INTERPRETATION OF SECTION 7(4)(b) OF ARBITRATION AND CONCILIATION ACT, 1996

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This blog is authored by Advocate Sugandha Sharma, Co-founder, LC Associates (Advocates & Legal Consultants), New Delhi. 

 

What constitutes the existence of a valid Arbitration Agreement has been the question of debate time and again and our Judicial Authorities with the evolution of society and the introduction of new technologies interpreted the same. Before we come to the interpretation and understanding of what are the constituents which prove the existence of the Arbitration Agreement, let us first understand what Arbitration Agreement is. 

 

Arbitration Agreement has been defined under Section 2(b) of the Arbitration and Conciliation Act, 1996 (“The Act”) to mean an agreement referred to in Section 7 of the Arbitration and Conciliation Act. Section 7 of the Act stipulates that “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. Sub-section 2 of Section 7 states that an arbitration agreement may be in the form of an arbitration clause in a contract or the form of a separate agreement and sub-section 3, further states that, no matter in what form the Arbitration Agreement is, it should be in writing. 

 

The Hon’ble Supreme Court in Visa International Limited v. Continental Resources (USA) Limited, (2009) 2 SCC 55, held that an Arbitration Agreement is not required to be in any form. The relevant part of the judgment reads as under: - 

"18. That an arbitration agreement is not required to be in any form has been reiterated in more than one decision. [See Bihar State Mineral Development Corporation. v. Encon Builders (I) (P) Ltd. [(2003) 7 SCC 418]. What is required is to gather the intention of the parties as to whether they have agreed for resolution of the disputes through arbitration. What is required to be decided in an application under Section 11 of the Act is whether there is any arbitration agreement as defined in the Act? It needs no reiteration that Section 7 of the Act does not prescribe any particular form and it is immaterial whether or not expression "arbitration" or "arbitrator" or "arbitrators" has been used in the agreement." 

 

Now, if we further read section 7 of the Act, sub-section 4, enumerates the conditions as to when an Arbitration Act shall be in writing. Thus, sub-section 4 shall be read as a part and parcel to sub-section 3 of section 7. Section 7(4) lays down the following criteria upon fulfilment of which, an Arbitration Act has said to 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 1 [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.” 

 

The question which is under consideration is the “Interpretation of Section 7 (4) (b) of the Act”?

Now, if we peruse sub-section 4 of the Act, there seems to be a contradiction in the explanation. On one hand, it states that an arbitration agreement is in writing if it is a document signed by the parties; and another interpretation states that an exchange of letters, telex, telegrams, or other means of telecommunication, including communication through electronic means, which provide a record of the agreement; or 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 shall also constitute as the Arbitration Act to be in writing. This dubiety has been explained and resolved by courts in various judicial pronouncements over time. 

 

The Supreme Court in Caravel Shipping Services Pvt. Ltd. vs. M/s. Premier Sea Foods (2019) 11 SCC 461, has held that an arbitration agreement compulsorily needs to be in writing, however, it may or may not be signed by the parties to it: 

"8. In addition, we may indicate that the law in this behalf, in Jugal Kishore Rameshwardas v. Goolbai Hormusji [Jugal Kishore Rameshwardas v. Goolbai Hormusji, AIR 1955 SC 812], is that an arbitration agreement needs to be in writing though it need not be signed. The fact that the arbitration agreement shall be in writing is continued in the 1996 Act in Section 7(3) thereof. Section 7(4) only further adds that an arbitration agreement would be found in the circumstances mentioned in the three sub-clauses that make up Section 7(4). This does not mean that in all cases an arbitration agreement needs to be signed. The only pre-requisite is that it be in writing, as has been pointed out in Section 7(3)." 

 

In Unissi (India) Pvt. Ltd. v. Post Graduate Institute of Medical Education and Research, (2009) 1 SCC 107, Supreme Court clearly held that even in the absence of a signed formal agreement between the parties, the Arbitration Agreement would be deemed to have come into existence when otherwise discernible from the conduct of the parties or the correspondences exchanged between them. 

 

In Dresser Rand S.A. v. Binda Agro Chern, (2006) 1 SCC 751, the Hon’ble Supreme Court held the consensus as idem of the disputing parties to constitute a valid binding Arbitration Agreement. 

“….21. The principle as to how to find out whether the correspondence shows consensus ad idem, was stated by this Court in Rickmers Verwaltung Gmbh v. Indian Oil Corporation Ltd. [1999 (1) SCC 1]: 

"…………………. The question, however, is can any agreement be spelt out from the correspondence between the parties in the instant case? In this connection the cardinal principle to remember is that it is the duty of the court to construe correspondence with a view to arrive at a conclusion whether there was any meeting of mind between the parties, which could create a binding contract between them but the Court is not empowered to create a contract for the parties by going outside the clear language used in the correspondence, except insofar as there are some appropriate implications of law to be drawn. Unless from the correspondence it can unequivocally and clearly emerge that the parties were ad idem to the terms, it cannot be said that an agreement had come into existence between them through correspondence. The Court is required to review what the parties wrote and how they acted and from that material to infer whether the intention as expressed in the correspondence was to bring into existence a mutually binding contract. The intention of the parties is to be gathered only from the expressions used in the correspondence and the meaning it conveys and in case it shows that there had been meeting of mind between the parties and they had actually reached an agreement, upon all material terms, then and then alone can it be said that a binding contract was capable of being spelt out from the correspondence." 

  

CONCLUSION 

Hence, upon the perusal of the above-mentioned judgments, it can be drawn that, letters, telex, telegrams, or other means of telecommunication including communication through electronic means which has been exchanged which provide a record or shows the agreement (i.e., consensus as idem of the parties or parties agreeing to resolve a dispute arising through arbitration); will also constitute a valid arbitration agreement. 

A signed arbitration agreement in form of a properly executed contract is not compulsory to prove an agreement to be a valid and enforceable arbitration agreement. 

If the above-mentioned documents and communications are not signed, though exchanged between the parties, the same shall constitute a valid arbitration Agreement provided consensus ad idem between the parties exists or can be drawn from such communication. 

 

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