Oral Arbitration Agreements and High Courts’ Power to Recall an Order Appointing Arbitrator under Section 11

Last month, the Supreme Court reaffirmed in Municipal Corporation of Greater Mumbai & Anr. v. Pratibha Industries Ltd (Pratibha Industries) that High Courts, being courts of record, have the inherent power to recall their own orders, even in matters falling under the Arbitration and Conciliation Act, 1996 (Arbitration Act).

In a peculiar factual matrix of this dispute, the Apex Court also held that the Bombay High Court was justified in recalling its previous order appointing an arbitrator after it was clarified that there was, in fact, no binding arbitration clause in the parties’ agreement.

Factual  Background

In 2008, the Petitioner floated a tender notice to invite bids for the supply, installation, and maintenance of water meters (Tender Notice). Eventually, the Parties agreed to certain General Conditions of Contract, which contained the following dispute resolution clause:

“Clause 13: Disputes and Arbitration:

13.1 No Arbitration is allowed.

13.2 In case of disputes or difference of opinion arising between the Hydraulic Engineer and the bidder, the bidder can refer the matter to the Municipal Commissioner of Greater Mumbai with an advance copy to the Hydraulic Engineer and the decision of Commissioner will be final in such case.” (emphasis supplied) 

Despite the seemingly clear provision against arbitration, the Respondent filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) before a Single Judge of the Bombay High Court (Section 9 Petition). The Respondent requested the Hon’ble Court to restrain the Petitioner from encashing certain bank guarantees provided by the Respondent in the Petitioner’s favour. The Hon’ble Court allowed the Section 9 Petition and granted the injunction.

In a subsequent hearing, the Respondent expressed its willingness to resolve the parties’ disputes by way of arbitration and proposed the name of a retired judge to be appointed as the sole arbitrator. The Petitioner’s representative, an Assistant Engineer of the municipal corporation, was present in court and stated that the Petitioner would have no objection to an arbitration presided over by the arbitrator proposed by the Respondent. Given the parties’ consensus on arbitrating their disputes, the Hon’ble Court referred the Parties to arbitration and appointed the Retired Justice as the sole arbitrator.

In an interesting turn of events, the Petitioner thereafter filed an application requesting the Hon’ble Court to recall its order appointing the sole arbitrator because the Assistant Engineer – who consented to arbitration on the Petitioner’s behalf – was not aware that the GCC contained a specific clause preventing dispute resolution by arbitration. Further, the Petitioner stated that the Assistant Engineer was not authorized to consent to arbitration on its behalf. In light of these statements made on affidavit, the Hon’ble Court noted that there was, in fact, no arbitration agreement between the parties and passed an order recalling its previous order referring the parties to arbitration [Recall Order].

On appeal, under Section 37 of the Arbitration Act, a Division Bench of the Hon’ble Court set aside the Recall Order on grounds that the Arbitration Act nowhere provides for the Court’s power to review or otherwise recall its own orders (DB Order).

Total Recall

When the Petitioner approached the Supreme Court, the Respondent relied on the DB’s analysis – in that the Arbitration Act is a complete and self-contained special legislation, which does not provide for any external review mechanism. The Respondents also argued that the internal dispute resolution mechanism contemplated by the GCC was nothing but an arbitral mechanism. Instead of attempting to invoke the Court’s review powers, the Petitioner ought to have preferred a challenge under Section 16 of the Arbitration Act before the Sole Arbitrator, since an arbitral tribunal is competent to decide the existence of an arbitration agreement.  Lastly, it was argued that the High Court would not retain inherent powers under Section 151 of the Civil Procedure Code, 1908 since the latter was not applicable.

Unimpressed with this line of argument, the Apex Court clarified that the Parties had categorically agreed in the GCC that there shall be no arbitration in relation to any dispute arising in relation to their agreement. It was clarified that in-house procedures, notwithstanding their provision for an appellate mechanism, cannot by any stretch of imagination be construed as an agreement to arbitrate.

It remained undisputed that the Assistant Engineer was neither aware of anti-arbitration clause nor empowered to take any decision to appoint an arbitrator at the hearing before Bombay High Court. The Supreme Court observed that the parties’ decision in to arbitrate and appoint an arbitrator, therefore, was merely an oral agreement reached in the Section 9 proceedings. No application under Section 11 was filed in this regard. Given that Section 7 of the Arbitration Act clearly requires an arbitration agreement to be in writing, the Supreme Court held that the parties’ aforesaid oral agreement cannot qualify as an arbitration agreement.

The Supreme Court also affirmed that High Courts have all the powers of a court of record by virtue of  Article 215 of the Indian Constitution. In this regard, the Court placed reliance on its previous decisions in National Sewing Thread Co. Ltd. v. James Chadwick & Bros (1953) and M. M. Thomas v. State of Kerala (2000). Given this position, the Supreme Court held that the Bombay High Court was unquestionably empowered to review and recall its order. Accordingly, the Recall Order was upheld while the DB Order was quashed and set aside.

Comment – what of oral arbitration agreements?

The Apex Court’s decision in Pratibha Industries is in consonance with a very recent judgment passed by another bench of the Court in Kerala State Electricity Board & Anr. v. Kurien Kalathil (KSEB). In KSEB, the Court categorically held that Courts should not refer parties to arbitration based on oral statements made by the Parties’ counsel in the course of a hearing in the absence of written instructions in this regard.

Where there is otherwise no arbitration agreement between the disputing parties, the Apex Court required that such parties should be referred to arbitration only when they have agreed to settle their disputes for arbitration by way of a joint-application or joint-affidavit filed with the court. The Court prescribed similar requirements for making an arbitral reference under Section 89 of the CPC in the absence of a prior arbitration agreement. In this regard, the Apex Court in KSEB relied on its following observations in Afcons Infrastructure v. Cherian Varkey Construction Co.:

“33. Even if there was no pre-existing arbitration agreement, the parties to the suit can agree for arbitration when the choice of ADR processes is offered to them by the court under Section 89 of the Code. Such agreement can be by means of a joint memo or joint application or a joint affidavit before the court, or by record of the agreement by the court in the order-sheet signed by the parties. Once there is such an agreement in writing signed by parties, the matter can be referred to arbitration under Section 89 of the Code; and on such reference, the provisions of the AC Act will apply to the arbitration,  and as noticed in Salem Bar Bar Association, T.N. v. Union of India (I) (2003) 1 SCC 49, the case will go outside the stream of the court permanently and will not come back to the court.” (emphasis supplied)

Seen through the lens of KSEB, the Supreme Court’s decision in Pratibha Industries seems to rest on solid ground. That said, perhaps it is worthwhile to (re)consider a few factors in Pratibha Industries.

The Supreme Court in both KSEB and Pratibha Industries has required that the intention to arbitrate be captured in a joint agreement/affidavit signed by the respective parties. However, the Court has also recently observed in M/s Caravel Shipping Services Pvt. Ltd. v. M/s Premier Sea Foods Exim Pvt. Ltd. that an arbitration agreement need not be signed by the parties.  This finding was in the context of a signed bill of lading under which the parties had agreed to be bound by certain printed terms which were, albeit unsigned, incorporated in the Bill by reference. In particular, the Court observed thus:

“9. […] the law in this behalf, in Jugal Kishore Rameshwardas vs. Mrs. Goolbai Hormusji… 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 prerequisite is that it be in writing, as has been pointed out in Section 7(3).” (emphasis supplied)

Both disputing parties are present – either in person or through an authorized representative – before the Court. Each of them categorically instructs her counsel in that she is willing to submit to arbitration. Based on these statements made on instructions in open court, a High Court Justice records these instructions in a written order. In such circumstances, it is difficult to see why such parties should not bound by an agreement to arbitrate which is recorded by the Hon’ble Court in a written order.

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