Inference of existence of arbitration agreement from correspondence - International Law Office

International Law Office

Litigation - India

Inference of existence of arbitration agreement from correspondence

March 02 2010

Facts
Decision
Comment


In Trimex International FZE Ltd v Vedanta Aluminium Ltd(1) the Supreme Court made an important pronouncement concerning the scope of determination of the existence of an arbitration agreement from correspondence between the parties under the Arbitration and Conciliation Act 1996. The court was of the opinion that the existence of an arbitration agreement can be inferred from a document signed by the parties or an exchange of emails, letters, telegrams or other means of communication which provide a record of the agreement.

Facts

Trimex International trades minerals across the world. On October 15 2007 Trimex submitted a commercial offer through email for the supply of bauxite to Vedanta Aluminium. After several exchanges of emails and agreeing on the material terms of the contract, Vedanta conveyed its acceptance of the offer through email on October 16 2007 and confirmed the supply of five shipments of bauxite from Australia to Vizag/Kakinada.

On the basis of Vedanta's acceptance, Trimex concluded the deal with the bauxite supplier in Australia and entered into a binding charterparty agreement with the shipowner in Oslo. Vedanta acknowledged acceptance of the offer in the minutes of a meeting held on October 26 2007. On November 8 2007 Vedanta also sent a formal contract containing a detailed arbitration clause to Trimex, which was accepted with some changes and returned the same evening.

On November 9 2007 Trimex entered into a formal bauxite sales agreement with Rio Tinto of Australia for the supply of 225,000 tonnes of bauxite. On November 12 2007 Vedanta requested that Trimex hold the next consignment until further notice. On November 13 2007 Trimex informed Vedanta that it was not possible to postpone the cargo and requested that it sign the purchase agreement. On November 16 2007 Vedanta terminated the contract, reserving the right to claim for damages. Trimex thereafter formally informed the shipowners about the cancellation of the carriage. The shipowners made a claim of $1 million towards commercial settlement and Trimex informed Vedanta to pay a sum of $1 million towards compensation for loss on account of the estimated loss for five shipments and $800,000 towards compensation for loss of profit and other costs and expenses for cancellation of the order.

Vedanta rejected Trimex's claim for damages. After negotiations, a settlement was arrived at between the shipowners and Trimex for a lump sum of $600,000 to be paid in two instalments. Trimex thereafter served a notice of claim-cum-arbitration on Vedanta to make the payment immediately or otherwise treat the notice as referral of the dispute to arbitration under Clause 29 of the purchase order. Trimex informed Vedanta that it had nominated Shiv Shankar Bhatt, a retired judge of the Karnataka High Court, as the arbitrator from its side and requested that Vedanta nominate its own arbitrator within 30 days. Vedanta rejected the arbitration notice, stating that there was no concluded contract between the parties. Aggrieved, Trimex filed the present petition for appointment of an arbitrator.

Decision

Vedanta contended that there was no concluded contract between the parties and that the parties were still not in agreement over various essential features of the transaction. Further, Vedanta was yet to accept or confirm the draft contract received from Trimex.

Trimex argued that after perusal of the sequence of events which took place on October 15 and 16 2007, it was clear that the contract between Trimex and Vedanta stood concluded by Vedanta's acceptance of the offer for five shipments at 3:05pm on October 16 2007. It was further submitted that from the material, it was established beyond doubt that the parties' intention in case any dispute should arise out of the contract, which was concluded on October 16 2007 at 3:06pm, would be to settle it through arbitration.

The Supreme Court perused the documents on record and the primary question for determination was whether a valid contract existed with the arbitration clause. The court noted that on October 15 2007 at 4:26pm the appellant submitted a commercial offer wherein Clause 6 contained an arbitration clause (ie, "this contract is governed by Indian law and arbitration in Mumbai courts"). At 5:34pm Vedanta offered its comments, but no comments were made in respect of the 'arbitration clause'. At 2:41pm Vedanta informed Trimex that it would like to have a termination clause after two shipments. At 3:06pm Trimex sent an email stating that "no owner will accept this condition; the Respondent may accept two or five quickly". At 3:06pm Vedanta accepted the offer for five shipments. In response at 3:49pm Trimex thanked Vedanta for acceptance and conveyed that it was "just in time" to go to the shipowners.

The court was of the opinion that the minute-to-minute correspondence exchanged between the parties, all the prescribed conditions which had been laid down, awareness of the urgency of accepting the offer with no further delay to avoid variation in the freight or other factors, coupled with the email sent on October 16 2007 at 3:06pm under the subject "re: offer for imported bauxite" stated in unequivocal terms (ie, "we confirm the deal for five shipments"), would all clearly go towards showing that after understanding all the details and the confirmation by Vedanta, Trimex sent a reply stating "thanks for the confirmation, just in time to go to the ship owners". According to the court, all the above details clearly established that both parties were aware of various conditions and understood the terms, and that the parties finally entered into a contract on October 17 2007.

The court held that it was clear that if it was the parties' intention to arbitrate any dispute which arose in relation to the offer of October 15 2007 and the acceptance of October 16 2007, the dispute should be settled through arbitration. It opined that once a contract is concluded orally or in writing, the mere fact that a formal contract has to be prepared and initialled by the parties would not affect either the acceptance of the contract so entered into or implementation thereof, even if the formal contract had never been initialled.

Furthermore, the court ruled that the acceptance conveyed by Vedanta satisfied the requirements of Section 4 of the Contract Act 1872.(2) The court held that when Trimex's representative opened the email from Vedanta at 3:06pm on October 16 2007, it came to his knowledge that an irrevocable contract was concluded.

Relying on the proposition of law expounded in Pagnan SPA v Feed Products Ltd(3) and Shankarlal Narayandas Mundade v The New Mofussil Co Ltd,(4) the court ruled that unless an inference can be drawn from the facts that the parties intended to be bound only when a formal agreement had been executed, the validity of the agreement would not be affected by its lack of formality. In the present case, where the commercial offer carried no clause, thus making the conclusion of the contract incumbent upon the purchase order, it was clear that the basic and essential terms had been accepted by Vedanta, with no option but to treat the same as a concluded contract.

Based on the above reasoning, the court held that Trimex had made a case for appointment of an arbitrator in accordance with Clause 6 of the purchase order dated October 15 2007 and subsequent materials exchanged between the parties, nominated Justice BN Srikrishna as the arbitrator to resolve the dispute between the parties, and allowed the petition.

Comment

The decision seeks to reinforce the primary aim of arbitration proceedings as an alternative dispute resolution mechanism. It is clear that in the absence of a 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 an exchange of emails, letters, telegrams and other means of communication that a valid arbitration agreement exists. Essentially, arbitration seeks to minimize the supervisory role of the courts. If the court adds a number of extra requirements, such as stamps, seals and originals, it would only be enhancing, rather than minimizing its role. Therefore, it should be the court's duty to ensure that the parties' intention to arbitrate is not foiled by formality.

For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (bishwajit.dubey@amarchand.com or tamal.mandal@amarchand.com).

Endnotes

(1) Arbitration Petition 10/2009 decided on January 22 2010.

(2) "Section 4: Communication when complete:

The communication of an acceptance is complete... as against the acceptor, when it comes to the knowledge of the proposer."

(3) [1987] 2 LLR 619.

(4) AIR 1946 PC 97.


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