Mere Reference To Proposal Containing An Arbitration Clause, Unilaterally Signed By One Party, Would Not Amount To An Arbitration Agreement: Bombay High Court

The Single Bench of Justice Manish Pitale held that for an arbitration agreement to come into existence, there must be a document incorporating an arbitration clause or agreement which is executed by both the parties, showing a consensus ad-idem between them.

The petitioner- M/s. TCI Infrastructure Limited engaged the respondent -M/s. Kirby Building Systems, for construction of a warehouse and a purchase order was issued to the respondent. Thereafter, the petitioner filed a civil suit against the respondent before the Trial Court for recovery of a specific amount, alleging use of substandard material by the respondent during the construction.

Claiming that there was an arbitration agreement between the parties, the respondent filed an application under Section 8 (1) of the Arbitration and Conciliation Act, 1996 (A&C Act) for referring the parties to arbitration. The Trail Court allowed the application and disposed of the suit, referring the parties to arbitration. Against this, the petitioners filed an appeal before the Principal District Judge, which was dismissed. The petitioners filed a writ petition before the Bombay High Court against the order passed by the Trial Court.

The petitioner M/s. TCI Infrastructure submitted before the High Court that a proposal regarding construction of a warehouse, containing an arbitration clause, was sent by the respondents to the petitioners. Subsequently, the petitioners issued a letter of intent to the respondents, which contained a reference to the said proposal and detailed the manner in which the respondents would execute the project. Thereafter, the petitioner issued a purchase order, reiterating the terms and conditions stated in the letter of intent, on the basis of which the respondents proceeded to execute the project.

The petitioner argued that the said proposal containing an arbitration clause was only signed by the respondents and that the letter of intent was the only document signed by both the parties. The petitioner added that there was no arbitration clause contained in the letter of intent, and hence, the suit against the respondents was erroneously dismissed by the Trial Court by exercising power under Section 8(1) of the A&C Act.

The respondents M/s. Kirby Building Systems averred that in the purchase order issued by the petitioners, there was a clear reference made to the proposal submitted by the respondents and hence, the clauses contained in the said proposal, including the arbitration clause, must be read as having been incorporated in the purchase order. Thus, the respondent argued that there was an arbitration agreement existing between the parties.

The Court observed that the proposal containing an arbitration clause, as forwarded by the respondents to the petitioners, was signed unilaterally by the respondents. The Court added that the letter of intent issued by the petitioners incorporated certain independent terms and conditions, which was signed by both the parties, and though the letter of intent made a reference to the said proposal, it did not make any reference to any arbitration clause.

While noting that the purchase order issued by the petitioners did not contain an arbitration clause, the Bench held that for an arbitration agreement to come into existence, there must be a document incorporating an arbitration clause or agreement which is executed by both the parties, showing consensus ad-idem between them.

Hence, the Court ruled that merely because there was proposal containing an arbitration clause, which was unilaterally signed by the respondents, and there was reference made to the said proposal in the letter of intent and the purchase order, it could not be said that an arbitration agreement came into existence between the parties.

"The only document i.e. the letter of intent dated 12/07/2012, signed by both the parties, merely referred to the proposal and specifically and independently recorded terms and conditions for the execution of the project by the respondents, which did not contain an arbitration clause/agreement. Mere reference to the proposal, without incorporation of the arbitration clause/agreement in the letter of intent dated 12/07/2012 and the purchase order dated 16/07/2012, would not amount to an arbitration agreement coming into existence. The trial Court failed to appreciate this aspect of the matter while exercising power under Section 8 of the Act of 1996.", the Court said.

The High Court thus allowed the writ petition, set aside the order of the Trial Court and restored the civil suit filed by the petitioners before the Trial Court.

Case Title: M/s. TCI Infrastructure Limited & Anr. versus M/s. Kirby Building Systems (Uttaranchal) Private Limited & Anr.

Dated: 19.09.2022 (Bombay High Court, Nagpur Bench)

Counsel for the Petitioners: Ms. Neelam Biala

Counsel for the Respondents: Mr. Rahul Bhanarkar

Click Here To Read/Download Order