Is An Arbitration Clause Contained In An Unsigned Document Enforceable: Analysis In

Light Of Sai Wardha Power Ltd. And Ors. V Goyal Dhatu Udyog Pvt. Ltd.
(Assignment towards partial fulfillment of the assessment in the subject of ADR)
(Final Word Count: 2537, excluding Footnotes)
Roll No. 921
IX Semester
B.A. LL.B. (Consti. Hons.)
Introduction
The Arbitration and Conciliation Act, 1996 [the “Act”] is the governing statute for both the
domestic and international arbitration. Except for certain modification, the Act is complete
adoption of the UNICTRAL Model Law. Apart from UNICTRAL Model Law, the Act also
draws its source extensively from English Arbitration Act, 1996 but the provisions of the Act
miss all-embracing approach of the English Arbitration Act, 1996.

Section 7(1) of the Act provides that arbitration shall be construed to be in writing if it is
contained in:

a) a document signed by the parties

b) an exchange of letters, telex, telegrams or other means of telecommunication which
provide a record of the agreement; or
c) 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.

Section 7(5) of the Act provides that the reference in a contract to a document containing an
arbitration clause constitutes an arbitration agreement if the contract is in writing and the
reference is such as to make that arbitration clause part of the contract.

The Arbitration agreement is of great significance as by this agreement the parties to a

transaction exclude themselves from regular judicial process of law (courts), for settlement of
disputes arising out of the transaction. If there is an arbitration agreement between the parties,
civil courts are barred from adjudicating the claim wholly covered under the arbitration
agreement.1

1
Arbitration Agreements Interpretation, Available at <http://legalapproach.blogspot.in/2012/11/arbitration-
agreement-under-arbitration.html>, [Last Accessed on 23 Sept, 2015]
Earlier in India, arbitration can only be commenced if the parties have recorded the arbitration
agreement in a signed document. This position went under a drastic change following a series of
Supreme Court decisions on this issue. The Supreme Court held that an arbitration agreement has
to be in writing, and may even be contained in exchange of letters or any other means of
telecommunication which provide a record of the agreement. The agreement need not be signed
and an unsigned agreement affirmed by the parties’ conduct would be valid as an arbitration
agreement. This article analyses various decision of the apex court on this moot issue, its impact
on contract formation and the sanctity of arbitration agreements formed through
correspondences.

Judicial Approach
In Shakti Bhog Food Limited Vs. Kola Shipping Limited,2 it was observed by Supreme Court;
“We would want to reiterate that as far as the provision of Section 7 of the Act is concerned, an
arbitration agreement may be in the form of an arbitration clause in a contract or in the form of
a separate agreement and furthermore an arbitration is considered to be in writing if it is
contained in a document signed by the parties or in a exchange of letters, telex, telegrams or
other means of telecommunication which provide a record of the agreement or an exchange of
statement of claim and defence in which the existence of an agreement is alleged by one party
and not denied by the other. So from the provisions of Section 7, it is clear that a charter party
agreement need not be in writing signed by both parties and this could as well be made out from
the acts of the parties to the agreement by way of their exchange of letters and information
through fax, e-mails, etc.”

In this judgment the court held that the arbitration agreement need not be in writing and it can be
inferred from the communication between the parties.

The Supreme Court’s decision in Smita Conductors Ltd v. Euro Alloys Ltd.3 settled the issue
where it was held that the agreement need not be signed and an unsigned agreement affirmed by
the parties’ conduct would be valid as an arbitration agreement. It was further upheld in the
Supreme Court’s decision in Trimex International FZE Limited, Dubai v. Vedanta Aluminum,

2
Shakti Bhog Food Limited Vs. Kola Shipping Limited (2009) 2 SCC 134.
3
Smita Conductors Ltd v. Euro Alloys Ltd 2001 (7) SCC 728
India.4 In this case, the Supreme Court has essentially held that where communication of
acceptance is complete, the contract has been formed and the terms can be ascertained from the
various correspondences exchanged between the parties, including the intention to arbitrate.

In 2014, this position was further expounded in the case of Govind Rubber Ltd. v. Louids
Dreyfus Commodities Asia P. Ltd.5 In this judgment, the Apex Court recorded as follows:

"Perusal of the aforesaid provisions would show that in order to constitute an arbitration
agreement, it need not be signed by all the parties. Section 7(3) of the Act provides that the
arbitration agreement shall be in writing, which is a mandatory requirement. Section 7(4) states
that the arbitration agreement shall be in writing, if it is a document signed by all the parties.
But a perusal of Clauses (b) & (c) of Section 7(4) would show that a written document which
may not be signed by the parties even then it can be arbitration agreement. Section 7(4)(b)
provides that an arbitration agreement can be culled out from an exchange of letters, telex,
telegrams or other means of telecommunication which provide a record of the agreement.

Reading the provisions it can safely be concluded that an arbitration agreement even though in
writing need not be signed by the parties if the record of agreement is provided by exchange of
letters, telex, telegrams or other means of telecommunication. Section 7(4)(c) provides there can
be an arbitration agreement in the exchange of statements of claims and defence in which the
existence of the agreement is alleged by one party and not denied by the other. If it can be prima
facie shown that the parties are at ad idem, then mere fact of one party not signing the
agreement cannot absolve himself from the liability under the agreement.”

In the present day of E-commerce, in cases of internet purchases, tele purchases, ticket booking
on internet and in standard forms of contract, terms and conditions are agreed upon. In such
agreements, if the identity of the parties is established, and there is a record of agreement it
becomes an arbitration agreement if there is an arbitration clause showing ad idem between the
parties. Therefore, signature is not a formal requirement Under Section 7(4)(b) or 7(4)(c) or
under 7(5) of the Act.

4
Trimex International FZE Limited, Dubai v. Vedanta Aluminum, India (2010) 3 SCC 1
5
2014 (4) Scale 92
A commercial document having arbitration clause has to be interpreted in such a manner as to
give effect to the agreement rather than invalidate it. On the principle of construction of a
commercial agreement, Scrutton on Charter Parties6 explained that commercial agreement has to
be construed, according to the sense and meaning as collected in the first place from the terms
used and understood in the plain, ordinary and popular sense. The learned Author also said that
the agreement has to be interpreted 'in order to effectuate the immediate intention of the parties'.
Similarly, Russel on Arbitration7 opined, relying on Astro Vendeor Compania Naviera SA v.
Mabanaft GmbH8 that the Court should, if the circumstances allow, lean in favour of giving
effect to the arbitration clause to which the parties have agreed. The Apex Court also in the case
of Union of India v. D.N. Revri and Co.9 held that a commercial document between the parties
must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate
it. The learned judge noted that:

“It would not be right while interpreting a contract, entered into between two lay parties, to
apply strict rules of construction which are ordinarily applicable to a conveyance and other
formal documents. The meaning of such a contract must be gathered by adopting a common
sense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic
interpretation.”

In the judgment given in the case of UNISSI (India) Pvt. Ltd. v. Post Graduate Institute of
Medical Education & Research10, the Hon'ble Supreme Court held that whether there exists an
arbitration agreement is to be decided on the basis of facts and circumstances of each case.

In Shakti Bhog Foods Limited v. Kola Shipping Limited11, this Court held that from the
provisions made under Section 7 of the Arbitration and Conciliation Act, 1996 that the existence
of an arbitration agreement can be inferred from a document signed by the parties, or an
exchange of letters, telex, telegrams or other means of telecommunication, which provide a
record of the agreement.
6
Thomas Edward Scrutton, Sir Alan Abraham Mocatta, Sir Michael J Mustill, Scrutton on Charterparties and Bills
of Lading, Article 6 on p.16, 17th Edition, Sweet & Maxwell, London, 1964
7
Russell on Arbitration, (Edited by - David St John Sutton, John Kendall), and Judith Gill 21st Edition, p.28,
Published by Sweet & Maxwell, London, 1997
8
(1970) 2 Lloyd's Rep. 267
9
AIR 1976 SC 2257,
10
(2009) 1 SCC 107
11
(2009) 2 SCC 134
In SBP & Co. v. Patel Engineering Ltd.12,it is laid down that when the defendant before the
judicial authority raises a plea that there is an arbitration agreement and the subject matter of the
claim is covered by the agreement, the judicial authority has to decide both the issues as to
whether there is in existence a valid arbitration agreement and whether the dispute raised before
it is covered by the arbitration clause.

Sai Wardha Power Ltd. And Ors. V Goyal Dhatu Udyog Pvt. Ltd.
FACTS OF THE CASE
The petitioners and respondent in this case entered into a purchase order which incorporated an
arbitration clause. As per clause 11(a), any dispute arising between the parties out of or relating
to the purchase order is required to be settled by the sole arbitrator to be appointed by the parties.
When the dispute arose, the petitioners filed application under section 8 of the Arbitration and
Conciliation Act, 1996 praying that the parties be referred to arbitration. The respondent filed
civil suit against the petitioners praying for the decree for Rs. 36,24,598/- along with interest.
The learned trial Judge concluded that the respondent/ plaintiff has not agreed in respect of the
arbitration clause and therefore, there is no arbitration agreement between the parties.

ISSUES FOR CONSIDERATION

 Whether the parties should be referred to arbitration?
 Whether the dispute between the parties is covered by the arbitration clause?

JUDGMENT OF THE COURT

The Court set aside the impugned order of the trial court and held that the arbitration agreement
exists between the parties and the dispute between the parties is covered by it. Therefore, the
dispute was referred for arbitration.

REASONING OF THE COURT

1. On issue regarding existence of arbitration agreement.

On perusal of Clauses (b) & (c) of Section 7(4) of Arbitration and Conciliation Act, 1996 it was
held that a written document which may not be signed by the parties even then it can be
arbitration agreement.13
12
2005(8) SCC 618
13
Govind Rubber Ltd. Vs. Louids Dreyfus Commodities Asia P. Ltd., 2014 (4) Scale 92.
Moreover, a commercial document having arbitration clause has to be interpreted in such a
manner as to give effect to the agreement rather than invalidate it.14 The agreement has to be
interpreted in order to effectuate the immediate intention of the parties.

The provisions made under Section 7 of the Arbitration and Conciliation Act, 1996 that the
existence of an arbitration agreement can be inferred from a document signed by the parties, or
an exchange of letters, telex, telegrams or other means of telecommunication, which provide a
record of the agreement. 15 Therefore, in the absence of signed agreement between the parties, it
would be possible to infer from various documents duly approved and signed by the parties in
the form of exchange of e-mails, letter, telex, telegrams and other means of telecommunication.16

In this case, the respondent has made the claim relying on the purchase order and the claim of
interest is also made relying on the terms incorporated on the purchase order. The facts on the
record showed the parties have acted upon the purchase order. The court concluded that under
these circumstances, the submission made on behalf of the respondent that there is no arbitration
agreement between the parties cannot be accepted, overlooking the terms of the arbitration clause
incorporated in the purchase order.

2. On issue regarding referral of parties for arbitration.

For applicability of Section 8, the following conditions must be satisfied: (a) that there exists an
arbitration agreement; (b) that action has been brought to the court by one party to the arbitration
agreement against the other party; (c) that the subject matter of the suit is same as the subject
matter of the arbitration agreement; (d) that the other party before he submits his first statement
of the substance of the dispute, moves the court for referring the parties to arbitration; and (e)
that along with the application the other party tenders the original arbitration agreement or duly
certified copy thereof.17

On already concluding that the arbitration agreement exists between the parties, the Court further
noted that the purchase order on which the arbitration clause is incorporated is not disputed by
the parties and in fact, the respondent has made the claim relying on the purchase order. In light

14
Union of India v. D.N. Revri and Co., AIR 1976 SC 2257
15
Shakti Bhog Foods Limited v. Kola Shipping Limited, (2009) 2 SCC 134
16
Trimex International FZE Ltd. Dubai Vs. Vedanta Aluminium Ltd., India, (2010) 3 SCC 1
17
Branch Manager M/s. Magma Leasing and Finance Ltd. Vs. Potluri Madhavilata, AIR 2010 SC 488.
of these facts, the court held that the conditions prerequisite for referring the parties to arbitration
exist and there is no option for the Court but to refer the parties to arbitration.

CONCLUSION
Decisions of the Apex Court and various High Courts on this issue has an impact on contract
formation and also on arbitration agreements. Through these decision, vis-à-vis initiation of
arbitration, the Courts have eliminated the requirement of a formal executed document. This,
though seemingly a positive step, has introduced incidental perils into contract formation.
Usually where a party wishes to enter into a commercial contract, negotiations take place,
pursuant to which a formal agreement is executed containing the final terms and conditions
mutually agreed upon. The decision of the Court, however, gives sufficient opportunity to either
party to raise a dispute and submit to arbitration where a contract has not been formally
executed, but where the parties have concluded negotiations on the material terms and
conditions.

In order to avoid the aforesaid situation, where one party is required to bear the brunt of the
contract, which was not even duly executed by it. It is advisable to have a disclaimer clause
imbedded in an arbitration agreement, which would establish that it was never the intention of
the parties to have an arbitration agreement executed by way of exchange of emails.

Further, it is also advisable that negotiating parties should be more circumspect in exchange of
their emails/letters/telex. It is recommended that their email should carry a disclaimer that the
email is only for communication purposes; and such communication does not bind the parties
into a legally binding contractual relationship.

The courts have to translate the legislative intention especially when viewed in light of one of the
Act's main objectives: to minimize the supervisory role of Courts in the arbitral process. If the
Court adds a number of extra requirements such as stamps, seals and originals, the court would
be enhancing its role, not minimizing it. Moreover, the cost of doing business would increase. It
takes time to implement such formalities. What is even more worrisome is that the parties'
intention to arbitrate would be foiled by formality. Such a stance would run counter to the very
idea of arbitration, wherein tribunals all over the world generally bend over backwards to ensure
that the parties' intention to arbitrate is upheld.18

18
Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, pg. 4 & 53,
(London: Street & Maxwell, 1986).