A Policy Circular Requiring Further Consent For Arbitration Cannot Be Construed As An Arbitration Clause: Calcutta High Court

The bench of Justice Ravi Krishan Kapur held that when for existing contracts, the circular required consent of the contractor for reference to arbitration, it cannot be construed to be an arbitration agreement as it would require a fresh arbitration agreement to be executed between the parties prior to reference of dispute to arbitration.

The Court held that a circular expressing desire for arbitration would not be construed as an arbitration clause unless a definite agreement is not executed between the parties pursuant to such expression of desire.

Facts

The respondent published an e-tender for hiring heavy earth-moving machinery and removal of coal at the Narayankuri, O.C. Patch of Kunustoria Area. The applicant emerged as the successful bidder.

A letter of acceptance dated 31.03.2017 was issued to the applicant, and a work order dated 24.05.2017 was executed between the parties. An agreement dated 30.08.2017 and a Supplementary Work Order dated 08.02.2019 were also entered into by the parties.

A dispute arose between the parties when the agreement was foreclosed by the respondent. Contemporaneously, a Circular dated 07.04.2017 was issued by Coal India Limited (CIL), of which the respondent is a subsidiary, directed disputes and differences between CIL or its subsidiaries with private contractors to arbitration.

Clause 2 provided that in future contracts involving the respondent, there would be an arbitration clause included. Clause 5 provided that for existing contracts, the consent of the contractor would be required for reference to arbitration.

The applicant filed an application for the appointment of an Arbitrator, which was dismissed on 01.12.2022, for lack of a valid arbitration clause. An SLP was preferred against the order. The Apex Court disposed of the SLP with liberty to application to file a review. Accordingly, it filed a review before the High Court.

Contention of the Parties

The applicant made the following submissions:

• That the Court wrongly relied upon Clause 5 of the Circular instead of clause 2 which provided for an automatic incorporation of arbitration clause.
• That the Circular binds and mandates arbitration, incorporating the arbitration clause by reference and complying with section 7 of the A&C Act.

Analysis by the Court

The Court observed that there was no arbitration clause in the agreement between the parties. It observed clause 2 of the circular applied only to future contracts whereas clause 5 applied to all existing contracts without an arbitration clause.

The Court held that the contract between the parties post-dates the Circular, making clause 2, not clause 5, applicable to the dispute. It held that in terms of Section 7 an arbitration clause may be incorporated into a contract by reference, but such incorporation requires both parties' conscious acceptance.

The Court found that while the Circular expressed a desire for arbitration in disputes with private contractors, it did not explicitly incorporate the arbitration clause into the existing contract between the parties. Further, it required consent of the applicant to agree to arbitration and also the execution of an agreement/amendment pursuant to such consent by the applicant.

The Court held that a policy circular issued by a parent company contemplating arbitration would not be an arbitration agreement if it requires fresh consent of the contractor to refer the dispute to arbitration.

Accordingly, the Court held that there is no valid arbitration agreement between the parties.

Case Title: Dhansar Engineering Company Pvt Ltd v. Eastern Coalfields Ltd, RVWO No. 38 of 2023

Date: 18.04.2024

Counsel for the Applicant: Mrs. Amrita Panda, Adv. Mr. Daipayan Basu Mallick, Adv. Mr. Arkaprava Sen, Adv. Mr. Sayantan Kar, Adv.

Counsel for the Respondent: Mr. Mainak Das, Adv. Mrs. Priti Banerjee, Adv

Click Here To Read/Download Order