The Bombay High Court in TCI Infrastructure Limited v. Kirby Building Systems (Uttaranchal) Private, Writ Petition No. 5377 of 2021 decided on 19.09.2022 held that Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) can be invoked only when a valid Arbitration Agreement signed by both the parties existed.
M/s. TCI Infrastructure Limited and M/s. Transport Corporation of India Limited (hereinafter collectively referred to as “the Petitioners”) had entered into an Agreement for construction of a warehouse with M/s. Kirby Building Systems (Uttaranchal) Private Limited and M/s. Kirby Building Systems India Private Limited (hereinafter collectively referred to as “the Respondents”).
The Petitioners filed a Special Civil Suit against the Respondents for the recovery of a specific amount before the 6th Joint Civil Judge, Senior Division, Nagpur (hereinafter referred to as the “Trial Court”), alleging that the Respondents had used sub-standard material while executing the Agreement and hence, the Petitioners were entitled to claim a specific amount.
The Respondents further filed an Application under Section 8(1) of the Act before the Trial Court and claimed that an Arbitration Agreement existed between the parties, pursuant to the Purchase Order dated 16.07.2012 read with the Proposal forwarded by the Respondents on 26.06.2012. The Trial Court passed the Order dated 01.12.2018 allowing the Respondents’ application and directing the parties to refer the dispute to Arbitration (hereinafter referred to as the “Impugned Order”).
In view of the Impugned Order, the Trial Court also passed an Order on the same day as the Impugned Order in the Petitioners’ Special Civil Suit disposing the suit as the parties were to go for Arbitration in terms of the Arbitration Agreement.
The Petitioners thereafter appealed against the Impugned Order through Regular Civil Appeal before the Court of Principal District Judge, Nagpur (hereinafter referred to as the “District Court”). The District Court vide Order dated 12.02.2021 dismissed the appeal as being untenable (hereinafter referred to as the “Appellate Order”).
Hence, the Petitioner filed the present Writ Petition before the Nagpur Bench of High Court of Bombay (hereinafter referred to as the “High Court”).
ISSUE BEFORE THE HIGH COURT
Whether a document having an Arbitration Clause unilaterally signed by a party will render a valid Arbitration Agreement between the parties?
CONTENTION OF THE PARTIES
The Petitioners contended that there did not exist any valid Arbitration Agreement between the parties and argued that even if the Arbitration clause was proposed by the Petitioners on 26.06.2012, the only document signed by both the parties was the Letter of Intent dated 12.07.2012 which did not contain any Arbitration clause.
The Petitioners submitted that the Trial Court had erred in ascertaining the nature of documents that were signed between the parties. Hence, in the absence of an Arbitration Agreement signed by both the parties, the application under Section 8(1) of the Act was erroneously allowed and the suit was wrongly disposed off. The Petitioners further stated that the District Court had also wrongly dismissed the appeal.
The Respondents contended that the Purchase Order dated 16.07.2012 has to be read together with the Proposal dated 26.12.2012, and both the documents justify the Impugned Order.
The Respondents submitted that the Purchase Order dated 16.07.2012 provided a clear reference of the Proposal dated 26.06.2012. Hence, the Respondent argued that an inference is drawn that there was a valid Arbitration Agreement between the parties. Thus, the Respondents stated that the District Court was justified in dismissing the Appeal.
DECISIONS AND FINDINGS OF THE HIGH COURT
The High Court observed that to invoke Section 8 of the Act, there shall be an Arbitration Agreement between the parties and that even an Arbitration clause would be treated as a valid Arbitration Agreement. The High Court opined that the existence of an Arbitration Agreement is a sine qua non for invocation of Section 8 of the Act.
The High Court examined the documents produced by the Respondents and held that the Purchase Order, which contained the Arbitration Agreement, was signed unilaterally by the Respondents. The High further observed that the Petitioner’s Letter of Intent dated 12.07.2012, which was signed by both the parties, specifically stipulated the terms and conditions of work, but did not contain any reference to Arbitration Agreement.
The High Court stated that the Petitioner had issued the Purchase Order on 16.07.2012, pursuant to the Proposal dated 26.06.2012 and the Letter of Intent dated 12.07.2012. However, the Trial Court had passed the Impugned Order considering only the Proposal dated 26.06.2012.
The High Court held that the Trial Court had committed an error by failing to appreciate the true purport of the documents produced by the parties. The High Court observed that:
“13. … For an arbitration agreement to come into existence between the parties, there ought to be a document executed on behalf of both the parties, showing consensus ad-idem, incorporating such an arbitration clause/agreement.”
The High Court emphasized that the only document signed by both the parties, i.e., the Letter of Intent dated 12.07.2012, admittedly contained no Arbitration Clause or Agreement. Thus, the High Court held that merely because the Proposal dated 26.06.2012 contained an Arbitration Clause, which was referred to in the Letter of Intent dated 12.07.2012, it cannot be inferred that a valid Arbitration Agreement existed between the parties.
The High Court further observed that mere reference to the Proposal, without incorporation of the Arbitration Clause in the Letter of Intent dated 12.07.2012 or Purchase Order dated 16.07.2012, would not create a valid Arbitration Agreement between the parties.
Thus, the High Court quashed and set aside the Impugned Order and the Appellate Order, and restored the Suit before the Trial Court.
In the present decision, the High Court held that it is essential for both the parties to consent to refer the disputes arising under the Agreement to Arbitration. The essential objective of Arbitration prescribed under the Act is that it upholds fairness and equality between all the parties to the dispute. Accordingly, both the parties to a dispute should mutually agree to the an Arbitration Agreement, which would otherwise defeat the said object of the Act.
Similarly, if the main Agreement does not contain an Arbitration Clause or Agreement, any reference therein to another document which contains an Arbitration Clause or Agreement signed by only one party, would not render the main Agreement as a valid Arbitration Agreement.
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