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In the absence of arbitration clause, no case can be filed under arbitration act = mere use of the word ‘arbitration’ or ‘arbitrator’ in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration. For example, use of words such as “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” or “if any disputes arise between the parties, they should consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement. Similarly, a clause which states that “if the parties so decide, the disputes shall be referred to arbitration” or “any disputes between parties, if they so agree, shall be referred to arbitration” is not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. Such clauses require the parties to arrive at a further agreement to go to arbitration, as and when the disputes arise. Any agreement or clause in an agreement requiring or contemplating a further consent or consensus before a reference to arbitration, is not an arbitration agreement, but an agreement to enter into an arbitration agreement in future.”

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 THE HON'BLE SRI JUSTICE B.SESHASAYANA REDDY

 

Arbitration Application No.141 of 2010

18-07-2011 

Ms.Jain Irrigation Systems Limited,Jalgaon, Maharashtra,Joint Managing Director
Shri Ajit Bhavarlal Jain

Ms.Satyam Computer Services Limited, Mahindra Satyam Infocity,Madhapur,
Hyderabad 

!COUNSEL FOR APPLICANT: Ms.C.Kodandaram, Senior Counsel         

COUNSEL FOR RESPONDENT: Ms.Shireen Sethana Baria          

:ORDER:  

        This Arbitration Application has been taken out by the applicant under
sub-sections (5) & (6) of Section 11 of the Arbitration and Conciliation Act,
1996 (for short, "the Act"), r/w. Scheme for Appointment of Arbitrators, 1996,
seeking appointment of an arbitrator.

2.      The applicant-M/s.Jain Irrigation Systems Limited, is a company registered
under the Companies Act, 1956, engaged in the business of production and supply
of equipment used in irrigation projects.  The respondent-M/s. Satyam Computer
Services Limited is a company registered under the Companies Act, 1956, engaged
in the business of providing information technology services.  In order to
streamline the day-to-day activities of business, integrate and link all its
departments and have a single platform for having complete coordination with all
its departments, the applicant decided to implement SAP, which, in simple words
is a software that has to be integrated in a company's existing computer systems
for effective streamlining of the day-today business operations of the company.
Negotiations held between the applicant and the respondent and ultimately,
negotiations culminated in appointing the respondent as service provider of the
applicant for the purpose of implementation of MySAP ERP ECC 6.0 vide letter
dated 23.11.2007.  The said letter contained preliminary terms of the contract
such as scope of work, consideration, payment schedule, etc. The applicant paid
an amount of Rs.1,01,12,400/- to the respondent towards its remuneration for
providing the services required by the applicant.  An annual maintenance
agreement, dated 14.11.2008, also came to be executed between the parties.
According to the applicant, the respondent failed to carry out proper and timely
services in respect of MySAP implementation for the applicant and also failed to
honour the confidentiality agreement.  Thereupon, the applicant issued a notice,
dated 04.01.2010 to the respondent seeking return of an amount of
Rs.9,00,00,000/- apart from damages and compensation for wrongful abandonment
and breach of confidentiality. The applicant also indicated in the notice with
regard to invocation of arbitration clause and reference of disputes to
Mr.Bharat B. Jain, Advocate, as sole arbitrator.    The respondent received the
notice and remained non-responsive.  Thereupon, the applicant by notice, dated
21.01.2010, invoked the arbitration clause 14.2 of the agreement for services
and appointed Justice H.Suresh, Retd. Judge of Bombay High Court and sought for
consent of the respondent.  The respondent did not respond to the notice.  I
will complete the narration of facts set out in the application by referring
Paras.2-s and 5 of the affidavit filed in support of the application, which read
as hereunder:
        "2. s. The applicant states and submits that all previous attempts of an
amicable settlement and negotiations between the parties have failed. The
Applicant states that the Respondent has failed to honour the said
Confidentiality Agreement.  The Applicant states that the Respondent has also
failed to carry out proper and timely services in respect of MySAP
implementation for the Applicant and have failed to resolve the numerous issues
arising out of their faulty services and therefore, disputes and differences
have arisen between the parties.  The Applicant submits that there is no formal
written signed contract between the parties.  An agreement was reached between
the parties, but no document was executed by the parties.  Though there is no
written signed document, the agreement came into existence, as the parties have
acted upon the agreement.  The deponent is advised to state that a formal
written signed document not being present and available does not ipso facto
disentitle the applicant to invoke the Arbitration Clause in the present case."
        "5. The applicant states and submits that the said Agreement was abandoned
by the Respondent in or around December, 2008.  The said Agreement was rescinded
by the Applicant vide its advocates' Notice dated 4th January, 2010.  The
Applicant invoked arbitration by its Notice, dated 21st January 2010 and the
same was received by the Respondent on 25th January, 2010 and the Respondent
till date has not replied to the same.  Therefore, the Applicant has filed this
Application for appointment of sole Arbitrator for adjudication of disputes
between the parties. The cause of action of the present case arose on 23rd
November, 2007 when the Applicant appointed the respondent for implementation of
MySAP ERP ECC 6.0 and on 26th November, 2007 when the Respondent sent the said
Agreement to the Applicant and on 19th February 2008 when the applicant signed
the Confidentiality Agreement and sent to respondent and on 30th September 2008
when the Applicant pointed out the defects to the Respondent and on 23rd
November 2008 when the Applicant requested  the respondent to solve the pending
issues pertaining to the services and on 28th November, 2008 when the Applicant
submitted the list of pending issues to the Respondent and on 18th November,
2009 when the Applicant once again pointed out the deficiencies to the
respondent and on 4th January 2010 when the advocates for the Applicant issues a
legal notice to the Respondent and on 21st January 2010 when the counsel for the
Applicant issued notice under section 21 of the Arbitration and Conciliation
Act, 1996 and the cause of action is continuing.  Hence, within limitation."

Hence, this Arbitration Application.

3.      Notice to the respondent came to be ordered on 07.09.2010.  The respondent
entered appearance through a counsel and filed counter-affidavit.

4.      It is stated in the counter-affidavit that the application is not
maintainable as there exists no arbitration agreement between the parties as
contemplated under Section 7 of the Act.  It is further stated in the counter-
affidavit that mutual discussions with regard to implementation of SAP project
has been culminated into a purchase/work order, dated 23.11.2007 placed by the
applicant with the respondent.  The said purchase/work order records that the
applicant intended to sign a MSA (Master Service Agreement) and a detailed SOW
(Statement of work) in the coming days. Pursuant to the said purchase/work
order, dated 23.11.2007, the respondent sent a standard MSA template vide its
mail dated 26.11.2007 to the applicant  and clearly conveyed that the applicant
would require to separately prepare SOW and incorporate the same with the
pricing and payment terms.  No agreement was ever executed for implementation of
SAP project due to urgency shown by the applicant and the respondent proceeded
on the basis of the purchase/work order, dated 23.11.2007.    As the project
progressed, the applicant sought undertaking from the respondent to maintain
confidentiality of proprietary information.  A letter of such a nature was
required by the applicant for the reason that the proposed MSA which was desired
to be executed between the parties did not fructify. If any such MSA was
executed between the applicant and the respondent, there was no occasion to give
such type of undertaking in as much as a confidentiality clause in an integral
part of any such MSA and would have covered the confidentiality terms.
Therefore, the respondent had sent a letter to the applicant on 19.02.2008  for
maintaining confidentiality.  The said letter does not refer to any agreement
much less arbitration agreement as alleged by the applicant.  Various
allegations made by the applicant against the respondent attributing lapses on
its part have been denied.  The various mails referred in the application are in
relation to maintenance support, for which AMS was to be executed, but was not
executed.  The applicant resorted to choosing arbitral proceedings over a suit
because of the heavy court fees required to be paid for such type of claims.  In
the present case, there is neither any arbitrable dispute nor any mandate
providing for arbitration.  Therefore, the Arbitration Application is liable to
be dismissed. 

5.      The applicant filed a rejoinder.  It is stated in the rejoinder that the
arbitration agreement or agreements containing arbitration clause are valid and
subsisting even if the same are not formally executed by the parties thereto and
arbitration would lie there under.    The respondent by e-mail, dated 26.01.2008
forwarded the Master Services Agreement incorporating the arbitration clause at
Clause No.14 therein.  Therefore, it is clear that it was the intention of the
respondent, in case of any dispute, to refer the same to arbitration.    The
respondent carried out the work for the applicant and accepted the payment in
respect of the same and therefore, the respondent cannot dispute the existence
of a contract between the parties, which contains an arbitration clause.

6.      Heard Sri C.Kodandaram, learned senior counsel appearing for the applicant
and M/s Shireen Sethana Baria, learned counsel appearing for the respondent.

7.      Learned senior counsel appearing for the applicant submits that e-mails
emanating from the respondent indicate that it is the respondent who prepared
the agreement for services and sent for consent.  The respondent having sent the
agreement for services for consent of the applicant and having acted upon it and
received an amount of Rs.1,01,12,400/- cannot be permitted to resile from the
terms of the agreement, which included an arbitration clause.  In a way, his
contention is that the e-mail correspondences between the parties are enough
indication that the parties acted upon the terms of the agreement for service.
The learned senior counsel took me to the e-mail message, dated 26.11.2007. In
elaborating his arguments, learned senior counsel contends that the
correspondence between the parties and conduct of the respondent clearly
establish  that  the terms of Agreement  for service have been acted upon and
therefore, even in the absence of signature of the parties on the agreement for
service, the terms therein binds the parties.  His contention is that there is
an agreement in writing though not signed by both the parties, but by the course
of conduct of the parties, it can be spelt out that such an agreement is enough
to rely upon the arbitration clause referred to therein.  Learned senior counsel
by referring Clause 14.2 of the agreement for services, contends that disputes
between the parties are required to be resolved by taking recourse to the
provisions of the Act and indeed the applicant issued a notice, dated
04.01.2010, adverting to the attention of the respondent to the above referred
clause.  But the respondent having received the notice failed to reply. Learned
senior counsel also refers the notice, dated 21.01.2010 addressed to the
respondent where under the respondent is requested to give consent for
appointment of Justice H.Suresh, Retd. Judge of High Court of Bombay.  Learned
senior counsel, apart from placing reliance on the judgments of the Supreme
Court and Karnataka High Court, laid much stress on Section 7 (4)(b) of the Act
to buttress his submissions.

8.      Section 7 of the Act reads as hereunder:
"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 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."

9.      The judgments on which learned senior counsel placed reliance are:
1) Indowind Energy Ltd. v. Wescare(I) Ltd. & Anr.1
2) Jindal Thermal Power Company Ltd. v. Karnataka Power Transmission Corporation
Ltd.2
3) Smita Conductors Ltd. Euro Alloys Ltd.3
4) Great Offshore Ltd. v. Iranian Offshore Engg. & Construction Co.4
5) Shakti Bhog Foods Ltd. v. Kola Shipping Limited5
6) Trimex International Fze. Ltd. v. Vedanta Aluminium Ltd.6, and
7) Kollipara Sriramulu (dead) by his L.R. v. T.Aswatha Narayana (dead) by his
L.Rs. & Ors.7
10.     In Indowind Energy Ltd.'s case (1 supra), the Supreme Court while
interpreting the provisions of Section 7(4) of the Act, has observed that a
contract can be spelt out from correspondence or conduct. But an arbitration
agreement is different from a contract.  An arbitration agreement can come into
existence only in the manner contemplated under Section 7 of the Act.  If
Section 7 of the Act says that an arbitration agreement should be in writing, it
will not be sufficient for the petitioner in an application under Section 11 of
the Act to show that there existed an oral contract between the parties.  I deem
it appropriate to refer para.19 of the cited judgment, which reads as hereunder:
        "19. The scope of examination of the agreement dated 24.2.2006, by the
learned Chief Justice or his Designate under Section 11(6) is necessarily to be
restricted to the question whether there is an arbitration agreement between the
parties. The examination cannot extend to examining the agreement to ascertain
the rights and obligations regarding performance of such contract between the
parties. This Court in SBP and Co. v. Patel Engineering Limited [2005 (8) SCC
618] and in National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. [2009 (1)
SCC 267] has held that when an application is filed under section 11, the Chief
Justice or his Designate is required to decide only two issues, that is whether
the party making the application has approached the appropriate court and
whether there is an arbitration agreement and whether the party who has applied
under section 11 of the Act, is a party to such agreement. Therefore, the Chief
Justice exercising jurisdiction under section 11 of the Act has to only consider
whether there is an arbitration agreement between the petitioner and the
respondent/s in the application under section 11 of the Act. Any wider
examination in such a summary proceeding will not be warranted."

11.     In Jindal Thermal Power Company Ltd.'s case (2 supra), a Division  Bench
of the Karnataka High Court while interpreting the Karnataka Electricity Reform
Act, 1999, has observed that concluded contract in terms of Explanation to
Section 19 and proviso to Section 27(2) of the Karnataka Electricity Reform Act,
1999, need not be in writing; it need not be in any particular form for the Act
does not prescribe any particular form; it need not be a formal agreement; it
need not be a PPA and it is restricted to tariff determination only.    In this
judgment, the Division Bench of the Karnataka High Court referred the judgment
of the Supreme Court in Kollipara Sriramulu's case (7 supra), wherein the
Supreme Court in para.3 of the judgment held:
        "We proceed to consider the next question raised in these appeals, namely
whether the oral agreement was ineffective because the parties contemplated the
execution of a formal document or because the mode of payment of the purchase
money was not actually agreed upon. It was submitted on behalf of the appellant
that there was no contract because the sale was conditional upon a regular
agreement being executed and no such agreement was executed, we do not accept
this argument as correct. It is well-established that a mere reference to a
future formal contract will not prevent a binding bargain between the parties.
The fact that the parties refer to the preparation of an agreement by which the
terms agreed upon are to be put in a more formal shape does not prevent the
existence of a binding contract. There are. however, cases where the reference
to a future contract is made in such terms as to show that the parties did not
intend to be bound, until a formal contract is signed. The question depends upon
the intention of the parties and the special circumstances of each particular
case. As observed by the Lord Chancellor (Lord Cranworth) in Ridgway v. Wharton,
the fact of a subsequent agreement being prepared may be evidence that the
previous negotiations did not amount to a concluded agreement, but the mere fact
that persons wish to have a formal agreement drawn up does not establish the
proposition that they cannot be bound by a previous agreement". The Supreme
Court in the said judgment has extracted the observations of Parker, J. in the
case of Alexander, supra, extracted by lis supra, with approval.   Further, the
Supreme Court has also referred to the following observation of Lord Cairns in
Rossiter v. Miller, with approval: "if you find not an unqualified acceptance
subject to the condition that an agreement is to be prepared and agreed upon
between the parties, and until that condition is fulfilled no contract is to
arise then you cannot find a concluded contract".

12.     In Smita Conductors Ltd.'s case (3 supra), the Supreme Court held that
existence, validity or effect of an arbitration agreement can be determined by
the court at three stages: 1)before the arbitration proceedings commence, (2)
during their pendency, and (3) after the award is made and filed in the court.

13.     In Great Offshore Ltd.'s case (4 supra), the Supreme Court while
interpreting Section 7 of the Act, held that plain language of Section 7 does
not require that the parties stamp the agreement and nothing in Section 7 of the
Act suggests that the parties must sign every page of the agreement.  The
Supreme Court also observed that technicalities like stamps, seals and even
signatures are red tape that have to be removed before the parties can get what
they really want - an efficient, effective and potentially cheap resolution of
their dispute.    It would be improper and undesirable for the courts to add a
number of extra formalities not envisaged by the legislation.  The Courts'
directions should be to achieve the legislative intention.
14.     In Shakti Bhogi Foods Ltd.'s case (5 supra), the Supreme Court observed
that the existence of an arbitration agreement can be inferred from the document
signed by the parties or an exchange of letters, telex, telegrams or other means
of communication which provide a record of the agreement.

15.     In Trimex International Fze Ltd.'s case (6 supra), the Supreme Court
observed that once the contract is concluded orally or in writing, the mere fact
that a formal contract has to be prepared and initialed by the parties would not
affect either the acceptance of the contract so entered into or implementation
thereof, even if the formal contract has never been initialed.

16.     Learned counsel appearing for the respondent submits that the respondent
acted on the purchase order, dated 23.11.2007.  The purchase order does not
contain any arbitration clause and therefore, the question of reference of
disputes that have arisen between the parties relatable to the purchase order
does not arise.  He would also contend that what is communicated to the
applicant by the respondent is only a model form of agreement for services.  It
neither contained the name of the applicant nor signature of the respondent to
infer that the agreement has become a concluded contract.  He would also contend
that this template agreement sent to the applicant never fructified and even the
confidentiality agreement, dated 19.02.2008, does not refer to the agreement for
services i.e. Master Service Agreement.  The learned counsel appearing for the
respondent copiously refers the contents of the purchase order and
confidentiality agreement, dated 19.02.2008, to buttress his submissions that
there is no clause under which parties are required to get their disputes
adjudicated by taking recourse to the provisions of the Act.  He would also
contend that agreement for services of MySAP ERP ECC 6.0 is dated 14.11.2008.
By that time, the purchase order, dated 23.11.2007, came into existence and
therefore, it is beyond a comprehension that purchase order is pursuant to the
agreement for services.  The learned counsel by referring the decision of the
Supreme Court in Trimex International Fze Ltd.'s case ( 6 supra),  on which
reliance has been placed by the learned senior counsel appearing for the
applicant, submits that in the said decision, purchase order contains an
arbitration clause and whereas, purchase order issued by the respondent herein
does not contain any arbitration clause and therefore, the cited decision does
not in any way helpful to the applicant.  Learned counsel also submits that the
decision in Great Offshore Ltd.'s case (4 supra) is not applicable to the facts
of the case since the Supreme Court was dealing with a case where the agreement
was signed by the parties.  Coming to the facts of the case on hand, it is only
model form that has been communicated to the applicant by the respondent and the
name of the applicant is not indicated in the model form and therefore, it
cannot be inferred that the receipt of model form by the applicant amounts to a
concluded contract between the parties.  Learned counsel would also submit that
mere reference to MSA document in the e-mail sent to the applicant is not
sufficient to infer that there is a concluded contract pursuant to the agreement
for services.  In support of his submissions, reliance has been placed by the
learned counsel on the following judgments of the Supreme Court and the decision
of the Bombay High Court:
1) Shakti Bhog Foods Ltd. vs. Kola Shipping Ltd. (5 supra)
2) National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.8
3) SBP & CO. v. Patel Engineering Ltd.9
4) Jagadish Chander v. Ramesh Chander & Ors.10
5) M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd.11
6) Rajesh V. Choudhary v. Kshitij R. Torak & Ors.12

17.     In SBP & Co.'s case (9 supra), the Supreme Court identified and segregated
the preliminary issues that may arise for consideration in an application under
Section 11 of the Act into three categories viz., 1) issues which the Chief
Justice or his designate is bound to decide; (ii) issues which he can also
decide, that is, issues which he may choose to decide; and (iii) issues which
should be left to the Arbitral Tribunal to decide.

18.     In National Insurance Company Ltd. v. Boghara Polyfab Pvt. Ltd.'s case (8
supra), the Supreme Court referred the SBP & Co.'s case (9 supra) with approval.

19.     In Jagdish Chander's case (10 supra), the Supreme Court held that
existence of an arbitration agreement as defined under Section 7 of the Act is a
condition precedent for exercise of power to appoint an Arbitrator/Arbitral
Tribunal, under Section 11 of the Act by the Chief Justice or his designate.  It
is not permissible to appoint an arbitrator to adjudicate the disputes between
the parties in the absence of an arbitration agreement or mutual consent.
Para.8 of the cited judgment needs to be noted and it is thus:
        "This Court had occasion to refer to the attributes or essential elements
of an arbitration agreement in K K Modi v. K N Modi [1998 (3) SCC 573], Bharat
Bhushan Bansal vs. U.P. Small Industries Corporation Ltd. [1999 (2) SCC 166] and
Bihar State Mineral Development Corporation v. Encon Builders (I)(P) Ltd. [2003
(7) SCC 418]. In State of Orissa v. Damodar Das [1996 (2) SCC 216], this Court
held that a clause in a contract can be construed as an 'arbitration agreement'
only if an agreement to refer disputes or differences to arbitration is
expressly or impliedly spelt out from the clause. We may at this juncture set
out the well settled principles in regard to what constitutes an arbitration
agreement :
(i) The intention of the parties to enter into an arbitration agreement shall
have to be gathered from the terms of the agreement. If the terms of the
agreement clearly indicate an intention on the part of the parties to the
agreement to refer their disputes to a private tribunal for adjudication and an
willingness to be bound by the decision of such tribunal on such disputes, it is
arbitration agreement. While there is no specific form of an arbitration
agreement, the words used should disclose a determination and obligation to go
to arbitration and not merely contemplate the possibility of going for
arbitration. Where there is merely a possibility of the parties agreeing to
arbitration in future, as contrasted from an obligation to refer disputes to
arbitration, there is no valid and binding arbitration agreement.
(ii) Even if the words 'arbitration' and 'arbitral tribunal (or arbitrator)' are
not used with reference to the process of settlement or with reference to the
private tribunal which has to adjudicate upon the disputes, in a clause relating
to settlement of disputes, it does not detract from the clause being an
arbitration agreement if it has the attributes or elements of an arbitration
agreement. They are : (a) The agreement should be in writing. (b) The parties
should have agreed to refer any disputes (present or future) between them to the
decision of a private tribunal. (c) The private tribunal should be empowered to
adjudicate upon the disputes in an impartial manner, giving due opportunity to
the parties to put forth their case before it. (d) The parties should have
agreed that the decision of the Private Tribunal in respect of the disputes will
be binding on them.

(iii) Where the clause provides that in the event of disputes arising between
the parties, the disputes shall be referred to Arbitration, it is an arbitration
agreement. Where there is a specific and direct expression of intent to have the
disputes settled by arbitration, it is not necessary to set out the attributes
of an arbitration agreement to make it an arbitration agreement. But where the
clause relating to settlement of disputes, contains words which specifically
excludes any of the attributes of an arbitration agreement or contains anything
that detracts from an arbitration agreement, it will not be an arbitration
agreement. For example, where an agreement requires or permits an authority to
decide a claim or dispute without hearing, or requires the authority to act in
the interests of only one of the parties, or provides that the decision of the
Authority will not be final and binding on the parties, or that if either party
is not satisfied with the decision of the Authority, he may file a civil suit
seeking relief, it cannot be termed as an arbitration agreement.

(iv) But mere use of the word 'arbitration' or 'arbitrator' in a clause will not
make it an arbitration agreement, if it requires or contemplates a further or
fresh consent of the parties for reference to arbitration. For example, use of
words such as "parties can, if they so desire, refer their disputes to
arbitration" or "in the event of any dispute, the parties may also agree to
refer the same to arbitration" or "if any disputes arise between the parties,
they should consider settlement by arbitration" in a clause relating to
settlement of disputes, indicate that the clause is not intended to be an
arbitration agreement. Similarly, a clause which states that "if the parties so
decide, the disputes shall be referred to arbitration" or "any disputes between
parties, if they so agree, shall be referred to arbitration" is not an
arbitration agreement. Such clauses merely indicate a desire or hope to have the
disputes settled by arbitration, or a tentative arrangement to explore
arbitration as a mode of settlement if and when a dispute arises. Such clauses
require the parties to arrive at a further agreement to go to arbitration, as
and when the disputes arise. Any agreement or clause in an agreement requiring
or contemplating a further consent or consensus before a reference to
arbitration, is not an arbitration agreement, but an agreement to enter into an
arbitration agreement in future."

20.     In M.R.Engineering & Contractors Pvt. Ltd.'s case (11 supra),  the Supreme
Court held that the wording of Section 7(5) of the Act makes it clear that a
mere reference to a document would not have the effect of making an arbitration
clause from that document, a part of the contract.   There should be a special
reference indicating a mutual intention to incorporate the arbitration clause
from another document into the contract.  The exception to the requirement of
special reference is where the referred document is not another contract, but a
standard form of terms and conditions of trade associations or regulatory
institutions which publish or circulate such standard terms and conditions for
the benefit of the members or others who want to adopt the same.   Section 7(5)
of the Act, therefore, requires a conscious acceptance of the arbitration clause
from another document, by the parties, as a part of their contract, before such
arbitration clause could be read as a part of the contract between the parties.
The scope and intent of Section 7(5) of the Act is summarized in the above
referred decision as hereunder:
        "The scope and intent of section 7(5) of the Act may therefore be
summarized thus:
(i) An arbitration clause in another document, would get incorporated into a
contract by reference, if the following conditions are fulfilled : (1) The
contract should contain a clear reference to the documents containing
arbitration clause, (2) the reference to the other document should clearly
indicate an intention to incorporate the arbitration clause into the contract,
(3) The arbitration clause should be appropriate, that is capable of application
in respect of disputes under the contract and should not be repugnant to any
term of the contract.

(ii) When the parties enter into a contract, making a general reference to
another contract, such general reference would not have the effect of
incorporating the arbitration clause from the referred document into the
contract between the parties. The arbitration clause from another contract can
be incorporated into the contract (where such reference is made), only by a
specific reference to arbitration clause.

(iii) Where a contract between the parties provides that the execution or
performance of that contract shall be in terms of another contract (which
contains the terms and conditions relating to performance and a provision for
settlement of disputes by arbitration), then, the terms of the referred contract
in regard to execution/performance alone will apply, and not the arbitration
agreement in the referred contract, unless there is special reference to the
arbitration clause also.

(iv) Where the contract provides that the standard form of terms and conditions
of an independent Trade or Professional Institution (as for example the Standard
Terms and Conditions of a Trade Association or Architects Association) will bind
them or apply to the contract, such standard form of terms and conditions
including any provision for arbitration in such standard terms and conditions,
shall be deemed to be incorporated by reference. Sometimes the contract may also
say that the parties are familiar with those terms and conditions or that the
parties have read and understood the said terms and conditions.

(v) Where the contract between the parties stipulates that the Conditions of
Contract of one of the parties to the contract shall form a part of their
contract (as for example the General Conditions of Contract of the Government
where Government is a party), the arbitration clause forming part of such
General Conditions of contract will apply to the contract between the parties."21.     Keeping in view the proposition of law laid down in the above referred
decisions, let me examine whether the correspondence between the parties infer
that the parties are mutually agreed for adjudication of their disputes by
taking recourse to the provisions of the Act.  It is not in dispute that there
is no formal written, signed contract between the parties.   Indeed, this fact
has been stated by the applicant in para.2-s of the affidavit filed in support
of the application, which has been extracted supra.  The purchase order
emanating from the respondent is dated 23.11.2007.  This purchase order came to
be issued after due deliberations and before the parties signing on MSA.  The
purchase order does not contain any arbitration clause.  After the purchase
order, Varghese Pappachan, on behalf of the respondent, sent certain e-mail
messages to the applicant.   Those e-mail messages find place at page.20 of the
application.  What all he stated is that MSA template requires certain
modifications and it is the respondent, who would prepare the MSA document and
SOW (Statement of Work) and mailing to the applicant for review and consent.
The proforma agreement for service has been mailed to the applicant by the
respondent.  Copy of the proforma agreement  finds place at page. 22 of the
material papers.  Even the name of the applicant does not figure in the proforma
agreement and it does not contain the signature of the respondent.  It is only a
format which is required to be considered by the applicant and communicate its
consent and thereafter, it has to take the shape of contract.  Till then, it
remains only a format.  The nature of work between the parties is governed by
purchase order and confidentiality agreement.  It is the contention of the
learned senior counsel that confidentiality agreement is pursuant to the format
agreement for service.  I do not see any substance in his contention. The format
contains a confidentiality clause i.e. 7.1.  If the parties intend that the
terms and conditions mentioned in the format have reached consciousness, there
was no need for the respondent to execute confidentiality agreement, dated
19.02.2008.  The very fact that the respondent executed confidentiality
agreement, dated 19.02.2008, indicates that there was no consciousness among the
parties in response to the terms and conditions stipulated in the format of
agreement for service.  A reading of the purchase order, copy of which finds
place at page. No.18 of the material papers, and so also the confidentiality
agreement, copy of which finds place at page No.36 of the material papers, does
not indicate that the disputes between the parties are required to be settled by
taking recourse to the provisions of the Act.  The e-mail messages emanating
from the respondent do not give any clue that the terms of MSA have been
accepted and acted upon.  Therefore, I find that the applicant failed to
establish that there is an arbitration agreement between the parties, in which
case, the application is liable to be dismissed.
22.     Accordingly, the Arbitration Application is dismissed.  No costs.?1 AIR 2010 SC 1793
2 2004 ILR (Kar.) 3463
3 (2001) 7 SCC 728
4 (2008) 14 SCC 240
5 (2009) 2 SCC 134
6 (2010) 3 SCC 1
7 (1968) 3 SCR 387 = AIR 1968 SC 1028
8 (2009) 1 SCC 267
9 (2005) 8 SCC 618
10 (2007) 5 SCC 719
11 (2009) 7 SCC 696
12 (decided on 06.08.2010 in A.A.No.135 of 2007)

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4 thoughts on “In the absence of arbitration clause, no case can be filed under arbitration act = mere use of the word ‘arbitration’ or ‘arbitrator’ in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration. For example, use of words such as “parties can, if they so desire, refer their disputes to arbitration” or “in the event of any dispute, the parties may also agree to refer the same to arbitration” or “if any disputes arise between the parties, they should consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is not intended to be an arbitration agreement. Similarly, a clause which states that “if the parties so decide, the disputes shall be referred to arbitration” or “any disputes between parties, if they so agree, shall be referred to arbitration” is not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement if and when a dispute arises. Such clauses require the parties to arrive at a further agreement to go to arbitration, as and when the disputes arise. Any agreement or clause in an agreement requiring or contemplating a further consent or consensus before a reference to arbitration, is not an arbitration agreement, but an agreement to enter into an arbitration agreement in future.”

  1. ensure
    If a new article becomes available or if perhaps any changes occur on the current publication, I would be interested in reading a lot more and finding out how to make good usage of those approaches you discuss. ensure

    Posted by ensure | October 15, 2011, 6:58 PM

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