In a country like India where:
"Our legal system has a reputation for being
expensive and for being prone to delays"[1] and our courts are overburdened
Inadequate infrastructure, thus constantly suggesting arbitration, in fact
"Indian courts are known for their pro-arbitration stance". But Indian citizens, corporates, companies are still reluctant to include Arbitration clause in their
principal or standalone agreement due lack of clarity or middle ground.
So, as
said many of the legal contracts in India lacks arbitration clause due to
various reasons thus the question in hand is whether a Matter Can be Referred
for Arbitration in the Absence of an Arbitration Clause or Agreement? And to
find the answer for the same the researcher will look in various provisions,
legal theories as well as judgements (both national and international) along
with precedents developed over time.
Introduction
Many people are unaware that even when an original contract does not contain an
arbitration clause, arbitration procedures are nevertheless fully feasible.
Although the framework of arbitration and litigation is similar, the main
distinction between the two is that the former is only possible because of an
arbitration provision or arbitration agreement. The formal agreement between the
parties to arbitrate any disputes or disagreements they may have now or in the
future is known as an arbitration agreement. held in the case of
Canara Bank vs.
Mahanagar Telephone Nigam Ltd.[2]
Since arbitration is an entirely mutual dispute resolution procedure, the
parties' agreement is the only factor that determines whether arbitration
procedures may be initiated. The necessary will (or consent to arbitrate) is
frequently, but not always, included in the agreement reached between the
parties in the form of an arbitration provision.
The process of alternate dispute procedures can occasionally become
time-consuming due to inartistic writing, which negates its fundamental purpose.
When there is no arbitration clause or provision in place, the problem gets
worse since a valid arbitration agreement is the cornerstone upon which the
whole structure of the arbitral procedure is built and because the nature of the
dispute lends itself more favorably to arbitration.
In this paper , the author would like to answer the research question as to "If
there is not a clause or agreement requiring arbitration, can a matter
nevertheless be referred to arbitration?"
The Parties' Intentions
In
Sonact Group Limited v. Premuda SPA[3], the English High Court endorsed the
"pro-arbitration approach"[4] to the implementation of formal settlements
through arbitration. The Court came to the judgement that the parties might be
presumed to have meant that the arbitral tribunal under the principal agreement
would also have jurisdiction over disputes arising out of the settlement
agreement between the same parties, even though the settlement agreement did not
explicitly contain an arbitration clause. The Court's judgement was supported by
the parties' apparent desire to arbitrate their differences and that's what it
matters.
The Supreme Court and High Courts of India have also taken a similarly
pragmatist and pro-arbitration approach. The Arbitration and Conciliation Act,
1996 governs arbitration law in India, furthermore, Section 7[5] of the
aforementioned law defines an arbitration agreement as "an agreement by the
parties to submit to arbitration all or certain disputes which have arisen or
which may arise between them in respect of a defined legal relationship, whether
contractual or not"
As per section 7(3) of The Arbitration and Conciliation Act, 1996[6], "an
arbitration agreement shall be in writing" and can take the shape of a
standalone contract or an arbitration clause in the existing contract. A written
arbitration clause is admissible under clause 4[7] of the aforementioned section
if it is contained in a document that the parties have signed, an exchange of
letters or correspondence that serves as a record of the agreement, or an
exchange of statements of claim and defense in which the existence of the
agreement is alleged by one party and not denied by the other. When a written
contract refers to another document that contains an arbitration clause in a way
that makes it a part of the contract, such reference becomes an arbitration
agreement.
The courts have frequently reaffirmed that an arbitration agreement need not be
in a certain form, keeping in mind Section 7(4)[8]. It is implied from the many
papers that the parties have signed and exchanged during the course of their
agreement, making it conceivable to use arbitration even in the absence of an
express agreement.
The Apex Court clarified that the arbitration provision is not necessary to be
in any specific form in
Smt.Rukmanibai Gupta v. The Collector, Jabalpur
&Ors[9]. What is crucial is that it should be possible to deduce from the
wording of the agreement that the parties intended to submit the disagreement to
arbitration. Therefore, whether or not the term "arbitrator" or the word
"arbitration" have been used in the agreement is irrelevant.
Furthermore, it is
not crucial that the arbitration clause be in the same document as the other
provisions of the parties' agreement. Additionally, the Supreme Court focused on
the fact that conflicts were brought to arbitration and that the arbitrator's
ruling was rendered final as markers of the type of the agreement, which the
Court concluded to be an arbitration agreement.
"Law is well settled that arbitration clause may be incorporated by reference to
a specific document which is in existence and whose terms are easily
ascertainable."[10]
In
Visa International Ltd vs. Continental Resources USA Ltd[11], the
court stated:
"No party can be allowed to take advantage of inartistic drafting of arbitration
clause in any agreement as long as clear intention of parties to go for
arbitration in case of any future disputes is evident from the agreement and
material on record including surrounding circumstances.",
which is somewhat similar to the points considered above and also stated
"Any dispute arising out of this agreement, and which cannot be settled amicably
shall be finally settled in accordance with the Arbitration and Conciliation Act
1996."
The Supreme Court held in
Mahanagar Telephone Nigam Ltd vs Canara Bank[12] that
if it can be inferred from the documentation on record that the parties were "ad
idem" and reached an agreement on all important conditions, such contract would
be declared binding. The meaning of a contract should thus be read using common
sense, and such comprehension should not be hampered by a pedantic and
legalistic interpretation.
"A commercial document has to be interpreted in such a manner so as to give
effect to the agreement, rather than to invalidate it. An 'arbitration
agreement' is a commercial document inter parties and must be interpreted so as
to give effect to the intention of the parties, rather than to invalidate it on
technicalities." [13]
In addition, when determining the terms of the agreement in
Khardah Company Ltd.
v. Raymon and Co. (India) Pvt. Ltd[14], the supreme court stated: "If on a
reading of the document as a whole, it can fairly be deduced from the words
actually used herein, that the parties had agreed on a particular term, there is
nothing in law which prevents them from setting up that term. The terms of a
contract can be expressed or implied from what has been expressed. It is in the
ultimate analysis, a question of construction of the contract."
PARTY AUTONOMY
"Party autonomy has been held to be the brooding and guiding spirit of
arbitration."[15]
The flexibility of the parties to create their contractual connection however
they see fit is known as "party autonomy." One of the main benefits of
arbitration is that the parties may agree on everything, from the hearing dates
to the process to be followed. The party autonomy concept is a fundamental tenet
of international trade and dispute resolution.
The Supreme Court of India clarified the significance of party autonomy in
Arbitration Mechanism in the landmark case of Pasl Wind Solutions Private... vs.
Ge Power Conversion India Private[16] by drawing on several precedents and
foreign references.
As a result, the Apex Court determined in Bharat Aluminium Co. v. Kaiser
Aluminium Technical Services Inc[17] that:
"Party autonomy being the brooding and guiding spirit in arbitration, the
parties are free to agree on application of three different laws governing their
entire contract
- proper law of contract,
- proper law of arbitration agreement, and
- proper law of the conduct of arbitration, which is popularly and in
legal parlance known as curial law.
The Apex Court in the judgment has also shed light on the findings of authors in
"Comparative International Commercial Arbitration which says - "[18]
"All modern arbitration laws recognize party autonomy, that is, parties are free
to determine the substantive law or rules applicable to the merits of the
dispute to be resolved by arbitration. Party autonomy provides contracting
parties with a mechanism of avoiding the application of an unfavorable or
inappropriate law to an international dispute. This choice is and should be
binding on the Arbitration Tribunal. This is also confirmed in most arbitration
rules."[19]
Henceforth, in determining the existence, legality, or interpretation of the
arbitration agreement or the presence of an arbitration provision in the
agreement, the contents of the said contract must be understood in the way that
the parties wish and want them to be understood.
"In that context, particularly in agreements of arbitration, where party
autonomy is the grund norm, how the parties worked out the agreement, is one of
the indicators to decipher the intention, apart from the plain or grammatical
meaning of the expressions and the use of the expressions at the proper places
in the agreement."[20]
POWER OF THE COURT TO REFER THE MATTER FOR ARBITRATION
When two parties sign into a contract and there is no arbitration clause, the
parties have just one option, which is for the aggrieved party to file a civil
claim in court. In such circumstances, the court may realize during the hearing
that the subject, being a commercial disagreement, is better addressed through
alternative conflict channels because litigation is a long and complicated
process.
Section 89 of the CPC[21], says – "Where it appears to the Court that there
exist elements of a settlement which may be acceptable to the parties, the Court
shall formulate the terms of settlement and give them to the parties for their
observations and after receiving the observations of the parties, the Court may
reformulate the terms of a possible settlement and refer the same for:
- arbitration
- conciliation;
- judicial settlement including settlement through Lok Adalat: or
- mediation.
Additionally, if the court believes that there is a settling aspect that would
be desirable to the parties, the court will draught the terms of the agreement
and, after hearing from the parties, may send the subject for arbitration,
conciliation, or judicial settlement. The Courts may send any issue to
arbitration in the absence of a pre-arbitration clause or agreement.
The Supreme Court clarified the requirements for referring a matter to
arbitration under Section 89 of the Civil Procedure Code in
Kerala State
Electricity Board and Anr. Vs. Kurien E. Kathilal and Anr[22], as the contract
did not contain an arbitration clause in this case, and thus a civil suit was
filed in the Kerala High Court. The court remarked during the hearing that
because the disagreement was commercial in nature, it would take a long time to
settle it through a civil complaint. The Court decided that it would be best to
refer the case to arbitration. The court obtained the parties' consent, the
parties agreed, and the dispute was submitted to arbitration by the High Court's
decision.
The Kerala Electricity Board filed an appeal with the Supreme Court, claiming
that there was no arbitration agreement or written condition. The parties
provided their oral approval in open court, and there was no written agreement
explicitly establishing the parties' purpose and assent to send the subject to
arbitration, which is required by section 7 of the AC Act[23].
The High Court
should not have sent the parties to arbitration without a "joint memo or a joint
application" from the parties, held the Supreme Court of India, and that there
was no arbitration agreement between the parties. Therefore, the parties must
agree in writing by joint letter or joint application for the court to send the
parties to arbitration if there is no arbitration agreement between the parties.
Only the oral consent of the counsel for the parties may be used to send the
parties to arbitration.
Section 7 consequently requires courts to get the parties' written assent before
submitting a matter to arbitration, even if they are following Section 89 of the
CPC
The Supreme Court defined this requirement in the Kerala Electricity Board case
as follows:
35. Insofar reference of the parties to arbitration, oral consent given by the
counsel without a written memo of instructions does not fulfill the requirement
under Section 89 CPC. Since referring the parties to arbitration has serious
consequences of taking them away from the stream of civil courts and subject
them to the rigor of arbitration proceedings, in the absence of arbitration
agreement, the court can refer them to arbitration only with written consent of
parties either by way of joint memo or joint application; more so, when
government or statutory body like the appellant-Board is involved.
Even if no prior arbitration agreement existed, the parties to the complaint may
agree to arbitrate if the court provides them with a choice of ADR procedures
under Section 89 of the Code. Such an agreement can be made before the court in
the form of a "joint memo, joint application, or joint affidavit," or it can be
recorded in the "order sheet" signed by the parties.
Once the parties have
signed such a written agreement, the matter then can be sent to arbitration
under Section 89 of the Code, and the requirements of the Act will apply to the
arbitration.[24]
In the absence of an arbitration clause, Section 89 of the Civil Procedure Code
allows courts to send a dispute to arbitration; however, such a referral can
only be made if all contract parties unanimously agree to resort to arbitration.
As previously noted, such authorization must be in writing. As a result, only
the Court has the ability to rule on the presence or legality of an arbitration
agreement.
In
Sukanya Holdings Pvt. Ltd vs Jayesh H. Pandya & Anr[25] court opined that
"section 89 of CPC would be applicable even in cases where there is no
arbitration agreement for referring the dispute to arbitration."
This Court reaffirmed the position in
Jagdish Chander v. Ramesh Chander[26] by
declaring the following:
"Therefore, where there is no pre-existing arbitration agreement between the
parties, the consent of all the parties to the suit will be necessary, for
referring the subject matter of the suit to arbitration under section 89 of the
Code."
It is important to keep in mind that while it is possible to send a dispute to
arbitration without a clause by assuming the parties' intentions, the Apex court
has also rejected such a referral in situations where the parties' intentions
could not be assumed from the exchange of papers.
The Supreme Court rejected a reference to the existence of an arbitration
agreement between the "first respondent and the appellant" in
S.N. Prasad, M/S
Hitek vs. M/S Monnet Finance Ltd. & Ors[27] and explained that, in order for a
statement of claim to qualify as an arbitration agreement under section 7(4)(c)
of the Act, the applicant must make a "specific allegation about the existence
of an arbitration agreement and the other party must non-denial"
"An `allegation' is an assertion or declaration about a fact and also refers to
the narration of a transaction. If there is no allegation as to the existence of
any arbitration agreement between the parties, the question of 'non-denial' does
not arise and the matter will not be referred for arbitration because no
reference in any manner by the party is inferred."[28]
NOVATION
Novation is the process of replacing a validly existing contract with a new one
when all parties are in agreement on the transfer. It is the transfer of a
contract's "benefits and the burdens" to an other party. Benefits from contracts
might be anything. The benefit may be money for services, for instance. The
responsibilities assumed to get the payment—in this case, the services—are
referred to as the burdens.
One of the contract's parties is prepared to give up
the obligations and forego the advantages. Novation is different from an
assignment, when one party surrenders all rights specified in the contract but
is still liable for its performance. The first contract is still in effect.
The Supreme Court held in
Spml Infra Ltd vs Ntpc Limited[29] that there is no
doubt that if a contract is novated by the parties entering into another
contract, the parties' rights and responsibilities would be covered by the new
contract rather than the one that has been novated.
As a result, if an arbitration clause is added to a future contract or, more
often, an amendment, it may be incorporated to the primary contract even if
there is no initial arbitration clause there. In this case, the arbitration
clause will take precedence and control all prior contracts.
"Once it is established that the parties had entered into an arbitration
agreement, the Courts must lean in favour of relegating the parties to that
forum. Once it is established that the parties had entered into an Arbitration
Agreement, the question whether the contract (including the arbitration clause)
stood discharged by accord and satisfaction must be considered with the
perspective whether the same is established without any detailed adjudicatory
exercise."[30]
THIRD PARTIES
Between two or more parties to the arrangement, there is an arbitration
agreement. However, there are some circumstances where an arbitration agreement
between two or more parties can act to "bind other parties or non-signatories"
to the agreement, as explained in Cheran Properties Limited vs. Kasturi And Sons
Limited[31], which is supported by an "expanding body of academic literature and
adjudicatory trends."
The court relied on ideas developed by numerous international jurists to explain
the aforementioned interpretation.;
"Arbitration is usually limited to parties who have consented to the process,
either by agreeing in their contract to refer any disputes arising in the future
between them to arbitration or by submitting to arbitration when a dispute
arises. A party who has not so consented, often referred to as a third party or
a non-signatory to the arbitration agreement, is usually excluded from the
arbitration.
There are however some occasions when such a third party may be
bound by the agreement to arbitrate. For example, …, assignees and
representatives may become a party to the arbitration agreement in place of the
original signatory on the basis that they are successors to that party's
interest and claim "through or under" the original party.
The third party can then be compelled to arbitrate any dispute that arises."[32]
Modern business transactions sometimes involve several stages and agreements, as
well as transactions within a group of companies. The agreement's context may
show that both signatory and non-signatory parties are intended to be bound by
it.
"The effort is to find the true essence of the business arrangement and to
unravel from a layered structure of commercial arrangements, an intent to bind
someone who is not formally a signatory but has assumed the obligation to be
bound by the actions of a signatory. " [33]
In
Chloro Controls India (P) Ltd. vs. Severn Trent Water Purification Inc.[34],
the Supreme Court clarified that arbitration between a signatory and a third
party is possible, but that the burden of proof lies with the third party to
demonstrate that it is claiming "through" or "under" the signatory party as per
Section 45 of the 1996 Act[35] in fact and in law.
The same point of view was expressed by the Supreme Court in Ameet Lalchand Shah
vs. Rishabh Enterprises[36], where the court said that
"If it can prima facie be shown that parties are ad idem, even though the other
party may not have signed a formal contract, it cannot absolve him from the
liability under the agreement."
Conclusion
The patterns have shifted recently. According to recent judgements, India is
leaning toward arbitration and adopting a pro-arbitration attitude. The
judiciary in India has repeatedly taken a pragmatic approach to arbitration,
highlighting the value of party autonomy as "the grund norm" in Pasl Wind
Solutions Private... vs. Ge Power Conversion India Private[37], placing a high
priority on determining the parties' intentions in Visa International Ltd vs.
Continental Resources USA Ltd, and upholding the applicability of mutual consent
in Jagdish Chander v. Ramesh Chander[38].
The Legislature has also taken significant steps towards this direction by
reducing the scope of interference in arbitration proceedings as is evident from
what was opined in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[39]
as, "The legislative policy of minimal interference is enshrined in Section 5,
which by a non-obstante clause prohibits judicial intervention except as
specified in Part I of the Arbitration Act."
Both the legislature and the judiciary are making excellent progress, but in
these situations where there is no arbitration clause, parties must exercise
extreme caution. It is usually better to have a good arbitration provision
prepared if the parties' desire to submit the matter to arbitration is evident.
In
Kerala State Electricity Board and Anr. vs. Kurien E. Kathilal and Anr., it
is noted that mutual consent of the parties to submit the subject to arbitration
ought to be in writing and should not be overlooked throughout the process of
drafting are crucial. A legally enforceable arbitration agreement is the
foundation of an arbitration, according to the Supreme Court's ruling in
Mahanagar Telephone Nigam Ltd. v. Canara Bank.
In reality, it can be difficult to persuade a business partner to accept
arbitration once a disagreement has occurred since the party in violation may
want the case's settlement to be pushed off indefinitely. However, for parties
facing the prospect of litigation before a clogged court system, it is
frequently in both parties' interests to agree to arbitration after a
disagreement has developed in order to prevent protracted court processes that
are in the best interests of neither side.
In addition, several companies in India have been successful in getting partners
and clients to agree to arbitrate a dispute after one has developed by making
the offer more appetizing, such as by recommending mediation first, with
arbitration to follow only if mediation is failed. In conclusion, if the parties
reach a submitting agreement after a disagreement has occurred, arbitration
without an arbitration provision is a completely viable dispute resolution
option. Because the parties consent to arbitration fully aware of the scope of
an ongoing conflict, arbitration by submission agreements really represents the
pinnacle of consensualism.
End-Notes:
- India's legal system 'expensive', 'prone to delays': President Kovind (2018) The Indian Express. Available at: https://indianexpress.com/article/india/indias-legal-system-expensive-prone-to-delays-president-ram-nath-kovind-5101493/.
- Civil Appeal Nos. 6202-6205 OF 2019 (Arising out of SLP (Civil) No. 13573-13576 of 2014)
- Males J: [2018] EWHC 3820 (Comm): 12 December 2018
- Berger, P.D.K.P. (2016) Principle XIII.1.2 - interpretation of arbitration agreements, translex. Available at: https://www.trans-lex.org/968902/_/interpretation-of-arbitration-agreements
- The Arbitration and Conciliation Act, 1996, s. 7
- The Arbitration and Conciliation Act, 1996, s. 7(3)
- The Arbitration and Conciliation Act, 1996, s. 4
- The Arbitration and Conciliation Act, 1996, s. 7(4)
- Smt. Rukmanibai Gupta vs Collector Jabalpur And Ors (1980) 4 SCC 556
- Ibid
- Arbitration Petition No. 16 OF 2007
- Mahanagar Telephone Nigam Ltd vs Canara Bank, CIVIL APPEAL NOS. 6202-6205 OF 2019 (Arising out of SLP (Civil) No. 13573-13576 of 2014)
- CIVIL APPEAL NOS. 6202-6205 OF 2019, (Arising out of SLP (Civil) No. 13573-13576 of 2014)
- Khardah Company Ltd. v. Raymon and Co. (India) Pvt. Ltd 1962 AIR 1810, 1963 SCR (3) 183
- PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited; MANU/SC/0295/2021
- Ibid
- Bharat Aluminium v. Kaiser Technical Services, Civ App 3678 of 2007
- Lew, Julian D. M., Loukas A Mistelis, and Stefan M Kröll. Comparative International Commercial Arbitration. The Hague: Kluwer law international, 2003.
- [Chapter 17: Determination of Applicable Law in Julian D.M. Lew, Loukas A. Mistelis, et al.,Comparative International Commercial Arbitration (Kluwer Law International 2003) pp. 411-437 , Para 17-8]
- Amazon.Com Nv Investment ... vs Future Retail Limited CIVIL APPEAL NOs. 4492-4493 OF 2021
- The Code of Civil Procedure, 1908, s. 89
- Kerala State Electricity Board vs Kurien E. Kalathil , CIVIL APPEAL NOS.3164-3165 OF 2017
- The Arbitration and Conciliation Act, 1996, s. 7
- Ibid; See 21
- Sukanya Holdings Pvt. Ltd vs Jayesh H. Pandya & Anr, Appeal (civil) 1174 of 2002
- Jagdish Chander v. Ramesh Chander , Appeal (civil) 4467 of 2002
- S.N. Prasad, M/S Hitek vs. M/S Monnet Finance Ltd. & Ors ,CIVIL APPEAL NO. 9224 OF 2010 [Arising out of SLP [C] No.17114/2008]
- Ibid see 26
- Spml Infra Ltd vs Ntpc Limited (COMM) 318/2020 and IA No. 16126/2021
- S.N.Prasad,M/S Hitek ... vs M/S Monnet Finance Ltd.& Ors, Civil Appeal No. 9224 Of 2010
- Cheran Properties Limited vs. Kasturi And Sons Limited, CIVIL APPEAL NOS 10025-10026 OF 2017
- Magic Eye Developers Pvt. Ltd. vs Green Edge Infra Pvt. Ltd. CS(COMM) 1290/2018
- Cheran Propertiees Limited vs Kasturi And Sons, CIVIL APPEAL NOS 10025-10026 OF 2017
- Chloro Controls India (P) Ltd. vs. Severn Trent Water Purification Inc CIVIL APPEAL NO. 7134 OF 2012 (Arising out of SLP (C) No.8950 of 2010)
- The Arbitration and Conciliation Act, 1996, s. 45
- Ameet Lalchand Shah vs. Rishabh Enterprises CIVIL APPEAL NO. 4690 OF 2018 (Arising out of SLP(C) No.16789 of 2017)
- Pasl Wind Solutions Private... vs. Ge Power Conversion India Private, CIVIL APPEAL NO. 1647 OF 2021 [Arising Out Of Slp (Civil) No.3936 OF 2021]
- Jagdish Chander v. Ramesh Chander, CASE NO.: Appeal (civil) 4467 of 2002
- N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd CIVIL APPEAL NOS. 3802 - 3803 / 2020
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