Supreme Court of India: Validity of an Arbitration Clause Contained In an ‘Incomplete Contract’

Supreme-Court-of-India-1_85138_730x419

In National Highways and Infrastructure Development Corporation Ltd. v BSCPL Infrastructure Ltd. 2019(11) SCALE 675, the Supreme Court of India decided the issue of whether an arbitration clause contained in a draft concession agreement can be validly invoked by the parties in the event of dispute. Law on the subject is no more res integra as last year the Supreme Court of India had decided PSA Mumbai Investments PTE Limited v Board of Trustees of the Jawaharlal Nehru Port Trust and Anr. (2018) 10 SCC 525 on similar lines. In that case, the Court observed that the Request for Proposal (‘RFP’) itself made it clear that nothing contained therein will be construed to make RFP an Agreement between the parties. The Letter of Award (‘LOA’) further stated that a Special Purpose Vehicle solely for the purpose of implementing the project would be set up. In the facts of that case, it was found that there was no absolute and unqualified acceptance by the said LOA, as two or three very important steps had to be undergone before there could be said to be an Agreement which would be enforceable in law as a contract between the parties. It was in those circumstances that the Court held that the arbitration clause contained in the draft concession agreement would not apply. The present case is decided squarely on similar facts. Detailed case analysis along with comparison in the position in Singapore and England & Wales is given below:-

Factual Matrix

The Employer issued an RFP which was followed by LOA being awarded to the Contractor. In the RFP it was agreed that the ultimate concession agreement was required to be executed within 15 days from the date of issue of LOA. Subsequently, the Employer had withdrawn LOA without signing the ultimate concession contract which was way beyond the stipulated time of 15 days. It is in this factual scenario that the controversy has arisen which is as to whether the LOA is a binding contract and further that, if it is found to be a binding contract, whether the arbitration clause in the draft ultimate concession agreement between the parties would kick in. In response to these issues, the High Court held that a general reference to an arbitration clause contained in the standard form of the draft ultimate concession agreement is good enough for the appointment of the arbitrator. This decision of the High Court was challenged before the Supreme Court in the present proceedings.

Parties Contentions

The Employer contended as under:-

Per Contra the Contractor contended as under:-

  • That since an agreement had been entered into at the stage of acceptance of LOA, the arbitration clause contained in the standard form in the draft ultimate concessions agreement would definitely kick in.

Judgement

The Court held as under

  • The Schedule of bidding process begins with the last date for receiving queries and ends with the signing of concession agreement, LOA being Item No. 7 and part and parcel of the bidding process. Therefore, dispute resolution can only take place by the Courts of Delhi under Clause 6.1 of the RFP;
  • It is not possible to say that a standard form arbitration clause contained in a draft agreement would then oust Clause 6.1 and disturb the entire scheme of the Schedule of bidding process.
  • This being the case, it is clear that even at the stage of acceptance of LOA, if disputes arise between the parties, they can only be resolved by the Courts of Delhi and not by arbitration.

Position in Singapore

An arbitration agreement may be in the form of a separate agreement or embedded in a clause within the underlying commercial contract. A reference in a contract to a document containing an arbitration clause could also constitute an arbitration agreement between the parties to the contract if the reference is such as to make that arbitration clause part of the contract. Singapore courts have been quite consistent in adhering to a strict requirement that to incorporate such arbitration clauses, the incorporating words must be specific and sufficiently clear.

In United Eng Contractors Pte Ltd v L & M Concrete Specialists Pte Ltd, [1999] 2 SLR(R) 524, the Singapore High Court decided a similar issue wherein the veracity of an arbitration clause contained in a LOA was in question. In that case, a dispute arose between the parties and the defendant successfully stayed the court action pursuant to Section 7 of the Arbitration Act (Cap 10, 1985 Rev Ed). The plaintiff appealed, arguing that there was no written agreement for arbitration. The defendant contended that a LOA, which incorporated a “Standard Conditions of Sub-Contract”, contained an arbitration clause. While rejecting this contention, GP Selvam J held that there was no written agreement to arbitrate as the terms of the letter were not accepted by the plaintiff, and there were no “standard conditions” which it could agree to accept. Thus, a LOA incorporating by reference an unenclosed document containing an arbitration clause and unsigned by the recipient did not constitute a written agreement to arbitration.

Position in England & Wales

An illustration of an ‘incomplete contract’ containing an arbitration clause provided by Jarvis Interiors Limited v. Galliard Homes Limited, [1999] EWHC 277 which was decided under the Arbitration Act 1950. In that case, Jarvis carried out building works for Galliard and claimed repayment on a quantum meruit basis, assuming there was no building contract between the parties. However, Galliard argued that the work for which Jarvis was claiming remuneration was done under the terms of a contract containing an arbitration clause and applied for a stay of the proceedings. The determination of this point turned on whether negotiations, meetings and exchanged ‘letters of intent’ gave rise to the conclusion of a building contract.

The Court of Appeal found that the letters of intent evinced no more than a non-binding agreement ‘subject to contract.’ It was mere negotiation preliminary to, or subject to, a contract which was never made. And Galliard failed to establish a meeting of minds between parties with the intention to create an immediate binding contract, which could be superseded by some later contract if the parties so wished. Consequently, the Court held that no contract for carrying out the works ever came into existence. It follows from this that Galliard cannot rely on an arbitration clause contained in any such contract, because no such contract existed.

Disclaimer: The views expressed on this post are mine and do not reflect the views of the organisation(s) I am engaged with

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