India: Bombay High Court Rules Arbitration Clause In Draft Concession Agreement Annexed To Bid Document Not Binding On Parties

Last Updated: 6 October 2017
Article by Ajay Bhargava, Aseem Chaturvedi and Sharngan Aravindakshan

Most Read Contributor in India, August 2018

A Single Judge of the Bombay High Court (Court), vide its Order and Judgement dated 19 September 2017, found that an arbitration clause in the draft concession agreement annexed to the bid document does not constitute a binding arbitration agreement between the parties. The Court ruled that as the concession agreement annexed to the bid document had not been executed, the arbitration clause therein could not be given effect to.

BACKGROUND

The State of Maharashtra (Respondent) had issued a tender for a Build, Operate & Transfer project for the construction of a government colony (Tender) in Mumbai. A Draft Concession Agreement, which was to be executed between the parties upon a successful bid, was annexed as Exhibit 'B' to the tender document. As the Petitioner had emerged as the successful bidder, a Letter of Acceptance (LoA) was issued to the Petitioner by the Respondent.

Due to the Respondent's failure to execute the Draft Concession Agreement thereafter, a writ was filed by the Petitioner vide Writ Petition No. 2527 of 2013 in the Court (Writ), praying for directions to the Respondent to execute the Draft Concession Agreement. On the Respondent's submission that the project-in-issue had been scrapped, the Court disposed the Writ in terms of a settlement order dated 11 March 2014 wherein the Respondent would refund to the Petitioner all amounts as well as return bank guarantees submitted by the Petitioner. Consequently, post a contempt application filed by the Petitioner to enforce the aforesaid order, the Respondent finally paid all dues as per the order dated 11 March 2014.

The Petitioner thereafter sent a notice of arbitration to the Respondent claiming damages for loss of business opportunities, bank guarantee expenses, legal expenses, etc. on the basis of the arbitration clause in the Draft Concession Agreement annexed to the tender document. On the Respondent refusing to appoint an arbitrator, the Petitioner filed an application for appointment of arbitrator before the Court.

THE CONTENTIONS OF THE PARTIES

The Petitioner contended that since the LoA issued by the Respondent specifically provided that it formed "part of the agreement", it was clearly the intention of the parties to incorporate the tender document (including the Draft Concession Agreement) in its entirety as binding on the parties. In view of the same, the Petitioner contended that the arbitration agreement contained in the Draft Concession Agreement was also binding on the parties. The Petitioner cited Unissi (India) Pvt. Ltd. v. Post Graduate Institute of Medical Education and Research, (2009) 1 SCC 107 (Unissi) wherein the Supreme Court of India (Supreme Court) had held that despite no formal agreement having been executed, as the tender documents indicated certain conditions of contract containing an arbitration clause, the same was binding.

The Respondent contended that since the Draft Concession Agreement was never executed, no clause in it could be enforceable. It was contended that the Petitioner was aware of the same as it had made specific prayers in the Writ seeking directions to the Respondent to execute the Draft Concession Agreement with regard to the tender project. It was further contended that the terms of the Draft Concession Agreement were not even agreeable to the Petitioner and that the Petitioner had wanted material variations not acceptable to the Respondent and for this reason, the Draft Concession Agreement was never executed between the parties.

HELD

The Court ruled that it was evident that the Draft Concession Agreement was never executed and a draft of the same annexed to the tender document cannot be relied on to contend any arbitration agreement between the parties. The Court further relied on correspondence between the parties such as the Petitioner requesting changes in the standard Draft to conclude that even the Petitioner's earlier stand was that the Draft Concession Agreement was never executed. The Court stated that the Petitioner's current somersault in position was therefore unsustainable.

Further, the Court distinguished the decision of the Supreme Court in Unissi by holding that the ratio in that case was actually based on the Respondent having accepted supply of material, etc. from the Petitioner. The parties had already acted upon the contract and therefore, the Respondent was not allowed to retract from the contract. However, in the present situation, the Court ruled that a further step of entering into the Draft Concession Agreement was contemplated and in view of the same not having been executed, no arbitration agreement could be said to exist.

COMMENT

The validity and enforceability of an arbitration clause in a draft agreement is an unsettled topic in both domestic and international arbitration. Considering this ruling is largely based on the fact that the agreement containing the arbitration clause is not executed, it is unclear how it will fare against the principle of severability of arbitration clauses from the main contract, should it be challenged.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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