Supreme Court Clarifies Arbitration Agreement Requirements in Mahanadi Coalfields Case (25 July 2022)

Date of the Judgment: 25 July 2022

Citation: Civil Appeal No 4914 of 2022 (Arising out of SLP(C) No 1098 of 2020)

Judges: Dr Dhananjaya Y Chandrachud and A S Bopanna, JJ.

Can a dispute resolution clause that outlines a process for internal settlement and then directs parties to the courts of law be considered an arbitration agreement? The Supreme Court of India recently addressed this question, clarifying the essential elements required for a valid arbitration agreement under the Arbitration and Conciliation Act, 1996. The Court held that a clause that does not explicitly provide for arbitration as the mode of dispute resolution, nor indicate an intention to refer disputes to an arbitrator, cannot be considered a valid arbitration agreement. The judgment was authored by Dr. Dhananjaya Y Chandrachud, J. and A.S. Bopanna, J. concurred.

Case Background

Mahanadi Coalfields Ltd. (the appellant), a subsidiary of Coal India Limited, issued an e-tender on 11 October 2010 for road construction work. M/s IVRCL AMR Joint Venture (the respondent) won the bid, and a contract was signed on 30 January 2012. The work was scheduled from 16 January 2012 to 14 January 2015. The appellant urged the respondent to expedite work starting 28 June 2012. The appellant sent multiple notices to the respondent in 2013 and 2014 for failing to meet the work schedule. The appellant terminated the contract on 15 May 2014, citing delays and the respondent’s inability to meet the schedule. The respondent claimed Rs. 128,65,12,688 on 12 October 2017, alleging delays by the appellant, which was rejected on 18 December 2017. The respondent then issued an arbitration notice on 9 April 2018, proposing Justice Asok Kumar Ganguly as the sole arbitrator. After no response from the appellant, the respondent filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 before the High Court of Orissa.

Timeline

Course of Proceedings

The High Court of Orissa allowed the application under Section 11 of the Arbitration and Conciliation Act, 1996, appointing a sole arbitrator. The High Court noted that Clause 15 of the contract provided for “Settlement of dispute/Arbitration.” The High Court relied on the Supreme Court’s decision in Mayavati Trading Private Limited vs. Pradyuat Deb Burman, stating that the arbitration clause should be considered. The High Court disregarded clause 19 of the work order which specified that matters relating to any dispute shall be subject to the jurisdiction of District Court, Angul only.

Legal Framework

The Supreme Court examined the definition of an “arbitration agreement” under the Arbitration and Conciliation Act, 1996. Section 2(b) of the Arbitration and Conciliation Act, 1996 defines an arbitration agreement as an agreement referred to in Section 7 of the same Act. Section 7 of the Arbitration and Conciliation Act, 1996 states that an arbitration agreement is 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. Sub-section (2) of Section 7 of the Arbitration and Conciliation Act, 1996 states that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. Sub-section (3) of Section 7 of the Arbitration and Conciliation Act, 1996 requires the arbitration agreement to be in writing. Sub-section (4) of Section 7 of the Arbitration and Conciliation Act, 1996 specifies that an arbitration agreement is in writing if it is contained in a document signed by the parties, an exchange of letters, or an exchange of statements of claim and defense where the existence of the agreement is alleged by one party and not denied by the other. The Court also referred to the principles laid down in Jagdish Chander v. Ramesh Chander [(2007) 5 SCC 719] regarding the essential attributes of an arbitration agreement.

Section 2(b) of the Arbitration and Conciliation Act, 1996: “arbitration agreement means an agreement referred to in section 7”

Section 7 of the Arbitration and Conciliation Act, 1996: (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, including communication through electronic means 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.

Arguments

Appellant’s Arguments:

• The learned Attorney General, appearing for the appellants, argued that Clause 15 of the Contract Agreement does not constitute a valid arbitration agreement under Sections 2(b) and 7 of the Arbitration and Conciliation Act, 1996.
• Clause 15 of the Contract Agreement, titled “Settlement of Disputes/Arbitration,” does not contain an explicit agreement to refer disputes to arbitration.
• Clause 15.1 outlines steps for dispute settlement at the company level, and Clause 15.2 states that if disputes persist with non-government agencies, they should be resolved in a court of law.
• The clause does not demonstrate a clear intention to refer disputes to arbitration nor does it appoint an arbitrator.

Respondent’s Arguments:

• The learned Senior Counsel, appearing for the respondent, argued that the first appellant, being a subsidiary of Coal India Limited (CIL), should consider referring the disputes to arbitration, as per CIL’s policy document dated 7 April 2017.
• The CIL policy document encourages settlement of disputes through arbitration for existing work orders/contracts.
• Clause 5 of the CIL policy document states that disputes should be settled through arbitration, requiring consent of the contractor and an agreement to refer the dispute to a sole arbitrator.
• The respondent also relied on an order dated 20 July 2018 of the Chief Justice of the High Court of Orissa, which was based on the understanding that Clause 15 of the Contract Agreement and Clause 5 of the policy decision provide for the appointment of an arbitrator.

Innovativeness of the argument: The respondent’s argument was innovative in that it tried to use a subsequent policy document of the parent company to interpret the contract of its subsidiary to show that there was an intent to arbitrate, despite the arbitration clause not explicitly stating that.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether Clause 15 of the Contract Agreement constitutes a valid arbitration agreement under Sections 2(b) and 7 of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Jagdish Chander v. Ramesh Chander [(2007) 5 SCC 719] – The Court relied on this case to enumerate the principles governing what constitutes an arbitration agreement. The Court held that the words used in an arbitration agreement should disclose a determination and obligation on behalf of parties to refer disputes to arbitration.
• K.K. Modi v. K.N. Modi [(1998) 3 SCC 573] – This case was relied upon in Jagdish Chander v. Ramesh Chander (supra) to determine the attributes of an arbitration agreement.
• Bharat Bhushan Bansal v. U.P. Small Industries Corpn. Ltd [(1999) 2 SCC 166] – This case was relied upon in Jagdish Chander v. Ramesh Chander (supra) to determine the attributes of an arbitration agreement.
• Bihar State Mineral Development Corpn v. Encon Builders (I) (P) Ltd [(2003) 7 SCC 418] – This case was relied upon in Jagdish Chander v. Ramesh Chander (supra) to determine the attributes of an arbitration agreement.
• State of Orissa v. Damodar Das [(1996) 2 SCC 216] – This case was relied upon in Jagdish Chander v. Ramesh Chander (supra) to determine the attributes of an arbitration agreement.
• IB Valley Transport, Vijay Laxmi (P) Ltd. v. Mahanadi Coalfields Ltd [(2014) 10 SCC 630] – The Court referred to this case where a similar clause was interpreted as a dispute resolution mechanism at the company level, to be exhausted before taking recourse to other legal remedies.
• Mayavati Trading Private Limited vs. Pradyuat Deb Burman [(2019) 8 SCC 714] – The High Court relied on this case to state that the arbitration clause should be considered.

Legal Provisions:

• Section 2(b) of the Arbitration and Conciliation Act, 1996: Defines “arbitration agreement” as an agreement referred to in Section 7 of the same Act.
• Section 7 of the Arbitration and Conciliation Act, 1996: Defines the essential attributes of an arbitration agreement, including the requirement that it be in writing and that it demonstrates the parties’ intention to submit disputes to arbitration.

Judgment

The Supreme Court held that Clause 15 of the Contract Agreement does not constitute a valid arbitration agreement. The Court emphasized that the clause does not explicitly provide for arbitration as the mode of dispute resolution. Instead, it outlines a dispute resolution mechanism at the company level and refers to courts of law for other disputes. The Court also stated that the CIL policy document dated 7 April 2017, does not constitute an arbitration agreement as it requires a further agreement between the parties to proceed to arbitration. The Court set aside the High Court’s order and clarified that the respondent is at liberty to seek other legal remedies.

How each authority was viewed by the Court?

• Jagdish Chander v. Ramesh Chander [(2007) 5 SCC 719]* – The Court followed the principles laid down in this case to determine whether a valid arbitration agreement existed. The Court held that the words used in an arbitration agreement should disclose a determination and obligation on behalf of parties to refer disputes to arbitration.
• IB Valley Transport, Vijay Laxmi (P) Ltd. v. Mahanadi Coalfields Ltd [(2014) 10 SCC 630]* – The Court followed this case to interpret Clause 15 as a dispute resolution mechanism at the company level, rather than an arbitration agreement.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the absence of a clear and explicit agreement to arbitrate in Clause 15 of the contract. The Court emphasized that the clause focused on internal dispute resolution and, failing that, recourse to the courts, rather than arbitration. The Court also noted that the CIL policy document did not constitute an arbitration agreement as it required a further agreement between the parties to proceed to arbitration. The Court’s reasoning was based on the principles laid down in Jagdish Chander v. Ramesh Chander, which emphasizes the necessity of a clear intention to refer disputes to arbitration for a valid arbitration agreement.

“The substantive part of the provision makes it abundantly clear that there is no arbitration agreement between the parties agreeing to refer either present or future disputes to arbitration.”

“Clause 15 does not comport with the essential attributes of an arbitration agreement in terms of section 7 of the 1996 Act as well as the principles laid down under Jagdish Chander (supra).”

“The communication dated 7 April 2017 merely indicates a desire on behalf of CIL to have disputes related to work contracts settled by arbitration. It requires both the parties to arrive at a further agreement to proceed to arbitration when the dispute arises.”

Key Takeaways

• A dispute resolution clause must explicitly state that disputes will be referred to arbitration to be considered a valid arbitration agreement.
• Clauses that provide for internal dispute resolution and then refer to courts of law for further disputes do not constitute arbitration agreements.
• Policy documents that express a desire to settle disputes through arbitration but require further agreement do not constitute valid arbitration agreements.
• The essential attributes of an arbitration agreement, as outlined in Section 7 of the Arbitration and Conciliation Act, 1996, must be met for it to be valid.

Directions

The Supreme Court set aside the impugned judgment and order of the High Court dated 29 November 2019. The respondent was granted liberty to seek recourse to other legal remedies.

Development of Law

The ratio decidendi of this case is that a clause titled “Settlement of Disputes/Arbitration” that provides for dispute resolution at the company level and refers to courts of law for other disputes does not constitute a valid arbitration agreement. The judgment reinforces the principles laid down in Jagdish Chander v. Ramesh Chander regarding the essential attributes of an arbitration agreement, emphasizing the need for a clear and explicit agreement to arbitrate.

Conclusion

The Supreme Court’s judgment in Mahanadi Coalfields Ltd & Anr vs M/s IVRCL AMR JOINT VENTURE clarifies that a dispute resolution clause must explicitly provide for arbitration to be considered a valid arbitration agreement. The Court emphasized that a clause that focuses on internal dispute resolution and refers to courts of law for other disputes does not meet the requirements of an arbitration agreement under the Arbitration and Conciliation Act, 1996. The judgment underscores the importance of clear and unambiguous language in contracts when parties intend to resolve disputes through arbitration.