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Thursday, October 19, 2000



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SC ruling on row over arbitration agreement

R.N. Sahai

IN Nimet Resources Inc and another vs. Essar Steels Ltd (Arbitration Petition No. 19 of 2000 disposed of on September 27, 2000), the petitioners are a Canadian Company and its agent. The respondent is Essar Steels Ltd.

The petitioners claim that they have an arbitrable dispute with the respondent for which an arbitrator is to be appointed by the Chief Justice or the person designated by him. On the other hand, the respondent claims that there is no arbitration agreemen t of the respondent with the Canadian Company and its agent. The petition is disposed of by Mr. Justice S. Rajendra Babu in the following manner:

(1) From the pleadings raised by the parties, prima facie, it appears that the parties are not total strangers. There has been some correspondence between them in regard to sale and supply of different quantities of ferro vanadium on different dates. Pri ma facie examination reveals that it cannot be a case of there being no transaction between the parties in regard to sale and supply of the goods in question.

Whether that transaction fructified into a contract with an arbitration clause is a moot point to be decided.

(2) Section 7 of the Arbitration and Conciliation Act, 1996 (`the Act') sets out what an arbitration agreement is. It could be in different forms-by way of an arbitration clause in a contract or in the from of a separate agreement, but the condition is t hat arbitration agreement should be in writing.

(3) When an arbitration agreement is not in writing the same should be construed by reference to (a) a document signed by the parties (b) exchange of letters, telex, telegram or other means of communication which provide a record of the agreement or (c) exchange of statement of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(4) If the contract is in writing and the reference is made to a document containing arbitration clause as part of the transaction, that would mean that the arbitration agreement is part of the contract.

Therefore, in a matter where there has been some transaction between the parties and the existence of the arbitration agreement is in challenge the proper course for the parties is to thrash out such question under Section 16 of the Act and not under Sec tion 11 of the Act.

(5) I am conscious of the fact that M. Jagannadha Rao, J. in Wellington Associates Ltd vs. Kirit Mehta, 2000 (4) SCC 272, held that the jurisdiction of the nominee of the Chief Justice of India to decide the question is not excluded by Section 16 of the Act and such a power can be exercised in a suitable case.

On this basis, it is no doubt permissible under Section 11 of the Act to decide a question as to the existence or otherwise of the arbitration agreement but when the correspondence or exchange of documents between the parties are not clear as to the exis tence or non-existence of an arbitration agreement, in terms of Section 7 of the Act the appropriate course would be that the arbitrator should decide such a question under Section 16 of the Act rather the Chief Justice of India or his nominee under Sect ion 11 of the Act.

The dispute in this case arose in this manner. Nimet Resources Inc. is a Canadian company conducting its business through its agent. They claim to have entered into certain transactions with Essar Steels Ltd (ES Ltd) for sale and supply of about 100 tonn es of ferro vanadium through the said agent.

Under the said contract, the Canadina company was to deliver different quantities of metal on different dates between September, October, and November 1998.

ES Ltd was to make the payment by opening appropriate letters of credit in respect of each delivery and in the said sales contract there is an arbitration agreement to the effect that the disputes arising out of the agreement shall be submitted to arbitr ation under the COMEX and/or the Institute of Scrap Recycling Industries and/or the LME, as the case may be.

The confirmation letter was also sent by the agent acknowledging execution of the contract between the Canadian company and the ES Ltd. Thereafter, the purchase order dated August 25, 1998 was issued and the ES Ltd. opened a letter of credit on October 1 5, 1998 but failed to open further letters of credit for ensuring payment of the balance quantity of about 80 tons of ferro vanadium.

There was some correspondence between the parties subsequently. ES Ltd, on February 25, 1999, denied the liability to make payment and the very existence of the sale contract dated August 20, 1998 purportedly entered into between the parties on the basis that the sales contract has not been signed by it or on its behalf, and, thereafter, stated that the sales contract, having not been signed, there existed no dispute and hence no arbitration would be accepted.

The Canadian company contends that the fact that ES Ltd. opened a letter of credit for 20 tonnes of ferro vanadium itself would indicate that ES Ltd. had acted upon the terms of the sales contract and the correspondence between them also would reveal the acceptance of the sales contract by ES Ltd.

The Canadian company contends that a dispute exists between them and clause 10 of the contract between the parties indicates an agreement providing for resolution of the disputes between the parties by arbitration, and venue thereof being in the event of their failure to resolve the disputes under the COMEX and/or the Institute of Scrap Recycling Industries and/or the LME Rules.

The Canadian company indicated in the notice sent on February 10, 1999 to choose a venue for the arbitration failing which the Canadian company was free to choose the same. ES Ltd. denied the existence of the sales contract by its reply dated February 25 , 1999. Hence the Canadina company filed the present arbitration petition before the Supreme Court under Section 11(5) of the Arbitration and Conciliation Act, 1996.

ES Ltd filed a reply to the petition on August 24, 2000 denying the existence of any agreement between the parties to submit to arbitration any disputes between them and denied any legal relationship between them. The stand of ES Ltd. is that it did not accept the sales contract dated August 20, 1998 and the alleged contract itself bears out that it was not signed by ES Ltd. nor was the same confirmed in any other manner. ES Ltd. also maintains that it did not execute any sale of confirmation.

(By arrangement with Corporate Law Adviser, New Delhi.)

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