Saturday, October 4, 2008

A Recent, Welcome Decision on Arbitration Agreements

(The following post is contributed by Venugopal Mahapatra and Gautam Bhatia)

The case of Great Offshore Ltd. v. Iranian Offshore Engineering and Construction Company, decided by a single judge bench of the Supreme Court as recently as August 2008, is a very important shot in the arm for arbitration in India. The case involved a dispute between the two parties over the existence of an arbitration agreement. The contentions centered upon a series of mutual exchanges of faxes and letters, at the conclusion of which Great Offshore Ltd. (GOL) sent a Charter Party Agreement (CPA) to Iranian Offshore Engineering and Construction Company (IOE) on 22 August 2005. GOL subsequently contended that a faxed copy of the CPA with its signature was provided to it by IOE on 12 October, whereas IOE alleged that the document was forged.

In the meanwhile, IOE, in an email dated 14 September had stated that the CPA was ready and had even agreed to deliver it to GOL. However, in a subsequent letter on 23 September, it put in certain specific demands as a pre-condition to its signing the CPA. GOL contended that the pre-conditions were not acceptable. And in any event, it alleged that IOE had given its approval to the CPA through the 14 September email. Consequently, it requested IOE to dispatch the signed CPA as soon as possible and honour its commitments. IOE, in response, strongly denied any concluded contract between the parties and contended that the matter had not progressed beyond the negotiation stage.

Therefore, on the ground that there was an arbitration agreement, GOL moved the Supreme Court for the appointment of a sole arbitrator under Section 11 of the Arbitration and Conciliation Act. As per its holding in the Patel Engineering Case, the Supreme Court limited its consideration to the judicial determination of the existence of an arbitration agreement. This hinged on the fact whether a valid contractual agreement existed between the parties.

GOL raised a number of contentions. First, that the CPA was signed by both the parties. Second, this fact was not denied in the pleadings. Third, placing reliance on 14 September email, it contended IOE had signed the original CPA. Fourth, that this fact was not initially denied by IOE. IOE, in its counter, contended that the original copy was never sent back to GOL as the matter was pending negotiations. Further, it requested the Court to look at the ‘intent’ of the parties, rather than disputed documents. Thus, it asserted that as most of the material clauses in the contract were left unsettled, there was no ‘meeting of minds’ between the parties.

The Court remarked that the matter turned on the question whether the faxed CPA with IOE’s signature was a ‘forged document’. It observed that as CPA appeared to be prima facie valid and IOE could not discharge its burden to prove forgery, the CPA was not forged. Therefore, it concluded that as the document was validly signed contractual agreement, IOE was bound by the same.

It buttressed its conclusions by relying on Section 7 of the Arbitration & Conciliation Act, 1996. Section 7 defines ‘arbitration agreement’. Section 7(3) states that the agreement should be in writing. Section 7(4)(a) states that an arbitration agreement is in writing if it is a document signed by both the parties. Section 7(4)(b) provides that an exchange of letters, telex or other means of telecommunications can amount to an agreement in writing, provided a record of such agreement is contained therein.

Relying on these provisions, the Court concluded that there is no requirement of the document containing the contract to be original (in this case, the CPA; a faxed copy of the same was sent back to GOL while IOE had retained the original). It can be a copy of the original. It also observed that there is no requirement of the document to be signed on every page. Interpreting Section 7(4)(b), it stated that ‘fax’ comes under the purview of ‘other means of telecommunication’ and signature of the parties is sufficient attestation of an agreement on record. Thus, the Supreme Court made light work of the objections raised by IOE on formalities and technicalities of the requirement of an arbitration agreement, and concluded that a valid arbitration clause was in existence.

This case is important mainly for the reason that by giving a wide scope to the language of Section 7, and bringing communication by fax within the ambit of Section 7, the Court has shown itself to be abreast of times, especially with regard to commercial transactions. There is an increasing awareness in the commercial world that transactions are no longer limited to paper and pen, and traditional laws must be evolved to take into accounts disputes that arise out of transactions that take place through electronic media. As recently as 2003, for instance, an advisory opinion has been written that seeks to include electronic media within the scope of the United Nations Convention on Contracts for the International Sale of Goods (CISG). Furthermore, it can also be said that in this judgment the Court has given primacy to substance over form, holding that if, in actuality, an arbitration agreement was concluded, it should not be rejected on mere technicalities.

Thus, on both these grounds, the judgment of the Supreme Court can be praised as one that will improve the perception of India as a destination both for commerce, and for the use of arbitration.

2 comments:

Siddharth Nair said...

This decision used Section 7 of the Arbitration & Conciliation Act, 1996 to establish the validity of arbitration contracts .

What about other kinds of contracts? I would suppose that the ICA, 1872 in itself would suffice to afford validity to any contract signed through facsimile.

Why exclusive recourse to Section 7 of the ACA, 1996, then?

GB and VGM said...

The scope of this judgment is limited to arbitration agreements, which may or may not be part of the main contract between the parties, and therefore can be viewed at independent of the requirements to complete a contract under the ICA.

Even in situations where the arbitration agreement is part of the main contract between the parties, there is an interesting issue relating to the doctrine of separability. In accordance with the doctrine of separability, the arbitration clause can be treated separate from the main contract, and its existence and validity is to be established separately from the main contract. For example, there may be a situation where a standard form contract is being used, that contains the arbitration clause as well. Suppose further that the offeror chooses to revoke his offer with the simple phrase, "I revoke my offer to purchase x from you." Under the doctrine of separability, while the original offer is certainly revoked, it can be argued that such revocation did not extend to the arbitration agreement as well.

Carrying the doctrine of separability to its logical conclusion, the tests of validity of contracts and of arbitration agreements therefore need not be the same. So this judgment is important in upholding one particular way of the formation of arbitration agreements, as opposed to main contracts