Arbitration clause in tax invoice binding when T&C of invoice are accepted by the parties: Calcutta High Court

Arbitration clause in tax invoice binding when T&C of invoice are accepted by the parties: Calcutta High Court

The bench stated that the words used in a clause must be the words of ‘choice’ and not of mere ‘possiblity’

The Calcutta High Court has held that an arbitration clause contained in a tax invoice would be binding on the parties when the terms and conditions contained therein were accepted and acted upon by them.

The bench comprising Justice Shekhar B. Saraf simplified that when a party accepted an invoice incorporating a clearly visible arbitration clause and subsequently acted in accordance with it, later, it cannot argue the absence of the clause. It stated that the conditions, which an arbitration clause contained in a tax invoice, must be fulfilled for it to be considered valid and binding.

The court added that an arbitration clause was not required to be in a particular form. However, the intention of the parties to arbitrate must be clear and absolute. An arbitration clause could be in myriad shapes and forms and would be valid if the intention of the parties was present. The words used in a clause must be the words of ‘choice’ and not of mere ‘possiblity.’

The petitioner, a company incorporated under the Companies Act, 1956, was involved in the production, sale, and distribution of desktops, laptops, and computer accessories.

The respondent approached the petitioner to supply various (IT) information technology-related products. After negotiating, an agreement was reached for the respondent to act as the vendor, providing the necessary components.

During their business relationship, the petitioner placed orders amounting to Rs.54,64,78,823.70. However, disputes arose due to alleged delays in the supply of ordered components by the respondent, impacting payments.

Subsequently, on 21 August 2014, the respondent sent an arbitration notice to the petitioner, claiming an amount of Rs.1,30,46,250 and nominating K. Balasubramanium as the arbitrator.

On 25 May 2018, the arbitrator issued an award directing the petitioner to pay the respondent Rs.1,06,01,817 along with interest at 18 percent per annum.

In response, the petitioner filed an application challenging the arbitral award under Section 34, before the court.

The petitioner challenged the award on the grounds:

• The award lacked jurisdiction, as there was no valid arbitration agreement. An arbitration clause on the invoice's overleaf, unsigned by the petitioner, did not constitute a conclusive contract.

• The arbitrator acted with material irregularity and patent illegality by deciding on the merits without addressing the arbitration agreement's validity.

• The arbitrator acted unilaterally and in a biased manner, conflicting with public policy. The petitioner highlighted delay-related disputes and asserted that the arbitrator ignored valid objections.

• The Section 21 notice lacked validity as it did not refer to the arbitration clause.

• The arbitration clause overleaf the invoices was not valid, and, as per the purchase order, the jurisdiction was Kolkata.

The respondent made the counter-arguments:

• Clause 19 in the invoices, consistent over the years, specified arbitration in Chennai with exclusive jurisdiction for all cases. Therefore, the petition is not maintainable before the court, as it does not have territorial jurisdiction to decide the dispute.

• The arbitration clause in invoices, even without a formal agreement, constituted a valid arbitration agreement.

• The invoices, when accepted without dispute, become binding.

• The unilateral appointment of the arbitrator was legal, relying on Perkins Eastman Architects DPC and Anr. vs. HSCC (India) Limited and Ellora Paper Mills Limited vs State of Madhya Pradesh cases.

The bench analyzed:

a) The terms and conditions contained in an invoice, including the arbitration clause, must be displayed in a prominent and intelligible format. If the terms and conditions, including the arbitration clause, are printed on the overleaf of the invoice/sales receipt, there must be a declaration to that effect on the front of the invoice/sales receipt.

b) The buyer or the person receiving the tax invoice/sales receipt must explicitly consent to the arbitration clause. In case of any disagreement in the tax invoice/sales receipt, the buyer or the person receiving it must register their protest with the seller within a reasonable time.

c. If the buyer accepts the delivery of goods based on a tax invoice/sales receipt, without registering any protest against the arbitration clause contained within such a tax invoice/sales receipt within a reasonable time, it could be inferred that the buyer has consented to the arbitration clause contained in the tax invoice/sales receipt.

d. In a case, where the invoice/sales receipt containing the arbitration clause does not bear the signature of the buyer, consent can also be gauged from the fact whether the parties have acted on such invoices or not. If the answer is in the affirmative, the parties will be bound by the terms and conditions contained in the invoice/sales receipt.

Thus, the judge held that an arbitration clause need not be in any particular form, however, the intention of the parties to arbitrate must be clear and absolute. He said that an arbitration clause could be in myriad shapes and forms and would be deemed valid if the intention of the parties was present.

Regarding the objection to the maintainability of the petition, the court observed that Clause 19 of the invoice conferred exclusive jurisdiction on the courts at Chennai. Moreover, the seat of arbitration was also declared to be Chennai.

Justice Saraf ruled that an exclusive jurisdiction clause within the arbitration agreement would override a generic jurisdiction clause contained in another agreement between the parties.

He added that the moment an arbitration clause conferred exclusive jurisdiction on the court at a particular place or the seat of arbitration was declared, it would mean that all other courts would not have the jurisdiction to entertain any petition arising out of the arbitration agreement.

Accordingly, the bench rejected the argument of the petitioner that since the purchase order conferred jurisdiction on the courts at Kolkata, the court would have the jurisdiction. It held that by virtue of Section 19 of the tax invoice, the petition was not maintainable for want of territorial jurisdiction.