Supreme Court settles the existence of an arbitration agreement despite the absence of signatures on formal contract: M/s. Unissi (India) Pvt. Ltd. vs. Post Graduate Institute of Medical Education & Research (2008)

Introduction

Date of the Judgment: October 01, 2008

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

Does the absence of a formal signed agreement negate the existence of an arbitration agreement when parties have acted upon the terms of a tender containing an arbitration clause? The Supreme Court of India addressed this critical question in a dispute between M/s. Unissi (India) Pvt. Ltd. and the Post Graduate Institute of Medical Education & Research (PGI), concerning the supply of pulse oximeters. The court examined whether the conduct of the parties, particularly the acceptance and execution of a tender with an arbitration clause, could establish a valid arbitration agreement even without a formally executed contract. The bench, comprising Justice Tarun Chatterjee and Justice Dalveer Bhandari, delivered the judgment.

Case Background

In December 2000, the Post Graduate Institute of Medical Education & Research (PGI) floated a tender for the purchase of Pulse Oxymeters, which included an arbitration clause. M/s. Unissi (India) Pvt. Ltd. (the appellant) submitted a tender on January 15, 2001, which was accepted by PGI. Purchase orders were placed, and Unissi supplied the equipment accordingly. The equipment was delivered, installed, and used by PGI.

PGI then requested Unissi to execute an agreement containing an arbitration clause on non-judicial stamp paper. Unissi complied, signed the agreement, and sent it to PGI. However, PGI never signed the agreement. Despite this, Unissi claimed an agreement was in effect. PGI failed to make payments for the delivered goods, amounting to Rs. 22,16,853.60, and also forfeited Unissi’s earnest money of Rs. 2,12,160/-.

Later, PGI had the equipment removed. Unissi found that the equipment had been mishandled and was no longer fit for use or resale. Unissi served a notice to PGI, but received no response. PGI contended that no agreement had been executed and alleged that Unissi had misrepresented themselves as manufacturers, claiming the equipment was imported from Korea.

A Technical Committee of PGI did not approve the purchase and installation of the equipment on January 14, 2003. Consequently, PGI informed Unissi that the tender was rejected, alleging that the supply did not meet specifications. PGI also debarred Unissi from dealing with them for two years.

Timeline:

Course of Proceedings

Faced with the dispute, Unissi filed an application under Section 11(4)(a) of the Arbitration and Conciliation Act, 1996, before the Additional District Court at Chandigarh, seeking a direction for PGI to appoint an arbitrator. The Additional District Judge, however, dismissed the application on August 3, 2005, concluding that no arbitration agreement existed between the parties.

The Additional District Judge reasoned that the photocopy of the proposed agreement bore only Unissi’s signature and not PGI’s, and therefore, it remained merely an offer. This order was challenged in the Supreme Court through a special leave petition. Initially, a question arose regarding the maintainability of the petition against an order under Section 11(4)(a) of the Act. The Supreme Court, on May 9, 2006, issued notice, citing the Constitution Bench judgment in SBP & Co. vs. Patel Engineering Ltd. & Anr. [(2005) 8 SCC 618], indicating that such a petition was entertainable. The court then proceeded to hear the case on its merits, specifically addressing whether an arbitration agreement existed despite the lack of PGI’s signature on the agreement.

Legal Framework

The Supreme Court examined Section 7 of the Arbitration and Conciliation Act, 1996, to determine whether a valid arbitration agreement existed between Unissi and PGI. Section 7 defines an arbitration agreement and specifies the conditions under which such an agreement is considered to be in writing.

Section 7 of the Arbitration and Conciliation Act, 1996, states:

“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 considered whether the tender documents, the exchange of letters, and the conduct of the parties satisfied the requirements of Section 7, particularly in the absence of a formally signed agreement by both parties.

Arguments

Issues Framed by the Supreme Court

1. Whether an arbitration agreement existed between the parties, considering that the formal agreement containing the arbitration clause was not signed by the Post Graduate Institute of Medical Education & Research (PGI).

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Acceptance of the Tender: The Court emphasized that PGI had accepted Unissi’s tender, which contained an arbitration clause. This acceptance was a key factor in determining the existence of an arbitration agreement.
• Conduct of the Parties: The Court considered the conduct of both parties, particularly PGI’s use of the equipment for about a year and their forfeiture of the bank guarantee and earnest money. These actions indicated that PGI considered the agreement to be in effect.
• Section 7 of the Arbitration and Conciliation Act, 1996: The Court interpreted Section 7 to mean that an arbitration agreement could be inferred from the documents and conduct of the parties, even in the absence of a formally signed agreement.

Key Takeaways

• Implied Agreement: An arbitration agreement can be inferred from the conduct of the parties and the documents exchanged, even if a formal agreement is not signed.
• Acceptance of Terms: By accepting a tender that contains an arbitration clause, a party implies acceptance of that clause.
• Section 7 Interpretation: Section 7 of the Arbitration and Conciliation Act, 1996, should be interpreted to consider the overall context of the transaction and the conduct of the parties.

Development of Law

The ratio decidendi of this case is that an arbitration agreement can exist even without a formally signed contract if the conduct of the parties and the documents exchanged indicate an intention to arbitrate. This clarifies that the absence of a signature on a formal agreement is not always fatal to the existence of an arbitration agreement.

Conclusion

In the case of M/s. Unissi (India) Pvt. Ltd. vs. Post Graduate Institute of Medical Education & Research, the Supreme Court held that an arbitration agreement existed between the parties, even though the formal agreement containing the arbitration clause was not signed by PGI. The Court emphasized that the acceptance of the tender, the conduct of the parties, and the provisions of Section 7 of the Arbitration and Conciliation Act, 1996, all supported the existence of an arbitration agreement. This judgment clarifies that the absence of a formal signature is not always necessary for an arbitration agreement to be valid.