Delhi High Court: Arbitration Clause Printed On An Invoice In Small Font Is Not An Arbitration Clause

Delhi-High-Court

The arbitration agreement need not be in any particular form. What is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The essential elements or attributes of an arbitration agreement is the agreement to refer their disputes or differences to arbitration, which is expressly or impliedly spelt out from a clause in an agreement, separate agreement, or documents/correspondence exchanged between the parties.[1]

Further, the arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract. The meaning of a contract must be gathered by adopting a common sense approach, and must not be allowed to be thwarted by a pedantic and legalistic interpretation.[2]

A commercial document has to be interpreted in such a manner so as to give effect to the agreement, rather than to invalidate it. An “arbitration agreement” is a commercial document inter parties, and must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities.[3]

The legal position that follows is that what is required to be ascertained is the intention of the parties to settle their disputes through arbitration. The essential attribute of an arbitration agreement is that it must be expressly or impliedly spelt out from a clause in the agreement that there is an agreement to refer their disputes/differences to arbitration.

In Parmeet Singh Chatwal & Ors. v. Ashwani Sahani O.M.P. 1445/2014 decided on 14 Feb 2020, the Delhi High Court, in proceedings under Section 34 of the Arbitration & Conciliation Act, 1996 (‘Act’) was called upon to decide the validity of the arbitration clause contained in an invoice. The Clauses in question reads as under

“We are member of Delhi Mercantile Association in case of any dispute its decision is final and binding for both the parties.”

“All disputes regarding this invoice will be settled by Delhi Hindustani Mercantile Association and will be binding on both parties.”

Based on these clauses, the Award Creditor sought to initiate arbitration proceedings between the parties and requested the Delhi Mercantile Association to take appropriate steps. The Delhi Mercantile Association nominated the arbitral tribunal which passed an award in favor of Award Creditor.

In section 34 proceedings, the question before the Court was whether these clauses constitute an Arbitration Clause.

As per the law settled by the Supreme Court in K.K.Modi vs. K.N. Modi & Ors.[4], among the attributes which must be present for an agreement to be considered as an arbitration agreement are:

  1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement,
  2. that the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration,
  3. the agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal,
  4. that the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides,
  5. that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly,
  6. the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal.

In light of the settled position of law, the Court analyzed the invoice and purported arbitration clause contained therein. The Court held that a perusal of the invoice shows that it is not clear as to whether the Award Debtor has signed the invoice or it has been signed on his behalf by some other entity. That apart, the manner of signing indicates that the person is only signing receipt of the goods rather than agreeing to the arbitration agreement between the parties. In Court’s opinion, the manner in which the signatures have been affixed on the invoice does not indicate an intent on the part of the Award Debtor agreeing to settle their disputes through arbitration.

Further the Court noted that the so called Arbitration Clause is reproduced in a small font at the bottom of the invoice. Thus, it is doubtful if the Award Debtor even noticed that he was signing a document which has an Arbitration Clause. It is not possible to conclude that the parties were ad idem.

The court also noted that as per the said alleged arbitration clause, the disputes are to be settled by Delhi Hindustani Mercantile Association. However, there is nothing to show how the arbitral tribunal will be constituted by the said Delhi Hindustani Mercantile Association. There is no consensus indicated in the arbitration clause of the composition of the arbitral tribunal.

Apart from the fact that there is no consensus for Arbitration, the Court also found that the clause itself is vague. It is not possible to accept the plea of the Award Creditor that the parties have agreed to refer the disputes to arbitration of the said Delhi Hindustani Mercantile Association.

In view thereof, the Court concluded that the signatures affixed on the invoice are only the acknowledgement of receipt of goods and nothing more.[5] Such a clause would not be an Arbitration Agreement. The Parties were not ad idem. As there is no Arbitration Agreement, the Award and the Proceedings to that extent are vitiated and hence award is set aside.

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

[1] Mahanagar Telephone Nigam Ltd. vs. Canara Bank & Ors., AIR 2019 SC 4449 at [9.2]

[2] Mahanagar Telephone Nigam Ltd. vs. Canara Bank & Ors., AIR 2019 SC 4449 at [9.4]

[3] Mahanagar Telephone Nigam Ltd. vs. Canara Bank & Ors., AIR 2019 SC 4449 at [9.5]

[4] (1998) 3 SCC 573 at [17]

[5] This view is substantiated by Supreme Court ruling in Food Corporation of India vs. National Collateral Management Services Limited and Delhi High Court ruling in Taipack Ltd. & Ors. V. Ram Kishore Nagar Mal (2007) 3 Arb.LR 402 Delhi

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