Summary
The Supreme Court set aside an ex parte Section 11 appointment of an arbitrator. A letter of intent that only enabled preliminaries pending a work order and formal agreement did not create a concluded contract, and even otherwise its general reference to the tender documents did not incorporate their arbitration clause under Section 7(5). So no arbitration agreement existed even prima facie.
Issues
- Whether, on a prima facie view under Section 11 of the Arbitration and Conciliation Act, 1996, an arbitration agreement existed between the parties.
- Whether the letter of intent dated 16.11.2022 issued on the tender created a concluded contract or binding legal relationship.
- Whether the general reference in the letter of intent to the tender documents incorporated the arbitration clause in Clause 23 of the Special Conditions of Contract under Section 7(5).
Provisions considered
- Section 11(6A), Arbitration and Conciliation Act, 1996The referral court's enquiry is confined to the prima facie existence of an arbitration agreement; questions like accord and satisfaction, limitation and arbitrability are left to the tribunal. The Court applied this limited test and still found no arbitration agreement. (¶¶ 20, 21, 42)
- Section 7(1) and 7(4), Arbitration and Conciliation Act, 1996An arbitration agreement requires a defined legal relationship, contractual or not, and may be shown by an exchange of communications; on the facts, the parties' documents did not show a binding legal relationship. (¶¶ 27, 28, 36)
- Section 7(5), Arbitration and Conciliation Act, 1996Incorporation by reference requires a written contract and a reference that makes the arbitration clause part of it; the LOI's general reference to the tender documents, with no mention of arbitration, was a 'reference' and not an 'incorporation'. (¶¶ 28, 37, 38, 39)
- Section 16, Arbitration and Conciliation Act, 1996Ordinarily the tribunal decides its own jurisdiction under the kompetenz-kompetenz principle and courts should refer when in doubt; reference may be refused only in rare cases where no arbitration agreement exists even prima facie. (¶¶ 21, 42)
Held
- After In re Interplay and SBI General Insurance v. Krish Spg., the scope of enquiry under Section 11 is limited to the prima facie existence of an arbitration agreement; courts should lean towards reference and reject it only in the rarest cases where, without going into disputed facts, no arbitration agreement appears to exist. (¶¶ 20, 21, 42)
- The High Court's finding that the appellant did not dispute the arbitration agreement in its reply of 04.11.2024 was erroneous on the face of the record, since that reply expressly denied any concluded contract. (¶ 29)
- A letter of intent ordinarily expresses an intention to contract in future and does not bind the parties unless a clear intention to be bound appears; whether a contract was concluded depends on the tender terms, the LOI and the parties' conduct, and the court must distinguish a promise from a promise to make a promise. (¶¶ 30, 31, 32)
- Here the tender required a formal agreement, the contract definition contemplated signing of a contract agreement, and the LOI was issued only to enable preliminaries pending a detailed work order, which was never issued, nor were sites handed over. Furnishing and renewing bank guarantees was only a preliminary step, so the LOI created no binding legal relationship. (¶¶ 33, 34, 35, 36, 41)
- Even assuming a binding relationship, a general reference to the tender documents does not incorporate the arbitration clause contained in them; incorporation needs a specific reference showing an intention to make the arbitration clause part of the contract, following NBCC (India) Ltd. v. Zillion Infraprojects and M.R. Engineers. (¶¶ 37, 38, 39)
- Glencore International and UNISSI were distinguished, as in those cases the parties had acted on the contract or tender and their communications showed a binding relationship, whereas here the tender was never worked upon. (¶¶ 40, 41)
Result
Appeal allowed; High Court order dated 01.10.2025 appointing a sole arbitrator set aside; respondent given liberty to pursue other remedies available in law.