Arbitration In IndiaPolicy Circular Requiring Arbitration Cannot Replace Explicit Agreement in Contracts

The Hon’ble Calcutta High Court, in the case of Dhansar Engineering Company Pvt. Ltd. Vs. Eastern Coalfield Ltd., RVW: 38 of 2023 Interlocutory Application no. GA/1/2023 decided on 18.04.2024, held that a policy circular issued by a parent company contemplating arbitration would not amount to an arbitration agreement if it required fresh consent of the contractor to refer the dispute to arbitration.

FACTS

Dhansar Engineering Company Pvt. Ltd. was awarded a contract by Eastern Coalfields Ltd. through an e-tender for hiring heavy earth-moving machinery and removing coal at the Narayankuri O.C. Patch of the Kunustoria Area. Following the tender process, a letter of acceptance was issued on March 31, 2017, and a formal work order was executed on May 24, 2017. Subsequently, the parties entered into a formal agreement on August 30, 2017, followed by a supplementary work order on February 8, 2019.

However, the Applicant allegedly failed to fulfil the conditions outlined in the Notice Inviting Tender (hereinafter referred to as “NIT”) despite multiple opportunities provided by the Respondent. This failure led Eastern Coalfields Ltd. to foreclose the contract. Meanwhile, a circular issued by Coal India Limited (hereinafter referred to as “CIL”) on April 7, 2017, introduced a policy requiring disputes between CIL subsidiaries and private contractors to be referred to arbitration. Despite this policy, the original contract between the parties did not explicitly incorporate an arbitration clause.

The Applicant had earlier sought the appointment of an arbitrator through an application, which was dismissed on December 1, 2022, due to the lack of a valid arbitration clause in the contract. Following a Supreme Court order granting liberty to file for review, the Applicant sought to challenge the dismissal, arguing that the arbitration clause was incorporated by reference through the CIL circular. The current review application raises issues regarding the enforceability of the arbitration clause and its incorporation into the contract.

ISSUES BEFORE THE SUPREME COURT

1. Whether a policy circular amounts to an arbitration agreement if it contemplates further consent of the parties?
2. Which clause of the CIL circular, Clause 2 (applicable to future contracts) or Clause 5 (applicable to existing contracts), governs the dispute in this case?

CONTENTIONS OF THE PARTIES

The Applicant argued that the earlier order dated December 1, 2022, contained an error apparent on the face of the record as it incorrectly relied on Clause 5 of the CIL circular, which applies to existing contracts, instead of Clause 2, which governs future contracts.

The Applicant contended that the agreement, executed after the issuance of the circular on April 7, 2017, automatically incorporated Clause 2 by reference, making arbitration mandatory under the amended terms.

It was submitted that the requirements of Section 7 of the Arbitration and Conciliation Act, 1996, were satisfied, as the arbitration clause was incorporated into the contract through the circular.

The Applicant distinguished the present case from precedents like Mahanadi Coalfields Ltd. v. Deepak Cables (India) Ltd., arguing that the applicable clause in this case is Clause 2, not Clause 5, which was relevant in the cited decision.

The Applicant asserted that the arbitration agreement was valid and binding, necessitating the appointment of an arbitrator to resolve the disputes.

The Respondent argued that there were no grounds for review under Order 47, Rule 1 of the Code of Civil Procedure, 1908, as an error apparent must be evident without the need for detailed reasoning or interpretation.

It contended that a review cannot serve as an appeal in disguise and that the Applicant is attempting to reargue the case, which is impermissible under the law.

The Respondent submitted that the Applicant was barred by the doctrine of estoppel from taking a contradictory stand in the review application, having already accepted the absence of a valid arbitration clause in earlier proceedings.

On merits, the Respondent argued that despite repeated opportunities, the Applicant failed to complete the work under the NIT, resulting in the foreclosure of the contract.

The Respondent maintained that the absence of a valid and explicit arbitration clause in the original contract precludes the Applicant from seeking relief based on the circular.

It further relied on judicial precedents, including Mahanadi Coalfields Ltd. v. IVRCL AMR Joint Venture, to argue that a mere circular cannot constitute a binding arbitration agreement unless explicitly incorporated into the contract.

DECISION AND FINDINGS

The Hon’ble Calcutta High Court held that there was an error in the earlier order dated December 1, 2022, as it relied on Clause 5 of the CIL circular, applicable to existing contracts, instead of Clause 2, which governs future contracts. Since the agreement between the parties was executed after the issuance of the circular on April 7, 2017, Clause 2 was deemed applicable.
The court observed that for an arbitration clause to be valid under Section 7 of the Arbitration and Conciliation Act, 1996, (hereinafter referred to as “A&C Act”) there must be a clear and mutual intention of the parties to resolve disputes through arbitration. This requires explicit incorporation of the arbitration clause into the contract.

The court found that the CIL circular, while expressing a general policy to adopt arbitration for dispute resolution, did not result in the automatic incorporation of an arbitration clause into the contract. The absence of a specific agreement or reference to arbitration in the original contract rendered the arbitration clause unenforceable.

The court dismissed the review application, concluding that the circular alone could not override the terms of the original agreement. It reiterated that arbitration agreements require clear mutual consent and cannot be implied solely through a policy circular.

The court emphasized that the power of review is limited and cannot be used to reargue or reconsider a decision based on merits unless there is a clear error on the face of the record.

The court, therefore, upheld the original finding that there was no valid arbitration agreement between the parties and dismissed the application for appointing an arbitrator. No costs were awarded.

AMLEGALS REMARKS

The present case emphasizes the necessity for a clause for arbitration in the agreement itself as enforcement in so many terms or categories under the Arbitration and Conciliation Act, 1996. Policymaking like CIL circular leaving all issues to be resolved by arbitration indeed helps streamline the process of settling disputes but cannot replace mutual consent and clearly struck out contractual terms. It reiterates that arbitration is a consensual process and by a mere policy directive, one cannot impose arbitration without express agreement of the parties.

Therefore, a caution not only to businesses but also entities that enter into contracts within a changing procedural scheme. It reinforces as needing careful drafting of agreements such that the mechanisms of dispute resolution- arbitration shall be readily included in it in simple and clear terms to be free of lengthy litigation. Overall, the court’s approach strikes a balance between upholding procedural fairness and emphasizing the contractual autonomy of parties.

Team AMLEGALS