Arbitration agreements require careful drafting

By Vivek Vashi, Bharucha & Partners
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In Nandan Biomatrix Ltd v D-1 Oils Ltd, decided on 11 Feburary, the Supreme Court restated the essential ingredients of a valid arbitration agreement.

Nandan and D-1 entered into a supply agreement on 10 August 2004 followed by a joint venture agreement on 30 September 2004 and a research and development agreement on 26 November 2004.

Terms of agreement

Under the supply agreement, Nandan agreed to set up nurseries to grow jetropha seeds meeting the requirements of D-1, and D-1 agreed to invest a substantial amount with Nandan.

Vivek Vashi Bharucha & Partners
Vivek Vashi
Bharucha & Partners

The supply agreement provided for arbitration in section 15.1, which states: “Any dispute that arises between the parties shall be resolved by submitting the same to the institutional arbitration in India under the provisions of the Arbitration and Conciliation Act, 1996.”

The joint venture agreement envisaged setting up a joint venture, and the R&D agreement contemplated research and development on agreed terms. Neither of these two agreements provided for arbitration.

Points of disagreement

According to Nandan, D-1 breached the supply agreement. Nandan claimed damages and reimbursement of expenses that it had incurred pursuant to the supply agreement. Nandan invoked arbitration under clause 15.1 of the supply agreement.

D-1 claimed that by a deed of termination dated 16 October 2004, the supply agreement had been terminated with no claims outstanding between the parties and therefore there was no “live dispute” that could go to arbitration. D-1 also claimed that the joint venture agreement was not to be pursued and the relationship between the parties was only as per the research and development agreement, which did not provide for arbitration.

As D-1 refused arbitration, Nandan requested the designate of the Chief Justice of India to appoint an arbitrator under section 11 of the statute. In that application, Nandan claimed that D-1 had concocted the termination deed by forging the signatures of Nandan’s two directors.

Issues for determination

Two issues fell for determination by the designated judge: whether clause 15.1 of the supply agreement was vague and unenforceable, since no institution had been identified and it was uncertain as to what rules would govern the arbitration proceedings; and whether there were any “live disputes” that could be referred to arbitration.

As regards the first issue, the Supreme Court restated the law as to the essential elements of an arbitration agreement (referring to Rukmanibai Gupta v Collector, Jabalpur, 1980, and Bihar State Mineral Development Corporation v Encon Builders (I) Pvt Ltd, 2003). The elements are: (1) There must be a present (or a future) difference in connection with some contemplated affair; (2) the parties must manifest an intention to settle such difference by a private tribunal; and (3) the parties must agree in writing to be bound by the decision of the tribunal.

The court held that clause 15.1 of the supply agreement met each of the above tests. The mere fact that the institution to which disputes may be referred was not identified made no difference, as a clear intent to settle disputes by arbitration had been expressed by the parties. The fact that the identity of the institution had not been agreed was not sufficient to void the agreement since, if the parties failed to agree, the court could nominate the institution.

As regards the second issue, the Supreme Court noted that whether or not the termination deed was a bona fide document, and what the effect of the termination deed was, were both “live issues”. Those matters could only be decided by the arbitral tribunal.

A case of alleged forgery

While according to D-1 the termination deed settled all issues, Nandan’s case was that the document was a forgery. Based on the evidence of the documents on record, it could not be said either that the termination deed was valid or that it was of no effect.

This ruling again exemplifies the need for care while drafting an arbitration stipulation. While the law leans in favour of upholding an arbitration stipulation, due care must be taken to ensure that the stipulation can be easily enforced without embroiling parties in needless – and time-wasting – litigation.

Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners. Bharucha & Partners is a full-service firm with practice areas including litigation, international and domestic arbitration, intellectual property, real estate, M&A, corporate restructuring, joint ventures and private equity.

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