Whether court can refer dispute to arbitration even if there is no proper and valid arbitration agreement?

 In another judgment in the case of Nimet Resources Inc. and Anr. v. Essar Steels Ltd. MANU/SC/0603/2000 : AIR2000SC3107 , the Supreme Court has held as under:

5. Section 7 of the Act sets out what an arbitration agreement is. It could be in different forms - by way of an arbitration clause in a contract or in the form of a separate agreement, but the condition is that an arbitration agreement should be in writing. When an arbitration agreement is not in writing, the same should be construed by reference to : (a) a document signed by the parties; (b) exchange of letters, telex, telegram or other means of communication which provide a record of the agreement; or (c) exchange of statement of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. If the contract is in writing and the reference is made to a document containing arbitration clause as part of the transaction would mean that the arbitration agreement is part of the contract. Therefore, in a matter where there has been some transaction between the parties and the existence of the arbitration agreement is in challenge the proper course for the parties is to thrash out such question under Section 16 of the Act and not under Section 11 of the Act.

6. Section 7 of the Act explains the meaning of arbitration agreement. It is an agreement by the parties to submit to arbitration in a dispute arising from a given contract. It could be inserted into an agreement by way of an arbitration clause and shall be in writing contained in a document. It would be sufficient compliance to these provisions even if such clauses are exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement. The legislative purpose appears to be that the parties consciously and by mutually agree to refer the disputes between them for adjudication to an arbitration tribunal in terms of the contract or constituted as per the arbitration agreement and under the provisions of the Act. Unilateral expression of reference to arbitration would not satisfy the ingredients of this provision. There has to be a clear unambiguous intent on the part of the parties recorded in writing in a contract or by various modes as indicated in Section 7 before a reference can be made. The intent could be gathered from the documents but it has to be a definite expression.

IN THE HIGH COURT OF BOMBAY

Arbitration Petition No. 26 of 2007

Decided On: 02.05.2008

Appellants: Ashoka Buildcon Ltd.
Vs.
Respondent: Maharashtra State Road Development Corporation Ltd.

Hon'ble Judges/Coram:
Swatanter Kumar, C.J.

 Citation: 2008(4)ARBLR288(Bom), 2008(5)MhLj67

1. By this order, I will dispose of the above petition filed by the petitioner under Section 11 of the Arbitration and Conciliation Act, 1996. The necessary facts are that, the Maharashtra State Road Development Corporation Ltd. has invited offers for collection of toll. In response thereto, the petitioner has submitted his offer. This offer was accepted by the respondent and the petitioner was awarded the contract for collection of toll on Daund Phata Road S.H. 67 near Daund R.O.B. in Pune District and near Bhima Bridge in Ahmednagar District. According to the petitioner, the respondent committed breach of the terms and conditions of the tender and because of political pressure, illegally terminated the contract in favour of the petitioner and encashed the performance Bank guarantee furnished by the petitioner in favour of the respondent. On 3rd September, 2003, the claims raised by the petitioner were referred to the Claims Settlement Committee. A meeting was held in the chamber of Joint Managing Director of the respondent where various matters were discussed in relation to the claims raised by the petitioner. In the meeting, it was decided that if the petitioner was not satisfied with the Recommendations of the Committee, he may adopt the alternative remedy of arbitration. The decision of the Claims Settlement Committee was communicated by the respondent to the petitioner on 7th September, 2004. In the said meeting, discussion in relation to two different contracts had been held wherein some reliefs were granted in one and about the other, the matter was decided to be referred to arbitration. According to the petitioner, the Joint Managing Director opined that if the contractor was not satisfied with the committee's recommendations, then he may adopt the alternative of arbitration.

2. Vide letter dated 17th November, 2005, the petitioner has requested the respondent to refer the matter to the Sole Arbitrator by mutual consent. However, the respondent did not agree for such reference and did not accept that the meeting had opened the doors for arbitration as such. Vide letter dated 26-12-2005, reference was declined. Further, according to the petitioner, the respondent had agreed to compensate the petitioner in relation to quantum of compensation and refund of the amounts of which the bank guarantee had been encashed. Request of the petitioner for arbitration was not accepted, resulting in filing of this petition under Section 11 of the Arbitration Act. The respondents have filed the reply affidavit wherein the stand taken by them besides scrutiny of the claim of the petitioner on merits, the claims are barred by time and that there is no agreement subsisting between the parties under which claims can be referred to the Arbitration. In the alternative, it is argued that even if the minutes of the meeting of the Joint Managing Director are taken as an arbitration clause, the same only applies to Clause 1 of the said letter that i.e. contract relating to the claims for construction of railway over bridges while Clause 2 was a separate agenda discussed and there was no arbitration clause in the agreement (i.e. for toll collection) between the parties for referring the findings of the committee to arbitration. In addition to this, it was also stated that the petitioner had filed a suit. As such, he himself has not opted for arbitration. In order to examine the merit or otherwise of these contentions, it will be useful for the Court to refer to the minutes of the meeting held by the Joint Managing Director on 3rd September, 2003:

Minutes of the Meeting held by Joint Managing Director, in his chamber, on 3-9-2003.

Sub: 1) Claims of the contractor in respect of work of toll collection at Daund ROB.

2) Claim Settlement in respect of construction of ROB at Nepty, Dehere, Daund and Murtizapur.

Jr. M.D. in his chamber on 3-9-2003 called a meeting with contractor M/s Ashoka Buildcon Ltd., to discuss his outstanding issues with MSRDC. The following were present--

1) Shri D.G. Marathe - Joint Managing Director

2) Shri N.M. Vedpathak - Executive Engineer

3) Shri Ashok M. Katariya - M.D. Of Ashoka Buildcon Ltd.

4) Shri Biyani S.R.

5) Shri Burud R.C. - Representatives of Ashoka Buildcon Ltd.

6) Shri Shukla S.P.

The following issues were discussed:

1) Toll collection at Daund ROB:

Shri Katariya pointed out the issue of settlement of claims in respect of toll collection work at Daund ROB. It was brought to the notice of Jt. M.D. That we have called remarks of the Camp Office, Pune on the claims of the contractor. The Jt. M.D. requested on telephone to the S.E. MSRDC, Camp Office, Pune, to submit his say by 8-9-2003.

In respect of difficulties encountered while doing the work of toll Collection, the representative of the contractor brought to notice following issues:

a) Non closure of gates of nearby Railways Crossing:

The contractor mentioned that due to non-closure of gates of nearby three railways crossings (other than one where the ROB is constructed) expected traffic was not coming at the toll plaza. The contractor pointed out the letter dated 24-5-2002, by MSRDC, mentioning that the gates are already closed. In this respect, contractor pointed out that MSRDC had not followed its promise of closing all the gates.

The Jt. M.D. Queried whether MSRDC has committed in the offer document that the gates will be closed/traffic will be diverted. Contractor said that there is no such assurance on the part of MSRDC. The Jt. M.D. said that the reply given by MSRDC is correct and there is no point in putting forth the global question like 'when the gates will be closed, so as to divert all the traffic to the toll plaza?' The Jt. M.D. said that above point raised by the contractor cannot be considered for rebate.

b) Location to toll plaza:

Contractor pointed out that due to peculiar location of toll plaza, the motorists who do not use the ROB and come to the Daund City by using Sonawadi diversion were required to pay toll. As such there was opposition by these motorists to pay toll. Also due to construction activity of permanent toll plaza, temporary toll station was required to be provided in the square, thereby leaving no control over the traffic. The contractor also pointed out that the police inspector, Daund, has asked to change the toll plaza location, and on that reason, did not provide the police protection, which was asked for. The Jt. M.D. asked to place this issue before the Claim Settlement Committee.

c) Non-supply of kiosks by MSRDC:

The contractor pointed out that the agreement provided that the MSRDC will provide the Kiosks and other construction necessary for safe guarding the proper collection of toll. Contractor said that due to non-construction of toll plaza, he could not collect toll efficiently and thereby resulted in lower toll collection.

The Jt. M.D. asked to place this issue before the Claim Settlement Committee.

d) Difference in previous rates of toll and existing rates of toll:

74

The contractor pointed out that prior to start of collection of toll for Daund ROB, the rates of toll at Bhima Bridge toll plaza were much lower than the present till rates and therefore there was resentment in the minds of people to pay the toll. The Jt. M.D. said that contractor should have considered this factor while quoting the offer.

e) The opposition of local political leaders for payment of toll:

The contractor pointed out that the local political leaders doing the dairy business have pressurized and never paid the toll.

The Jt. M.D. asked to place this issue before the Claim Settlement Committee.

The contractor requested that comparison of his remittance and the remittance by the present agency i.e. MESCO, will prove that he has tried his best for maximum toll collection.

The contractor was informed that he has not quantified, how much rebate he is asking for different reasons. The contractor said that the difference of remitted amount and offer amount is the rebate he is asking for, plus the reimbursement of administrative expenses, which he has incurred through his pocket and the refund of security deposit and performance security amount forfeited by MSRDC.

2) Claims in respect of construction of R.O.B. at Nepty, Dehere, Daund and Murtizapur.

The Jt. M.D. was apprised about the final revised amount of Rs. 216.0 lacs as an award declared by the committee and approved by the then V.C. and M.D. due to non receipt of certificate that with payment of this amount, the full and final settlement of contractor's claims will be effected, the payment is not yet made to the contractor. To this, the contractor pointed out that following issues still need consideration from the committee.

a) Loss due to idleness:--The contractor insisted that his being an ISO organization, the joint record kept by him shall be considered for settlement of claim, while the committee has recommended the amount on the basis of IRCON's say.

b) Escalation:--The contractor insisted that the actual diesel prices shall be considered for working out the price escalation while the committee has worked out it on the basis of price indices.

The Jt. M.D. opined that if the contractor is not satisfied with the committee's recommendations, then he may adopt the alternative of arbitration.

The meeting ended with thanks to the chair.
No. MSRDC/01/JMD/4237
DATE: 10-9-2003

Sd/-
Jt. Managing Director
MSRDC Ltd., Mumbai.

3. Terms of Sub-clause (1) of Section 7 explains the arbitration agreement between the parties. In the case of Wellington Associates Ltd. v. Kirit Mehta MANU/SC/0232/2000 : AIR2000SC1379 , the Supreme Court while explaining this term as well as the arbitration clause between the parties where the expression "may" was used, enunciated the principle as under:

17. Further, a reading of Sub-clauses (4), (5) and (6) of Section 11 shows that they enable the Chief Justice or his designate to appoint arbitrator or arbitrators, and likewise Section 11(12) enables the Chief Justice of India or his designate to appoint arbitrator or arbitrators; under Rule 2 of the scheme framed by the Chief Justice of India, a request is to be made to the Chief Justice of India along with a duly certified copy of the 'original arbitration agreement.' Section 2(b) of the Act defines 'arbitration agreement' as an agreement referred to in Section 7. Section 7 defines 'arbitration agreement' as follows:

Section 7. Arbitration agreement.--(1) In this part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in--

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

22. It is contended for the petitioner that the word 'may' in Clause 5 has to be construed as 'shall.' According to the petitioner's counsel, that is the true intention of the parties. The question then is as to what is the intention of the parties? The parties, in my view, used the words 'may' not without reason. If one looks at the fact that Clause 4 precedes Clause 5, one can see that under Clause 4 parties desired that in case of disputes, the Civil Courts at Bombay are to be approached by way of suit. Then follows Clause 5 with the words 'it is also agreed' that the dispute 'may' be referred to arbitration implying that parties need not necessarily go to the Civil Court by way of suit but can also go before an arbitrator. Thus, Clause 5 is merely an enabling provision as contended by the respondents. I may also state that in cases where there is a sole arbitration clause couched in mandatory language, it is not preceded by a clause like Clause 4 which discloses a general intention of the parties to go before a Civil Court by way of suit. Thus, reading Clause 4 and Clause 5 together, I am of the view that it is not the intention of the parties that arbitration is to be the sole remedy. It appears that the parties agreed that they can "also" go to arbitration also in case the aggrieved party does not wish to go to a Civil Court by way of a suit. But in that event, obviously, fresh consent to go to arbitration is necessary. Further, in the present case, the same Clause 5, so far as the venue of arbitration is concerned, uses word 'shall.' The parties, in my view, must be deemed to have used the words 'may' and 'shall' at different places after due deliberation.

4. In the case of Jayant N. Sheth, Proprietor Struct Mast Engineers v. Gyneshwar Apartment Co-operative Housing Society Ltd. MANU/MH/0080/1999 : 1999(1)BomCR774 , a Bench of this Court took the view that arbitration agreement has to be where there is an actual arbitration agreement between the parties and an understanding or an option to go to the Arbitrator was not enough to constitute an arbitration agreement within the meaning of Section2(1) read with Section 7 of the Arbitration Act.

5. In another judgment in the case of Nimet Resources Inc. and Anr. v. Essar Steels Ltd. MANU/SC/0603/2000 : AIR2000SC3107 , the Supreme Court has held as under:

5. Section 7 of the Act sets out what an arbitration agreement is. It could be in different forms - by way of an arbitration clause in a contract or in the form of a separate agreement, but the condition is that an arbitration agreement should be in writing. When an arbitration agreement is not in writing, the same should be construed by reference to : (a) a document signed by the parties; (b) exchange of letters, telex, telegram or other means of communication which provide a record of the agreement; or (c) exchange of statement of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. If the contract is in writing and the reference is made to a document containing arbitration clause as part of the transaction would mean that the arbitration agreement is part of the contract. Therefore, in a matter where there has been some transaction between the parties and the existence of the arbitration agreement is in challenge the proper course for the parties is to thrash out such question under Section 16 of the Act and not under Section 11 of the Act.

6. Section 7 of the Act explains the meaning of arbitration agreement. It is an agreement by the parties to submit to arbitration in a dispute arising from a given contract. It could be inserted into an agreement by way of an arbitration clause and shall be in writing contained in a document. It would be sufficient compliance to these provisions even if such clauses are exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement. The legislative purpose appears to be that the parties consciously and by mutually agree to refer the disputes between them for adjudication to an arbitration tribunal in terms of the contract or constituted as per the arbitration agreement and under the provisions of the Act. Unilateral expression of reference to arbitration would not satisfy the ingredients of this provision. There has to be a clear unambiguous intent on the part of the parties recorded in writing in a contract or by various modes as indicated in Section 7 before a reference can be made. The intent could be gathered from the documents but it has to be a definite expression.

7. There is no dispute before us that the claims raised in the present petition are relating to the second contract and are stated to be covered under Clause 1 of the minutes recorded between the parties on 3rd September, 2003. We have already referred the minutes recorded between the parties which clearly show that there was no definite agreement between the parties to refer their dispute to arbitration. The expression "then he may adopt the alternative of arbitration" is an uncertain clause and is an option. Firstly, this clause has no application to the claims of the petitioner raised in the present petition inasmuch as it relates to the construction of ROB at Nepty, Dhere, Daund and Murtizapur and not to the disputes of collection of toll at Daund ROB. It does not bind the parties essentially to go to arbitration. Firstly, they have to reconcile whether the recommendation of the committee the contractor is satisfied or not and it is only thereafter that the contractor may go to arbitration. No mode of arbitration is indicated. Thus, the clause is somewhat uncertain and in any case, is hardly of any relevance in dealing with the dispute raised in the present petition. Even in the case of Wellington Associates (supra), the Supreme Court had taken a view that use of expression "may" unless supported by other attending circumstances giving a definite intention of the parties to refer the matter to the arbitration may not constitute an arbitration agreement per se. However, this discussion is not really very relevant for the matters in controversy in view of the facts of the present case. Even if the above clause is treated as arbitration agreement, it will relate only to Clause 2 of the minutes dated 3rd September, 2003 and not to Clause 1. Clause 1 claim relates to collection of toll at Daund ROB. The decision between the parties was that the Joint M.D. asked that the issues be placed before the Claims Settlement Committee and there was no intention of the parties to refer the matter to arbitration in relation to Clause 1. It is nobody's case that contract/agreement executed between the parties dated 31-5-2002 contained an arbitration clause. The arbitration clause is sought to be enforced entirely on the strength of the agreement arrived at between the parties in the joint meeting of 3rd September, 2003. As already noticed, there is no arbitration clause, referred in relation to contract in respect of Clause 1 and it is not possible to infer with in extent of definiteness in existence of arbitration agreement between the parties in relation to that contract. Reference can also be made to the judgment of this Court in N.C. Sanghani and Ors. v. Rakesh V. Zangda and Ors. Arbitration Application No. 264 of 2005 where this Court held as under:

The arbitration clause has to be gathered from the documents executed between the parties in the form of a contract or otherwise, but the intent to refer to arbitration has to be express or implied. It cannot be uncertain or unmeaningful. The essential elements of an arbitration clause have been repeatedly stated in various pronouncements of the Supreme Court and the parties are to be ad idem to make a reference of their dispute to the arbitration and such an intent must be clear from the material on record, particularly the contract relied upon between the parties. The law was in fact liberalised to the extent that where the party might have taken a stand on a mistaken or wrong understanding of the law, it is not precluded; from changing its stand, even in accordance with such clause. This principles have clearly been stated by the Supreme Court in the cases of State of Orissa and Anr. v. Sri Dhamodar Das MANU/SC/0250/1996 : AIR1996SC942 , Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I)(P) Ltd. MANU/SC/0611/2003 : AIR2003SC3688 and Groupe Chimique Tunisien SA v.Southern Petrochemicals Industries Corporation Ltd. MANU/SC/8192/2006 : AIR2006SC2422 . In a very recent judgment of the Supreme Court in the case of Maharshi Dayanand University and Anr. v. Anand Co-op. L/c Society Ltd and Anr. in Appeal (Civil) No. 2133 of 2007 dated 25th April 2007, the Court, though made a reference to arbitration, while allowing the parties to raise the pleas before the arbitrator, clearly stated that existence of an arbitration clause was sine qua non for reference of a dispute to the arbitration. As already indicated above, in the present case arbitration clause is uncertain and in fact is not even a concluded contract between the parties. It was an offer to give resignation by the petitioner in a letter addressed to the board of directors of the respondent-company. This would clearly show that there was no written contract or agreement between the parties and the endorsement by one of the respondents would not bind the company as such. In any case the arbitration clause is vague, uncertain and incapable of being construed to conclude that parties were ad idem for referring their dispute to the arbitration.

8. Keeping in view the above principle of law, it is clear that there is no proper and valid arbitration agreement between the parties as contemplated under the provisions of the Arbitration and Conciliation Act, 1996. Another factor which is relevant and needs to be noticed is that even in relation to the present dispute, of course, on a different aspect, the applicant himself had filed the suit in this Court being Suit No. 2702 of 2003. Filing of a suit by the petitioner itself indicates the conduct and intent of the petitioner that the claim in relation to that contract never understood to be covered by the arbitration clause between the parties. How the parties understood the minutes of the meeting is to be seen from their conduct subsequent thereto. The minutes were recorded in the year 2003. The petitioner has filed the suit in 2003 and having failed to get any effective relief, they have filed the present arbitration application on 26th July, 2007.

9. In these circumstances, I am of the considered view that this petition has no merit and the same is dismissed. The parties to bear their own costs.

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