Supreme Court settles the applicability of Section 45 of the Arbitration and Conciliation Act in International Commercial Arbitration: M/s Shakti Bhog Foods Limited vs. Kola Shipping Limited (2008)

Introduction

Date of the Judgment: September 23, 2008

Judges: Tarun Chatterjee, J., Dalveer Bhandari, J.

When disputes arise in international commercial agreements, how should courts approach arbitration clauses? This question was addressed by the Supreme Court of India in a case between M/s Shakti Bhog Foods Limited and Kola Shipping Limited. The core issue revolved around whether a dispute should be referred to arbitration in London, as per an alleged agreement between the parties, or whether the Indian courts should continue to hear the matter. The Supreme Court, comprising Justice Tarun Chatterjee and Justice Dalveer Bhandari, upheld the decision to refer the dispute to arbitration, reinforcing the importance of honoring international arbitration agreements.

Case Background

M/s Shakti Bhog Foods Limited (hereinafter referred to as “the appellant”), a company engaged in manufacturing and exporting food products, intended to export sorghum (referred to as “the cargo”) to the State of Niger. The appellant obtained an irrevocable letter of credit from the State Bank of India, Overseas Branch, New Delhi, on July 12, 2005.

On July 26, 2005, the appellant contacted Kola Shipping Limited (hereinafter referred to as “the respondent”) through a broker, Brisk Marine Services, proposing to load 13,500 MT of cargo at Kakinada Port for transportation to Cotonou. The respondent issued a bill of lading. The Charter Party Agreement allegedly required the appellant to load the cargo within nine days, by August 6, 2005. The vessel M.V. Kapitan Nazarev arrived at Kakinada Port on July 24, 2005, and was inspected by the appellant’s surveyor on July 25, 2005.

However, the export order from the State of Niger did not materialize. On August 9, 2005, the appellant informed the respondent of this development, citing unreasonable conditions imposed by the State of Niger. According to the respondent, the Charter Party Agreement stipulated that if the export order from Niger failed, the appellant would load maize to Colombo from Kakinada Port. On August 19, 2005, the appellant offered to compensate the respondent for the incurred loss. The respondent, on August 24, 2005, rejected the demurrage amount offered by the appellant, leading to a dispute over the quantum of demurrage.

The appellant loaded only 1100 MT of the cargo between August 6, 2005, and August 9, 2005, instead of the agreed 13,500 MT. On September 5, 2005, the appellant requested the respondent to unload the cargo, but the cargo remained on the vessel due to the ongoing disputes. The respondent then initiated proceedings in the High Court of Delhi, seeking interim orders for the discharge of the 1,100 MT of cargo under Section 9 of the Arbitration and Conciliation Act, 1996. The High Court allowed this application on September 28, 2005. The appellant initially appealed but later withdrew the appeal on January 22, 2007.

The appellant also filed a suit claiming damages, as the unloaded cargo had become unfit for consumption, along with an application for an interim injunction to detain the vessel at Kakinada Port until the suit’s disposal. This application was dismissed on November 11, 2005, and the dismissal was unsuccessfully challenged before the High Court of Andhra Pradesh. The respondent then applied under Section 45 of the Arbitration and Conciliation Act, 1996, to refer the dispute to arbitration in London under the English Arbitration Act, 1996, and to stay all further proceedings in the suit pending arbitration. The Additional District Judge allowed this application on November 30, 2006. The appellant’s Civil Revision Petition before the High Court of Andhra Pradesh was dismissed, affirming the existence of a Charter Party Agreement.

Timeline

Course of Proceedings

The respondent initiated proceedings in the High Court of Delhi seeking interim orders in the matter of discharge of 1,100 MT of the cargo under Section 9 of the Act. The said application came to be allowed by the High Court on 28th of September, 2005. The appellant carried the matter in appeal and subsequently withdrew the same on 22nd of January, 2007. In the meantime the appellant had also filed a suit claiming damages as by the time the cargo unloaded from the ship had become unworthy of consumption.

The appellant also filed an application for injunction under Order XXXIX Rules 1 and 2 of the Civil Procedure Code, seeking interim injunction directing the Port Officer, Kakinada Port, to detain the vessel of M.V. Kapitan Nazarev at Kakinada harbour till the disposal of the suit. The application came to be dismissed by the III Additional District Judge, Kakinada, by an order dated 11th of November, 2005. The appellant thereafter unsuccessfully challenged the said order by filing an appeal before the High Court of Andhra Pradesh.

The respondents then entered into appearance in O.S. No. 44 of 2005 and moved an application under Section 45 of the Act to refer the dispute between the parties to arbitration in London under the provisions of the English Arbitration Act, 1996 and stay all further proceedings in the suit pending arbitration. The Learned III Additional District Judge, Kakinada, allowed the application by an order dated 30th of November, 2006. Feeling aggrieved, the appellant filed a Civil Revision Petition before the High Court of Andhra Pradesh at Hyderabad which was dismissed on a finding that there was a Charter Party Agreement in existence and the appellant could not deny the existence of the same.

Legal Framework

This case primarily concerns Section 45 of the Arbitration and Conciliation Act, 1996, which deals with the referral of parties to arbitration in international commercial disputes. Section 45 states that a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative, or incapable of being performed.

The Supreme Court also refers to Section 7 of the Arbitration and Conciliation Act, 1996, which defines an arbitration agreement. According to 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.”

The Court also considers Clause 19 (a) read with Box 25 of the Charter Party Agreement between the appellant and the respondent, which states:

“Clause 19- LAW AND ARBITRATION
(a) This charter party shall be governed and construed in accordance with the English Law and any dispute arising out of this charter party shall be referred to arbitration in London in accordance with the Arbitration Acts 1950 and 1979 or any statutory modification or re-enactment thereof for the time being in force. Unless the parties agree upon a sole arbitrator, one arbitrator shall be appointed by each party and the arbitrators so appointed shall appoint a third arbitrator, the decision of the three-man tribunal thus constituted or any two of them, shall be final. On the receipt of one party of the nomination in writing of the other’s arbitrator, that party shall appoint their arbitrator within fourteen days. Failing which the decision of the single arbitrator appointed shall be final. For disputes where the total amount claimed by either party does not exceed the amount stated in Box 25, the arbitration shall be conducted in accordance with the small claims procedure of the London Maritime Arbitrators Association.”

These provisions are crucial in determining whether an arbitration agreement exists, its validity, and the procedure to be followed in case of a dispute.

Arguments

Arguments by the Appellant (M/s Shakti Bhog Foods Limited):

• The trial court did not provide a definitive finding regarding the existence of an Arbitration Agreement. Without such a finding, invoking Section 45 of the Arbitration and Conciliation Act, 1996, is unjustified.
• Even if a Charter Party Agreement exists, it does not cover the shipment of 1,100 MT of bagged cargo. Therefore, the orders passed by the trial court and the High Court are improper and should be set aside.
• The respondent did not provide prima facie evidence of the arbitration clause’s existence. The High Court’s decision to allow the respondent’s application under Section 45 cannot be sustained.
• The same issue was raised before the Delhi High Court and the Andhra Pradesh High Court. The appellant should be permitted to contend that there was no arbitration clause in the Charter Party Agreement.
• The loading of sorghum in the vessel was done under a bill of lading, and there was no other contract between the parties. A bill of lading is merely a receipt and does not contain any terms of the agreement.
• The appellant had sent an email to the respondent on July 26, 2005, stating that it had not signed any Charter Party.
• Under Section 8 of the Act, the party making an application to refer the matter to arbitration must provide the original arbitration agreement or a duly certified copy.

Arguments by the Respondent (Kola Shipping Limited):

• The Delhi High Court, after reviewing the records, concluded that a Charter Party Agreement existed between the parties, which included an arbitration clause. The appellant cannot deny the existence of this clause.
• The Andhra Pradesh High Court correctly noted that the appellant’s contentions had been negated by the Delhi High Court’s order. The appellant had preferred an appeal against that order but subsequently withdrew it.
• Once an arbitration clause exists in the agreement, the matter must be referred to an arbitrator. The trial court considered the materials and allowed the application under Section 45 of the Act, which the Andhra Pradesh High Court affirmed.
• The Charter Party Agreement dated July 18, 2005, stipulated that the appellant agreed to load, and the respondent agreed to carry, 13,500 tons of cargo from Kakinada to Cotonou. This agreement provided for arbitration in Box 25 and Clause 19, with disputes to be referred to arbitration in London under the English Arbitration Act.
• The appellant has not refuted the signature on the front page of the Charter Party Agreement, which amounts to a valid arbitration agreement under Section 7 of the Act.
• The venue for arbitration, as chosen by both parties, is London, and the governing law is English Law. Under the mandatory provision of Section 45 of the Act, the Court is obligated to stay further proceedings in the suit and refer the matter to arbitration as per Clause 19 of the Charter Party Agreement.
• An arbitration agreement may be in the form of an arbitration clause in a contract or a separate agreement. It is considered in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams, or other means of telecommunication.

Submissions Table

Issues Framed by the Supreme Court

1. Whether the trial court provided a definitive finding regarding the existence of an Arbitration Agreement.
2. Whether the Charter Party Agreement, if it exists, covers the shipment of 1,100 MT of bagged cargo.
3. Whether the respondent provided prima facie evidence of the arbitration clause’s existence.
4. Whether the appellant should be permitted to contend that there was no arbitration clause in the Charter Party Agreement, given prior proceedings.
5. Whether the loading of sorghum in the vessel was done under a bill of lading, and if so, what implications does this have on the existence of a broader agreement.
6. Whether the email sent by the appellant on July 26, 2005, has any bearing on the existence of a Charter Party Agreement.
7. Whether the respondent is required to provide the original arbitration agreement or a duly certified copy under Section 8 of the Act.

Treatment of the Issue by the Court

Authorities

The court relied on the following authorities:

• Section 7 of the Arbitration and Conciliation Act, 1996: To define and establish the requirements for an arbitration agreement.
• Section 45 of the Arbitration and Conciliation Act, 1996: To determine whether to refer parties to arbitration in international commercial disputes.
• Clause 19 (a) read with Box 25 of the Charter Party Agreement: To ascertain the agreed venue and law governing the arbitration.
• Welex A.G. vs. Rosa Maritime Ltd. (The “Elipson Rosa Case”) [2002] EWHC 762 (Comm): Queen’s Bench Division (Commercial Court) to support the conclusion that a charter party existed based on correspondence and a fixture note.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 7 of the Arbitration and Conciliation Act, 1996: The court used this provision to define and establish the requirements for an arbitration agreement, emphasizing that an agreement can be inferred from documents signed by the parties or an exchange of communications.
• Section 45 of the Arbitration and Conciliation Act, 1996: The court relied on this section to determine whether to refer the parties to arbitration in international commercial disputes, noting that the court is duty-bound to stay proceedings and refer the matter to arbitration unless the agreement is null and void, inoperative, or incapable of being performed.
• Clause 19 (a) read with Box 25 of the Charter Party Agreement: The court used these clauses to ascertain the agreed venue (London) and the governing law (English Law) of the arbitration.
• Welex A.G. vs. Rosa Maritime Ltd. (The “Elipson Rosa Case”) [2002] EWHC 762 (Comm): The court cited this case to support the conclusion that a charter party existed based on correspondence between the parties, a fixture note, and the bill of lading signed by the parties.

What weighed in the mind of the Court?

To arrive at its conclusion, the Supreme Court considered several key factors. The prior determination by the Delhi High Court that a Charter Party Agreement existed, coupled with the appellant’s withdrawal of its appeal against that order, weighed heavily in the Court’s decision. The Court also emphasized that the appellant had not refuted the signature on the front page of the Charter Party Agreement. Additionally, the conduct of the parties, including their correspondence and the partial loading of the cargo, suggested the existence of an agreement beyond just the bill of lading. The Court found that the appellant’s explanations for its actions were unsatisfactory, further supporting the conclusion that a Charter Party Agreement was in place.

Fact:Law Ratio

The Supreme Court’s decision in this case was influenced by both factual and legal considerations. The factual aspects included the conduct of the parties, the correspondence exchanged, and the circumstances surrounding the loading of the cargo. The legal aspects involved the interpretation and application of Section 7 and Section 45 of the Arbitration and Conciliation Act, 1996, as well as relevant case law.

Logical Reasoning

Issue: Existence of Arbitration Agreement

Flowchart:

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Key Takeaways

• Importance of Honoring Arbitration Agreements: The Supreme Court’s decision reinforces the importance of honoring arbitration agreements in international commercial contracts.
• Validity of Electronic Communications: The court recognized that arbitration agreements can be formed through electronic communications such as emails and telexes.
• Limited Scope of Court Intervention: Courts should generally refer parties to arbitration unless the arbitration agreement is demonstrably null and void, inoperative, or incapable of being performed.

Development of Law

The ratio decidendi of this case is that when an arbitration agreement exists in an international commercial contract, courts are obligated to refer the parties to arbitration unless the agreement is null and void, inoperative, or incapable of being performed. The court also clarified that an arbitration agreement can be inferred from electronic communications and the conduct of the parties.

Conclusion

In conclusion, the Supreme Court’s judgment in the case of M/s Shakti Bhog Foods Limited vs. Kola Shipping Limited reinforces the importance of honoring arbitration agreements in international commercial contracts. The Court’s decision underscores the limited scope of judicial intervention in matters subject to arbitration and emphasizes the need to uphold the sanctity of agreements freely entered into by the parties. This case serves as a reminder that courts should generally refer parties to arbitration unless the agreement is demonstrably null and void, inoperative, or incapable of being performed.