Intention to Inclusion: Supreme Court Principles on Valid Arbitration Clauses and Extension to Non-Signatories

India’s arbitration jurisprudence continues to evolve, striking a balance between contractual consent and commercial reality. Two recent decisions illustrate how Indian courts interpret arbitration clauses and extend their scope beyond signatories when justified by commercial conduct.

This article examines two key questions:

1. What constitutes a valid arbitration agreement?
2. Can a non-signatory be bound by an arbitration clause?

The first question is addressed in the Calcutta High Court’s decision in Ilead Foundation vs. State of West Bengal [1], which reaffirmed Supreme Court principles on validity. The second is addressed in the Supreme Court’s ruling in OPG Power Generation Private Limited vs. Enexio Power Cooling Solutions India Private Limited and Others [2].

Part I: What constitutes a Valid Arbitration Agreement?

In Ilead Foundation v. State of West Bengal, a dispute arose under a Memorandum of Understanding (MoU) dated August 30, 2017. Ilead was appointed to implement a government project. After the first phase was completed and paid for, further payment was refused by the state, citing breach of contract.

Ilead first approached the Calcutta High Court under Article 226, but the Court dismissed the petition, stating the matter required detailed fact-finding beyond writ jurisdiction. However, it noted that the parties were free to invoke arbitration.

Dispute Over the Arbitration Clause

Ilead invoked Clause 9.1 of the MoU to initiate arbitration. The state opposed this, arguing:

1. The clause was vague and did not mention applicable law, seat, or venue;
2. The term “Arbitrator” alone could not amount to a valid arbitration agreement; and
3. A notification dated September 12, 2023 by the project director PBSSD, clarified that “Arbitrator” should be interpreted as “adjudicator,”.

Court’s Findings

The Court dismissed these objections, relying on the Supreme Court’s ruling in Jagdish Chander v. Ramesh Chander [3]. Key takeaways from that case:

1. Clear Intention is Crucial: The agreement must show a clear intention to resolve disputes through arbitration. A mere possibility of agreeing to arbitration in the future is insufficient.
2. No Need for Exact Words: Even if the terms “arbitration”, “arbitral tribunal” or “arbitrator” are missing, the clause can still be valid if:

(a) It is in writing;

(b) Refers disputes to a private decision-making body;

(c) Ensures fair and impartial hearing; and

(d) Makes the decision binding on the parties.

Clause 9.1 stated that unresolved disputes shall be referred to the Vice Chairman, who would act as an Arbitrator and whose decision would be final and binding. The Court held the clause to be a valid arbitration agreement.

Regarding PBSSD Notification of September 2023, the Court held that the subsequent notification will not change the terms and conditions of the MoU entered into between the parties for a period of three years, which ended in 2020. It cannot be applied retrospectively and unilaterally.

Further, as the named Arbitrator was a party interested in the dispute, he was held de jure ineligible under Section 12(5) of the Act.

Accordingly, the Court exercised its powers under Section 11 to appoint an independent arbitrator.

Part 2: Can a non-signatory be bound by an arbitration clause?

This issue was addressed by the Supreme Court in OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited.

OPG invited tenders for the supply and installation of an air-cooled condenser. While Enexio responded to OPG, the initial purchase orders and payments came from OPG’s holding company, Gita Power and Infrastructure Privat Limited. Later, OPG issued new purchase orders on identical terms, including an ICC arbitration clause.

Following a dispute over non-payment, Enexio invoked arbitration. The Arbitral Tribunal found both OPG and Gita Power jointly and severally liable, reasoning that they acted as one economic entity.

The award was challenged before the Madras High Court. A single judge set aside the award, but the Division Bench reinstated it. The matter then reached the Supreme Court.

The Supreme Court upheld the award, endorsing the tribunal’s application of the Group of Companies doctrine, and noted:

1. Gita Power and OPG acted as a single commercial unit;
2. Gita Power had initiated the contract and made early payments;
3. OPG took over the same terms to maintain contractual continuity; and
4. Even though Gita Power didn’t sign the final contract, its involvement showed a clear intent to be bound by the arbitration clause.

To support this, the Supreme Court referred to its recent judgment in Cox and Kings Limited vs. SAP India Private Limited [4], which held that a non-signatory can be bound if:

1. There’s a direct relationship with the signatories;
2. The subject matter is common;
3. The transaction is composite; and
4. The conduct of the non-signatory shows intent to be part of the deal.

Applying the above factors, the Supreme Court concluded that Gita Power was rightfully bound and liable. The appeal was dismissed, and the arbitral award stood restored.

Key Takeaways

1. Arbitration agreements need not contain precise legal formulations. What matters is the parties’ clear and binding intent to refer disputes to arbitration.

2. Government circulars or clarifications cannot retrospectively modify the terms of a previously concluded contract, especially when the contract period has lapsed, and no mutual consent has been recorded to vary terms.

3. Non-signatories, particularly in group company structures, can be bound by an arbitration agreement if their conduct and role within the transaction demonstrate intent to be part of it.

4. Courts will not enforce arbitrator appointments that violate neutrality principles under Section 12(5) of the Arbitration and Conciliation Act, 1996.