non-performance or fault of the petitioner. On one hand it was the contention of the petitioner that a payment of Rs. 35 lakh was awaited, which the respondent refused to pay stating that the contract was invalid, and on the other hand, the respondent sought to recover the money due to him by encashment of bank guarantees.
Judgement
The court found that the contract which contained an arbitration clause between the parties was only signed on behalf of the petitioner and not on behalf of the respondent. Therefore, the question with respect to the validity of the arbitration agreement which in turn would determine the maintainability of the application under section 9 of the Arbitration and Conciliation Act, 1996 arose before the court.
Section 7 of the Arbitration and Conciliation Act, 1996 lays down that an arbitration agreement can be in the form of a clause in the contract or a separate agreement if it is written and signed by the parties. Since the contract was not signed by the parties, the court in the present case held that it was an invalid agreement. Moreover the court held that the emails and other exchanges between the parties neither show that the parties have agreed for adjudication of the disputes through arbitration nor the statements of claim and defence between the parties reveal the existence of an agreement and not denied by the respondent. The court relied on Vimal Kishor Shah and Ors. v. Jayesh Dinesh Shah and Ors., to hold that signature of the parties is a sine qua non for an arbitration agreement.
Analysis
However, in the case of Jugal Kishore Rameshwardas v. Mrs. Goolbai Hormusji, the Supreme Court opined that “an arbitration agreement needs to be in writing though it need not be signed.” Section 7(3) stipulates that an arbitration agreement needs to be in writing and section 7(4) mentions circumstances in which it can be considered to be in written form. However, one cannot deduce that all arbitration agreements need to be signed.
This landmark judgment of the Supreme Court has been reiterated by Justice Nariman in the recent case of M/s Caravel Shipping Services Private Limited v M/s Premier Sea Foods Exim Private Limited, which supersedes Vimal Kishor Shah, relied upon by the High Court in the present case.
Furthermore, the High Court in the present case dismissed the application under section 9 as the applicant was not a party to the arbitration agreement. The court relied on a conjoint reading of section 9 and section 2(h) of the Arbitration and Conciliation Act, 1996 which stipulates that only a party to an arbitration agreement can submit an application under section 9 for obtaining interim relief from the court.
In the case of Trimex International Fze v Vedanta Aluminium Ltd., the Supreme Court held that since the parties accepted shipments and made payments accordingly, they had accepted the contract and were therefore bound by its terms. Similarly, in the present case, completion of work and timely tender of payments indicate that a contractual relationship existed between the parties. The Supreme Court opined, “Once the contract is concluded orally or in writing, the mere fact that a formal contract has to be prepared and initialed by the parties would not affect either the acceptance of the contract so entered into or implementation thereof, even if the formal contract has never been initialed.” Therefore, the stand of the High Court that parties did not have a contractual relationship even though business transactions between them were conducted as per the terms of the contract is flawed. The email exchanges between the parties establish the reference to a contract containing the arbitration agreement and the repeated requests by the petitioner to discuss the contentions and sign the agreement weakens the case of the respondent. The agreement was signed on behalf of the petitioner and was sent to the respondent to be signed but failure of a party to sign a written agreement cannot invalidate the arbitration agreement.
The Supreme Court further held that:
“It is essential that the intention of the parties be considered in order to conclude whether parties were ad idem as far as adopting arbitration as a method of dispute resolution was concerned. In those circumstances, the stand of the respondent that in the absence of signed contract, the arbitration clause cannot be relied upon is liable to be rejected.”
The High Court, in the present case, laid more emphasis on the procedural formality and technicality of the formation of a contract, rather than investigating whether the parties had the intention to be bound by the arbitration clause or not.
Conclusion
The decision of the court to declare an arbitration agreement invalid merely on the ground that the document was not signed by one of the parties signifies that the party shall not be able to approach an arbitral tribunal. The party has other remedies including approaching the court for enforcement of the contract (not the arbitration clause in the same forum as the suit will be struck by the doctrine res judicata) and specific performance of its terms. However, the remedy of approaching an economically viable, faster and less formal forum for dispute resolution has been barred, which defeats the objectives laid down in the Arbitration and Conciliation Act, 1996.
In the case of Great Offshore Ltd. v Iranian Offshore Engg & Constn, the Supreme Court viewed the case in light of the objective of minimizing the role of courts in arbitral proceedings. Justice D. Bhandari, expressed his concern by including the following remark in the judgment, “What is even more worrisome is that the parties’ intention to arbitrate would be foiled by formality”. With the addition of extra formalities, including stamps, seals, signatures etc., the arbitration procedure inevitably becomes more time consuming, complicated and expensive, which in turn defeats the purpose of the act as envisioned by the legislature.
Even after so many years of familiarity with alternate dispute resolution methods, the citizens don’t refer their disputes to arbitration due to the lack of a nudge in that direction. The country awaits a cultural revolution wherein arbitration is not viewed as antithetical to the court proceedings but as a machinery supplementing arbitration. The 2016 and 2019 amendments while aiming to reduce the involvement of court in arbitral proceedings also ensured that a balance between judicial intervention and judicial restraint was struck. The power to decide the validity of an arbitration agreement must be exercised cautiously, with due regard to the intention of the parties as it might not only render the arbitration proceedings inefficacious but also prevent people from referring their disputes to arbitration.
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