When Does An Arbitration Clause Bind? – Reading Delhi High Court's Belvedere Judgment Against Wider Jurisprudence

The Delhi High Court's judgment is the latest of many—by the Supreme Court and High Courts—that an arbitration agreement does not necessarily need to be a signed document, or a clause in a signed document. An arbitration clause in invoices, purchase orders, standard website terms, or informal electronic exchanges can bind the parties. Through some of these judgments, this article analyses what constitutes a valid arbitration agreement even when no signed contract exists.

The Law:

To appreciate the judgments on the subject, it would be helpful to first look at Section 7 of the Arbitration and Conciliation Act, 1996, which provides the ingredients of a valid arbitration agreement. The relevant portion reads as follows:

“7. Arbitration 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 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.

(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.”

Thus, under the statute, an arbitration agreement must be expressed in writing, whereby the parties' consent to have present or future disputes adjudicated through arbitration. The requirements of Section 7 are satisfied if the arbitration agreement is a signed agreement, appears in an exchange of communications (including electronic communications), or is contained in another agreement that is incorporated by reference to the one in relation to which disputes have arisen.

Unsigned Contracts and Communications:

Much like the Delhi High Court in Belvedere, the Supreme Court and other High Courts have had to interpret Section 7 of the Arbitration Act to decide whether an arbitration agreement exists in a given set of circumstances.

Before the 2015 amendment to the Arbitration Act, the Supreme Court, in Shakti Bhog Foods Limited v Kolla Shipping Limited^[2], dealt with a dispute regarding the validity of an arbitration clause in an unsigned charter party agreement. The Court held that where the existence of the arbitration agreement could be determined from the correspondence between the parties, an arbitral tribunal was required to be constituted. It also rejected the argument that the communications relied upon should contain the arbitration agreement. Thereafter, in Trimex International FZE Limited, Dubai v Vedanta Aluminium Limited India^[3], the Apex Court relied on Shakti Bhog to hold that since the parties' correspondence showed that the contract had been concluded by exchange of emails, the mere fact that it was not formally signed would not be a ground to refuse the appointment of an arbitrator.

Post the 2015 amendment to the Arbitration Act, the Supreme Court in Inox Wind Limited v Thermocables Limited^[4], examined whether a purchase order containing a reference to standard terms and conditions with an arbitration clause, the arbitration agreement could be said to be incorporated by reference. Holding in the affirmative, the Apex Court opined that such a reference would be sufficient to incorporate the arbitration agreement contained in the standard terms into the subsequent contract.

The Bombay High Court also addressed whether a reference to standard terms and conditions containing an arbitration clause would constitute a valid incorporation by reference. In Ingram Micro India Private Limited v Mohit Raghuram Hegde^[5], the Court held that where the reference to the standard terms containing an arbitration clause was made in a customer KYC that was filled up by the Respondent as well as in invoices that had been acted upon, the same constituted a valid arbitration agreement.

Based on the judgments of the Apex Court and Bombay High Court, it is safe to say that where the parties have agreed on the terms of their relationship, and those terms include consent to resolve disputes through arbitration, the arbitration agreement would bind them even in the absence of a formal, signed contract.

Invoices and Purchase Orders:

The law regarding arbitration agreements in unsigned contracts, communications between the parties, or standard terms incorporated by reference is reasonably well settled. However, when it comes to arbitration clauses in documents such as tax invoices, a great deal depends on the parties' conduct, and two judgments of the Bombay High Court reflect this fact.

In Concrete Additives and Chemicals Private Limited v S.N. Engineering Services Private Limited^[6], the Bombay High Court rejected Concrete Additives' application seeking the appointment of an arbitrator based on the arbitration clause contained in an invoice. The Court held that issuing the invoice was a unilateral act related to acceptance of the goods and that the contract between the parties was in the purchase orders. As the purchase orders did not contain an arbitration clause, the Court held that there was no valid arbitration agreement between the parties.

However, in Bennett Coleman & Co Limited v MAD (India) Private Limited^[7], when faced with another case where the arbitration clause was contained in tax invoices, the Bombay High Court allowed the application and constituted the arbitral tribunal. The Court rejected the MAD's reliance on Concrete Additives, holding that the facts differed. This is because, in Bennett Coleman, the parties had a long relationship. Bennett Coleman issued several invoices containing the arbitration clause, and MAD had acted upon them. Thus, the Court held that the parties' conduct established that they had agreed to resolve disputes through arbitration. Interestingly, while allowing the application, the Court also placed reliance on Inox and Ingram.

Analysis

An analysis of the judgments reveals that, when no signed contract exists, substance matters more than form to determine whether an arbitration agreement exists. Courts will examine the record—emails, messages, invoices, or even standard terms- to determine whether the parties expressed their intention to arbitrate in writing. If the court finds that the terms of the contract have been finalised, the arbitration agreement is likely to be enforced. However, if the record shows that the parties are still negotiating key terms of the relationship, the court may find that there has been no agreement to arbitrate.

Further, the timing of the communication of the document containing the arbitration clause is essential; a clause introduced only after a contract is finalised, such as in Concrete Additives, is unlikely to be enforced. However, an arbitration clause in documents that have been acted upon is usually upheld, as in Bennett Coleman.

Arbitration agreements incorporated by reference are usually upheld even if the terms can be accessed only via hyperlink, as seen in Inox and Ingram.

Lastly, Courts may interpret silence as consent, especially prolonged silence through multiple transactions. For example, repeatedly making payment for goods or services under invoices bearing an arbitration clause without objection, as was the case in Bennett Coleman, is likely to act as an estoppel from disputing the existence of the arbitration agreement.

The various judgments dealing with applications seeking the appointment of an arbitrator in the absence of a signed agreement have resulted in a coherent, flexible framework; an arbitration clause in a document will bind parties once consent, express or inferred, is established. The Delhi High Court's judgment in Belvedere expands the envelope by expressly recognising that the agreement to arbitrate can be established even from WhatsApp messages. By doing so, the law has now been aligned with business reality and creates a pro-arbitration ecosystem.

Parties must therefore be mindful to communicate arbitration clauses early, preserve their digital trails, object immediately if they do not wish to arbitrate, and, when faced with references to other documents, go through the referenced document as well.

Dushyant Krishnan is a lawyer practicing in the Bombay High Court and other courts and tribunals in Mumbai. Views are personal