I. Introduction

The Arbitration and Conciliation Act, 1996 ("the Act"), requires the parties to submit their disputes to arbitration arising out of a defined legal relationship.1 A valid arbitration agreement is the foundation on which the entire edifice of the arbitral process is structured.

While the characteristics of an arbitration clause mandate that such agreements be entered into in writing,2 the same may not necessarily be in a contract signed between the parties.

This piece seeks to highlight the principles for determining the existence of an arbitration agreement. The piece further analyses the alternate mechanisms for recognition of valid arbitration agreements, outside the scope of a signed document executed by the parties.

II. Determining factors that constitute an arbitration agreement

The Supreme Court of India ("Supreme Court") in Jagdish Chander,3 has laid down the following principles for constituting a valid arbitration agreement under the Act:

  1. Intention of the parties to enter into an arbitration agreement must be gathered from the terms of the agreement. While there is no specific form for an arbitration agreement to exist, the words should disclose a determination and an obligation to go for arbitration and not merely contemplate the possibility of going for arbitration.
  2. The words "arbitration" or "arbitral tribunal (or arbitrator)" are not a requirement if it has attributes or elements of an arbitration agreement.
  3. When there is a specific and direct expression of intent to have the disputes settled by arbitration, it is not necessary to set out the attributes of an arbitration agreement.
  4. A clause will not be considered as an arbitration agreement, if it contemplates a fresh or further consent of the parties to refer the disputes to arbitration.

The case at hand dealt with the issue of whether an arbitration clause, which required consent from the parties to refer the dispute to arbitration, can be arbitrated without such qualification having been met. The Supreme Court in this case, held that unequivocal consent of the parties formed the basis for any dispute to be referred to arbitration.

The principles as stated in the judgement form the basis of any valid arbitration agreement. As per the Act, other than by a signed agreement, an arbitration agreement can also be contained in:

  1. An exchange of letters, telex, telegrams or other means of communication which provide a record of the Agreement; or
  2. An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

III. An exchange of letters, telex, telegrams or other means of communication

An exchange of letters, telex, telegrams or other means of electronic or telecommunication may form the basis to show the existence of an arbitration agreement between the parties. The issue first came into consideration before the Supreme Court in the case of Nimet Resources.4 The Court observed that if a contract containing an arbitration clause, without signatures of either party is referred to in communications between the parties, that would imply that the arbitration agreement is a part of the contract. The Court however, refrained from finally deciding upon the issue, by directing the parties to refer this issue to the arbitral tribunal under Section 16 of the Act.

The matter was decided by the Supreme Court for the first time in Unissi.5 In the said case, the tender offer of one party, which contained an arbitration clause, was accepted by the other party. However, only one party had signed the Agreement and the other party had failed to do so. The Supreme Court, relying on the judgement in Nimet Resources, held that an arbitration agreement did exist in the particular case. The Court was of the opinion that the offer and acceptance of the tender through various communications, was sufficient to hold that an arbitration agreement existed between the parties despite both parties having not signed the agreement.

It is further pertinent to note that such record or understanding may be through an exchange over any means of telecommunication. Post the 2015 amendment to the Act,6 communication by electronic means can also be used to disclose consent between parties to the terms of the contract.

IV. Exchange of statements of claim and defence

An alternate means of proving a record of an arbitration agreement is by means of an exchange of statements of claim and defense, where the existence of an arbitration agreement is alleged by one party and not denied by the other.7

The term "statements of claim and defence", do not necessarily mean that such statements need to be made before an arbitrator or arbitral tribunal. The Supreme Court in S.N. Prasad,8 has interpreted the term as provided in Section 7(4)(c) of the Act, to mean that such a statement can be by way of a representation by any party in any application, petition or suit. The said case dealt with the issue as to whether a guarantor for a loan, who is not a party to the loan agreement containing an arbitration clause, can refer such a dispute to arbitration.

The High Court of Karnataka, has, however, read down the meaning of statements of claim and defence. The court held that an exchange of legal notices, with an allegation of an arbitration clause made by one party and not denied by the other party, would constitute a valid arbitration agreement.9 The Court had observed that if an application for appointment of arbitrators is made pursuant to such an exchange of notices, an implied proof of consent could be construed to refer the disputes to arbitration.

V. Analysis

It is thus apparent that while all arbitration agreements need to be written, the basis to refer the disputes need not be express and can be based on implied consent. The courts have accepted this view.

The Supreme Court has accepted the position that correspondence between the parties can be used to infer consent of entering into an arbitration agreement under Section 7(b) of the Act.10 Such consent can be inferred by an exchange of correspondence in writing between the parties to rely on an agreement containing an arbitral clause. However, it is paramount for the courts to construe such correspondence with a view to arrive at the conclusion as to whether the parties had given their consent ad idem to the terms of contract.11 Mere reference to an agreement without a clear record of consent to the terms of the agreement would not provide a basis for implied consent to the arbitration clause in the agreement.

Similarly, the courts have held that an exchange of statements of claim and defence can be used to construe parties' consent to arbitration. However, only an 'exchange' can disclose the parties' intention to enter into an arbitration agreement. Failure to reply to a statement of claim cannot be considered to be an exchange of a statement of the claim and defence.12 Thus, if in the reply to a statement of claim, all claims, objections etc., are replied to but for the issue pertaining to the arbitration agreement, then such an agreement could be inferred.

While the meaning of statements of claim and defence, have not been strictly construed to mean only those that are filed in arbitration proceedings under Section 7(4)(c) of the Act, it remains to be seen how the same is interpreted in future cases, especially for legal notices.

VI. Conclusion

A binding agreement for disputes to be resolved through arbitration is a sine-qua-non for referring the parties to arbitration.13 The essential elements or attributes of an arbitration agreement is an express or implied consent spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the parties.14 Upon satisfaction of these conditions, an arbitration agreement is said to be in existence.

Thus, an arbitration agreement may be express or implied. However, the scope of implied acceptance of an arbitration agreement would require to be determined based on the facts of each case, to construe if the parties impliedly consented to arbitration in the manner as provided for in Section 7(4) of the Act.

Footnotes

1. Section 7(1) of the Act.

2. Section 7(3) of the Act

3. Jagdish Chander v. Ramesh Chander and Others, (2007) 5 SCC 719.

4. Nimet Resources Inc. v. Essar Steels Ltd., (2000) 7 SCC 497.

5. Unissi (India) Private Limited v. Post Graduate Institute of Medical Education and Research, (2009) 1 SCC 107.

6. Arbitration and Conciliation (Amendment) Act, 2015.

7. Section 7(4)(c) of the Act.

8. S.N. Prasad, Hitek Industries (Bihar) Limited v. Monnet Finance Ltd. & Ors., (2011) 1 SCC 320.

9. Tata Elxsi Limited, Bangalore v. Anand Joshi, 2000 SCC Online Kar 120; M/s. Shyamraju and Company (India) Pvt. Ltd. v. City Municipal Corporation, CMP 134 and 135 of 2018, dated 18.02.2019 (Kar HC).

10. M/s Caravel Shipping Services Private Limited v M/s Premier Sea Foods Exim Private Limited, C.A. Nos. 010800-010801 [arising out of SLP (C) Nos. 31101-31102 of 2016], dated 29.10.2018 (SC).

11. Rickmers Verwaltung GMBH v. Indian Oil Corporation Ltd., (1999) 1 SCC 1; Govind Rubber Ltd. v. Louids Dreyfus Commodities Asia Pvt. Ltd., 2014 (14) Scale 92.

12. Tata Elxsi Limited, Bangalore v. Anand Joshi, 2000 SCC Online Kar 120

13. Mahanagar Telephone Nigam Ltd. vs. Canara Bank and Ors., Civil Appeal Nos. 6202-6205 of 2019 [arising out of SLP (C) Nos. 13573-13576 of 2014], dated 08.08.2019 (SC).

14. Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.