Calcutta High Court: Policy Circular Mandating Additional Consent For Arbitration Is Not An Arbitration Clause

Calcutta High Court: Policy Circular Mandating Additional Consent For Arbitration Is Not An Arbitration Clause

The Calcutta High Court has ruled that a policy circular issued by a parent company, contemplating arbitration, would not constitute an arbitration agreement if it mandates fresh consent from the contractor to refer the dispute to arbitration.

Justice Ravi Krishan Kapur determined that if the circular mandates the contractor's consent for arbitration reference in existing contracts, it cannot be considered an arbitration agreement. This is because it necessitates the execution of a new arbitration agreement between the parties before a dispute is referred to arbitration.

The Court ruled that a circular expressing a desire for arbitration would not be interpreted as an arbitration clause unless a definite agreement is executed between the parties following such an expression of desire.

The respondent issued an e-tender for the rental of heavy earth-moving machinery and coal removal at the Narayankuri, O.C. Patch of Kunustoria Area. The applicant secured the bid successfully.

The applicant received a letter of acceptance dated March 31, 2017, and the parties executed a work order dated May 24, 2017. Additionally, an agreement dated August 30, 2017, and a Supplementary Work Order dated February 8, 2019, were also entered into by the parties.

A dispute emerged between the parties when the respondent terminated the agreement. Simultaneously, Coal India Limited (CIL), the parent company of the respondent, issued a circular dated April 7, 2017, directing disputes and differences between CIL or its subsidiaries and private contractors to arbitration.

Clause 2 stipulated that all future contracts with the respondent would incorporate an arbitration clause. Clause 5 mandated that for existing contracts, the contractor's consent would be necessary for arbitration referral.

The applicant submitted an application for the appointment of an arbitrator, which was rejected on December 1, 2022, due to the absence of a valid arbitration clause. A Special Leave Petition (SLP) was filed challenging the order. The Supreme Court disposed of the SLP, granting the applicant the liberty to file a review. Consequently, a review was filed before the High Court.

The applicant contended that the Court's reliance on Clause 5 of the Circular, rather than Clause 2, was erroneous. Clause 2 explicitly mandates the automatic inclusion of the arbitration clause. Furthermore, the Circular effectively imposes arbitration by incorporating the arbitration clause by reference and adhering to Section 7 of the A&C Act.

The Court noted the absence of an arbitration clause in the agreement between the parties. It observed that Clause 2 of the circular pertained exclusively to future contracts, while Clause 5 applied to all existing contracts lacking an arbitration clause.

The Court determined that the contract between the parties was executed after the issuance of the Circular, rendering Clause 2 rather than Clause 5 relevant to the dispute. It affirmed that under Section 7, an arbitration clause may be integrated into a contract by reference, but such integration necessitates the conscious acceptance of both parties.

The Court determined that although the Circular indicated a preference for arbitration in disputes with private contractors, it did not directly include the arbitration clause in the current contract between the parties. Additionally, it mandated the applicant's consent to arbitration and the subsequent execution of an agreement or amendment by the applicant in accordance with such consent.

The Court ruled that a policy circular issued by a parent company, envisioning arbitration, would not qualify as an arbitration agreement if it necessitated the contractor's renewed consent to refer the dispute to arbitration.

Thus, the Court concluded that there is no valid arbitration agreement between the parties.