A policy circular doesn’t serve as arbitration clause without explicit consent: Calcutta High Court

Calcutta High Court

Calcutta High Court: An application was filed seeking review of an order dated 01-12-2022 passed under Section 11(6) of Arbitration and Conciliation Act, 1996 wherein the prayer for appointment of an arbitrator was dismissed on the ground that there was no valid arbitration clause between the parties. Ravi Krishan Kapur, J., held that the applicant is not entitled to any reliefs as prayed for as the Circular dated 07-04-2017 merely expresses a desire and the arbitration clause has not been incorporated in the contract.

The case revolves around a dispute arising from an e-tender published by the respondent for the hiring of heavy earth-moving machinery and the removal of coal at the Narayankuri, O.C. Patch of Kunustoria Area. The applicant emerged as the successful bidder and was awarded the contract, evidenced by a letter of acceptance dated 31-03-2017, and a subsequent work order executed on 24-05-2017. Additionally, an agreement dated 30-08-2017 and a supplementary work order dated 08-02-2019 were entered into by the parties.

The respondent alleged that despite repeated opportunities, the applicant failed to fulfill the conditions outlined in the tender document. Consequently, the respondent foreclosed the work awarded to the applicant under the tender. During this period, a circular dated 07-04-2017 was issued by Coal India Limited (CIL), the respondent’s subsidiary, which directed disputes with private contractors to arbitration. The applicant filed an application for an arbitrator’s appointment, dismissed due to lack of a valid arbitration clause between the parties. This dismissal led to the filing of a Special Leave Petition before the Supreme Court, which granted the applicant the liberty to file an application for review. Thus, the present petition was filed.

Counsel for petitioner contended that the Court erred in relying on Clause 5 of the Circular instead of Clause 2, which was deemed relevant. The petitioner argued that Clause 2, pertaining to future contracts/work orders, governed the present case since the contract was dated after the issuance of the Circular. Therefore, the arbitration clause was incorporated by reference, complying with Section 7 of the Arbitration and Conciliation Act, 1996. In response, the respondent argued against the grounds for review, citing the doctrine of estoppel and maintaining that the applicant failed to complete the work despite opportunities. The respondent also contended that there was no valid arbitration clause between the parties, thus rendering the application meritless.

The Court acknowledged that the power to review is statutory and should be exercised within its prescribed limits. It emphasized the grounds for review, including mistakes or error apparent on the face of the record. It observed that Clause 2, not Clause 5, of the Circular was applicable in the present case, constituting an error apparent in the previous order. Regarding the validity of the arbitration agreement, the Court referenced Section 7 of the Arbitration and Conciliation Act, which allows for the incorporation of arbitration clauses by reference. However, it emphasized that mere communication of a decision to arbitrate is not sufficient, and there must be conscious acceptance by both parties for the arbitration clause to be valid.

The Court remarked that “In the facts of this case, there is no reference to the Circular whereby the arbitration clause has been incorporated in the contract between the parties. It is true that the policy decision in terms of the Circular is to make arbitration a mechanism for dispute resolution both in cases of existing and future contracts. However, this requires a further document to be executed between the parties incorporating the arbitration clause. Any agreement or clause in an agreement requiring or contemplating further consent before a reference to arbitration is not an arbitration, but an agreement to enter into an arbitration agreement in the future which per se is not enforceable.”

The Court further remarked that “An arbitration clause cannot be deemed to have been incorporated by way of a subsequent Circular, unless it is specifically referred to and included in the original agreement between the parties. Section 7(5) mandates a reference in a contract containing an arbitration clause. In the absence of any mutual intention to incorporate the arbitration clause from another document into the existing contract between the parties, there is no valid arbitration agreement. The Circular dated 7 April 2017 merely expresses a desire. The arbitration clause has not been incorporated in the contract. The applicant is not entitled to any reliefs as prayed for. For the above reasons, there is no merit in the contentions of the applicant.”

Thus, the Court held that the order dated 01-12-2022 was erroneous in relying on Clause 5 instead of Clause 2 of the Circular. However, it also determined that there was no valid arbitration agreement between the parties as the arbitration clause was not specifically referred to and included in the original contract. Therefore, the application for review was entertained, but ultimately dismissed due to the lack of a valid arbitration agreement.

[Dhansar Engineering Company Private Limited v. Eastern Coalfields Limited, 2024 SCC OnLine Cal 4028, decided on 18-04-2024]

Advocates who appeared in this case :

Mrs. Amrita Panda, Adv. Mr. Daipayan Basu Mallick, Advocate for petitioner

Mr. Arkaprava Sen, Adv. Mr. Sayantan Kar, Adv. …for review applicant Mr. Mainak Das, Adv. Mrs. Priti Banerjee, Advocates for respondent

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