Supreme Court clarifies when an arbitration clause can be invoked - International Law Office

International Law Office

Litigation - India

Supreme Court clarifies when an arbitration clause can be invoked

November 15 2011

Background
Facts
Decision
Comment


Background

In Cauvery Coffee Traders, Mangalore v Hornor Resources (Intern) Company Ltd(1) the Supreme Court has affirmed its stand in, among others, Ramesh Chandra Sankla v Vikram Cement(2) and Pradeep Oil Corporation v Municipal Corporation of Delhi(3) and observed that once a party has finally and fully settled its disputes with another and received the benefits under the settlement, that party cannot later invoke the arbitration agreement in respect of the dispute.

Facts

On June 24 2008 the applicant and the respondent entered into a purchase contract, under which the applicant agreed to sell and the respondent agreed to purchase approximately 40,000 wet metric tonnes (MT) of calibrated lumpy ore fines (or 10% more or less at the buyer's discretion) at the price and on the terms and conditions stipulated in the above agreement. The agreement provided for the chemical composition of the ore and for a guaranteed iron level in the contracted goods of no less than 63%. If the iron level was less than 63%, the buyer had the right to reject the cargo.

Under the purchase contract, on August 6 2008 the applicant shipped a total consignment of 24,500 dry MT of calibrated lumpy ore from New Mangalore Port, India to Rizhao Port, China. The applicant raised a provisional invoice for $3,213,529.11 and sent a certificate of origin and bill of lading (dated August 6 2008) as issued by the carriers in respect of the carriage of the goods from Mangalore Port to Rizhao Port. The material supplied had been sent after proper analysis and it had been certified by the analyst in India that the goods supplied contained more than 63% iron content. On arrival of the goods at the Chinese port, delivery was taken by the respondents and on chemical analysis, the iron content was found to be 62.74%. The goods were accepted by the respondent buyer, who undertook to make payment without any delay.

However, on September 9 2008 the respondent informed the applicant by email that only provisional payment would be released for the shipment in question, based on the revised rates, as the iron level of the shipment had been found to be lower than 63%. Furthermore, the respondent requested that the applicant issue the necessary instructions through its banker if it was agreeable to the said revised payment. In response, on October 7 2008 the applicant informed the respondent by email that a sum of $1.5 million could be the amount for the final settlement in respect of the shipment in question. The relevant portion of the email read as follows:

"Further to telecom just now, pls note as per latest mutual agreement between seller and buyer, the said USD1.50 million shall be final settlement for subj shipment, so please request your bank to revise the swift msg as follows:

beneficiary agrees to receive USD 1,500,000.00 for full and final payment for this set of documents and under this letter of credit, after release of this amount, the letter of credit shall be considered expired and cancelled." (Emphasis added.)

Accordingly, the applicant instructed its banker to accept the proposal made by the respondent. On October 8 2008 the banker therefore emailed to accept the proposal and agreed to receive the agreed amount. Thereafter an amount of $1.5 million was received by the applicant.

However, before this payment was made, the applicant had repeatedly sent reminders to the respondent requesting payment of the balance under the purchase contract. On November 14 2008 the applicant sent a legal notice calling on the respondent to pay the balance amount under the purchase contract and further stated therein that the parties should hold friendly negotiations as detailed in Clause 18 of the purchase contract. Under the terms of the purchase contract, arbitration could be held only in a third country. As the respondent neither responded with payment of the balance amount nor agreed for the initiation of arbitration proceedings, the applicant approached the Supreme Court under Sections 9 and 11 of the Arbitration and Conciliation Act 1996 for, among other things, the appointment of an arbitrator.

Decision

The applicant contended that although the supply of iron ore had been made strictly in terms of the purchase contract, the balance payment was not made even after several reminders. The applicant further contended that the respondent was not ready for friendly negotiations or to refer the matter to arbitration. Therefore, the matter should have been referred to arbitration in a third country, preferably Singapore or Australia.

In turn, the respondent contended that the applications were not maintainable as the purchase contract could only be dealt with under Part II and not under Part I of the act. Therefore, the present application under Sections 9 and 11 of the act was not maintainable. The respondent's contention was rejected by the Supreme Court at the very outset in view of the law laid down in Bhatia International v Bulk Trading SA(4) and followed in Venture Global Engg Case v Satyam Computer Services Limited.(5)

The respondent further contended that since the parties had entered into a full settlement and the applicant had accepted $1.5 million in lieu of the full and final settlement, the question of referring the purported dispute to arbitration did not arise. The Supreme Court agreed with this argument.

The Supreme Court observed that it was apparent from the terms of the purchase contract that if ore supplied by the applicant did not conform with the terms of the purchase contract (ie, the iron level of the ore was below 63%), the respondent buyer could either reject the shipment or pay an adjusted price. The Supreme Court further observed that the records before it showed that the applicant had agreed to receive the adjusted sum of $1.5 million as full and final settlement of the dispute. This was further evident from the fact that the applicant had issued instructions to its banker to accept the proposal made by the respondent. Although the applicant claimed that the instructions given to its bankers were a mistake, this argument was rejected by the Supreme Court as an afterthought, in line with Nathani Steels Ltd v Associated Constructions(6) and PK Ramaiah & Company v Chairman & Managing Director, NTPC.(7)

The Supreme Court therefore held that it was not open to the applicant to invoke the arbitration clause after having received the new adjusted price of $1.5 million towards full and final settlement. In its argument, the Supreme Court relied on, among others, Nathani Steels Ltd and PK Ramaiah. The court stated that once a final settlement had been arrived at between the parties, even by making certain adjustments and without any misrepresentation or fraud or coercion, then acceptance of money as full and final settlement or the issuance of receipt or vouchers would conclude the controversy. It would therefore no longer be open to either of the parties to lay any claim or demand against the other party.

In line with its decisions in, among others, Ramesh Chandra Sankla and Pradeep Oil Corporation, the court further observed that a party cannot be permitted to "approbate and reprobate" at the same time. Where a party knowingly accepts the benefits of a contract, it is estopped from denying the validity or binding effect on it of such contract. Accordingly, it was observed by the court that since the applicant had already accepted the $1.5 million as the new adjusted price for final settlement, it was not now open to it to invoke the arbitration clause and claim the balance payment, especially when the respondent had the right to reject the entire shipment if the ore was not in conformity with the terms of the purchase contract.

Comment

This decision clarifies the position that even though an application under Sections 9 and 11 of the act (though in Part I) would be maintainable in cases of international disputes, the parties could not invoke the arbitration agreement if the dispute has been amicably settled by the parties. In such cases, if either of the parties later invokes the arbitration agreement, it would amount to blowing hot and cold at the same time, contrary to the doctrine of estoppel by election.

For further information on this topic please contact Kirat Singh Nagra or Tanuj Bhushan at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (kirat.nagra@amarchand.com or tanuj.bhushan@amarchand.com).

Endnotes

(1) Arbitration Petitions 7/2009 and 8/2009.

(2) AIR 2009 SC 713.

(3) (2011) 5 SCC 270.

(4) (2002) 4 SCC 105.

(5) (2008) 4 SCC 190.

(6) 1995 Supp (3) SCC 324.

(7) 1994 Supp (3) SCC 126.


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