Recent Supreme Court Judgment on Construction of Arbitration Clause

A few days back, this blog posted a brief note on M/s. Unissi (India) Pvt. Ltd. v. Post Graduate Institute of Medical Education & Research Civil Appeal No. 6039 of 2008, Date of Judgment - 1.10.08. This case requires some elaboration as it has a major impact on arbitration agreements. Though the Supreme Court has reiterated its previous stand on interpreting Section 7 of the Arbitration and Conciliation Act, 1996 widely, the clarification is in itself significant. Comment: This is a case where despite no formal concluded arbitration agreement between the parties, the Supreme Court constructively read such an agreement from the tender documents which indicate certain conditions of contract containing an arbitration clause. The court gave an interpretation of Section 7 of the Arbitration and Conciliation Act, 1996 in tune with the spirit of the provisions of Article II, Para 2 of New York Convention that is in pari materia to Section 7 of the Act. The guiding principle for the court while deciding to refer the matter back to the High Court ‘to appoint an Arbitrator in accordance with law to resolve the dispute between the parties’ is as follows:- “If we break down para 2 [of the New York Convention] into elementary parts, it consists of four aspects. It includes an arbitral clause (1) in a contract containing an arbitration clause signed by the parties, (2) an arbitration agreement signed by the parties, (3) an arbitral clause in a contract contained in C , and (4) an arbitral agreement contained in exchange of letters or telegrams. If an arbitration clause falls in any one of these four categories, it must be treated as an agreement in writing.” “If the two contracts stood affirmed by reason of their conduct as indicated in the letters exchanged, it must be held that there is an agreement in writing between the parties in this regard.” The wide construction of the term ‘agreement in writing’, when applied to the correspondence and subsequent conduct of the parties enabled the court to decide as follows: 12. … The tender documents itself contain an arbitration clause and by reason of acceptance of the tender of the appellant by the PGI, it must be held that there was a valid arbitration agreement between the parties. The appellant supplied 41 Pulse Oxymeters and the receipt thereof was duly acknowledged on behalf of the PGI on the delivery challans. The service/installation reports of the aforesaid machines were duly signed on behalf of the PGI. In the letters issued by the PGI, there was an apparent acknowledgement of supply of the aforesaid meters by the appellant and also reference to the aforementioned tender enquiry number. It is an admitted position that the appellant had sent the agreement containing the arbitration clause, as per the format provided by the PGI, after duly signing the same on requisite value of stamp paper for signing of the same by the PGI. The PGI though admittedly received the same, did not send back the agreement to the appellant after signing it as per the agreement between the parties. The PGI admittedly had used the machines for about an year and thereafter returned the same to the appellant. Subsequently, the bank guarantee furnished by the appellant for Rs. 2,13,160/- and the earnest money deposit of Rs.45,000/- was encashed and forfeited by the PGI. In view of the aforesaid facts and the correspondences between the parties, particularly the tender offer made by the appellant dated 15.1.2001 and supply order of the PGI dated 29.9.2002, and, in our view, to constitute an arbitration agreement between the parties and the action taken on behalf of the appellant and in view of Section 7 of the Act and considering the principles laid down by the aforesaid two decisions of this Court, as noted herein earlier, we are of the view that the arbitration agreement did exist and therefore the matter should be referred to an Arbitrator for decision. That apart, as we have already noted herein earlier that in this case, the documents on record, in our view, apparently show supply of materials by the appellant and acceptance thereof by the PGI in pursuance of the tender enquiry by the PGI, wherein tender of the appellant containing an arbitration clause was admittedly accepted by the respondent. In that view of the matter, it cannot be said that the PGI should now be allowed to wriggle out from the arbitration agreement between them. Remaining Issues 1. It took almost five years to determine whether there exists an arbitration agreement between parties. 2. Now that the matter is referred back to the High Court to appoint an arbitrator, it remains a hope that an arbitrator will be appointed expeditiously by the High Court and the arbitrator will resolve the dispute amicably that the award will not reach the courts for another bout of legal battle.

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