ISSUE VI : Think before you type! E-mail exchanges can bind parties

Think before you type! E-mail exchanges can bind parties

Introduction

For an arbitration clause to be enforceable under Indian law, it must satisfy the criteria for a valid contract provided under the Indian Contract Act, 1872. For instance, contracting parties must give free consent, the contract must have a legal object, there should be some consideration and effective communication of acceptance. With advancement in technology, the concept of communication of acceptance has undergone a drastic change from the established position under Entores v. Miles Far East Limited1 which has had an impact on arbitration agreements and their enforceability. As a matter or practice, most commercial contracts are preceded by negotiations and are followed by a duly executed stamped agreement which contains the binding arbitration agreement or clause.

This position is likely to undergo a drastic change following the Supreme Court’s (“the Court”) decision in Trimex International FZE Limited, Dubai v. Vedanta Aluminum, India.2 In this case, the Supreme Court has essentially held that where communication of acceptance is complete, the contract has been formed and the terms can be ascertained from the various correspondences exchanged between the parties, including the intention to arbitrate. This bulletin analyses the decision of the Court, its impact on contract formation and the sanctity of arbitration agreements formed through correspondences.

1. Facts of the case

A Dubai company, Trimex International FZE Limited (“Petitioner”), traded in minerals across the world. Its primary business consisted of procuring mineral ores according to the orders placed upon them by their purchasers. Vedanta Aluminum Limited (“Respondent”), an Indian company was approached via e-mail by the Petitioner for the supply of bauxite on October 15, 2007.

Several e-mails were exchanged between the Petitioner and the Respondent regarding the material terms of the supply on October 15 and 16. Thereafter, the Respondent conveyed its acceptance of the terms on October 16, 2007 and further confirmed  5  (five)  shipments  of  bauxite  from  Australia  to  Vizag/Kakinada,  India.  On receiving the confirmation, the Petitioner entered into a binding charter party agreement with a ship owner for making delivery of the 5 shipments. Pursuant to this, in a meeting between the parties on October 26, 2007, the Respondent acknowledged its acceptance of the Petitioner’s offer which was recorded in the minutes of the meeting. Later, on November 8, 2007, the Respondent sent a draft formal agreement (“Contract”), including a detailed arbitration clause, to the Petitioner which was accepted with a few changes and sent back the very same day. The next day, the Petitioner entered into a separate agreement with the supplier in Australia for the supply of bauxite.

On November 12, 2007, the Respondent requested the Petitioner to hold the consignment due till further notice. In response, the Petitioner said that it was not possible to hold the consignment at that point in time and requested the Respondent to sign the Contract. On receiving no response from the Respondent by an e-mail on November 16, 2007, the Petitioner terminated the agreement while reserving its right to claim damages. Thereafter, on November 18, 2007 the Petitioner informed the ship owner of the cancellation of the order and the ship owner made a claim of US$ 1 million towards commercial settlement. The Petitioner requested the Respondent to pay the said amount to the ship owner and an additional 0.8 million US$ towards compensation for loss of profit and other costs and expenses for cancellation of the order.

The Respondent rejected the claim of the Petitioner, and due to this, the Petitioner, after negotiations had to pay 0.6 million US$ in two installments to the ship owners. On September 1, 2008, the Petitioner served a notice of claim-cum-arbitration on the Respondent asking it to either pay up or treat the notice as reference to arbitration. The Respondent rejected the arbitration notice stating that there was no concluded contract between the parties. Accordingly, the Petitioner filed a petition for appointment of arbitrator.

2.0 Contention of the parties

2.1 Petitioner’s contentions

The Petitioners primary contention is that the Contract was valid and binding. To support this argument, the Petitioner submitted that:

  • the contract was concluded upon acceptance of the offer for five shipments.
    • the offer of October 16, 2007 was in reply to the request of the Respondent and was on the basis of a similar transaction which had been concluded in the previous month.
    • the offer that was accepted by the Respondent contained the arbitration clause, which was never objected to.

The Petitioner further argued for the validity of the Contract by contending that only after several e-mail exchanges and agreeing on the material terms of the contract, the Respondent agreed to place the order of 5 (five) shipments, based on which the Petitioner then further contracted with the bauxite supplier in Australia and also entered into a charter party agreement with the ship owner. The Petitioner stressed on the fact that the arbitration clause was included under the copy of the Contract that the Respondent had sent and as there was no change in it, the obvious conclusion was that the arbitration clause was acceptable to both parties.

It further contended that the offer dated October 15, 2007 contained all the essential ingredients for a valid acceptance by the Respondents such as offer validity period, product description, quantity, price per tonne, delivery (CIF) and payment terms (irrevocable L/C), shipment lots, discharge port, governing law and arbitration. Relying upon the minute to

minute correspondence exchanged between the parties, the Petitioner attempted to prove that the parties were under a time constraint and that the Respondent was aware of the urgency of the acceptance of the offer to avoid a price variation and that the acceptance conveyed by the Respondent is complete.

2.2 Respondent’s contentions

The Respondent, on the other hand, argued that there cannot be a concluded contract as the parties were not ad idem with respect to various essential and material features of the transaction. It stated that:

  • besides the number of consignments, all other terms and conditions pivotal and essential to the transaction were under negotiation, which is evident from the several e-mail exchanges between the parties.
    • the product specifications, price, inclusions in the contract price, delivery point, insurance, commencement and conclusion dates of the contract, transfer of title, quality check and demurrage remain undecided and, therefore, no concluded contract can be said to be in existence.

Accordingly, the Respondent argued that in such a scenario, (a) the parties cannot be said to be “in one mind” with respect to all aspects of the transaction which is necessary for the formation of a binding contract; (b) despite being provided with a notice to defer the shipment, the Petitioner permitted the nomination of the vessel of its own accord and attempted to fasten the liability on to the Respondent.

Though the Respondent admitted the exchange of e-mails with the Petitioner, it contended that there was no concluded contract as the Contract remained unsigned without which the Petitioner cannot enforce certain obligations reflected in those e-mails and invoke the arbitration clause as if a formal agreement existed. The Respondent, relying upon the decision  of  the  Court  in  Dresser  Rand  S.A.  v.  Bindal  Agro  Chem  Ltd.,3  contended  that  an agreement upon the terms which will govern a contract is not the same as entering into the Contract itself.

3. Decision of the Court

The Court, after hearing both parties at length, rejected the contentions of the Respondent and held that the offer made on October 15, 2007 was accepted on October 16, 2007, and accordingly any dispute between the parties will have to be subjected to arbitration in accordance with the terms and conditions agreed to. Once a contract is concluded orally or in writing, the mere fact that a formal contract has to be prepared and initialed by the parties would not affect either the acceptance of the contract so entered into or implementation thereof, even if the formal contract has never been initialed. While providing the reasoning for holding the Contract as concluded, the Court considered the decision of the Court of Appeal in Pagnan SPA v. Feed Products Ltd.,4 which observed that usually in

practice, to hold a contract as concluded, parties must agree on the essential terms and matters of details can be left over for determination at a later period in time.

The Court reiterated its stand that one of the main objectives of the Act is to minimize the supervisory role of the courts. In holding this, the Court observed that if a number of extra requirements such as seals and originals, stamps etc. are added in considering an arbitration agreement, it would amount to increasing the role of courts and not minimizing it. Relying upon UNCITRAL Model Law, the Court concluded it would be improper and undesirable for the courts to add a number of extra formalities not envisaged by the legislation. The court’s objective should be to achieve the legislative intent. Accordingly, the Court held in favor of the Petitioner and appointed a former judge to arbitrate the matter.

Conclusion

The decision of the Court has an impact on contract formation and also on arbitration agreements. Through this decision, vis-à-vis initiation of arbitration, the Court has eliminated the requirement of a formal executed document. This, though seemingly a positive step, has introduced incidental perils into contract formation. Usually where a party wishes to enter into a commercial contract, negotiations take place, pursuant to which a formal agreement is executed containing the final terms and conditions mutually agreed upon. The decision of the Court, however, gives sufficient opportunity to either party to raise a dispute and submit to arbitration where a contract has not been formally executed, but where the parties have concluded negotiations on the material terms and conditions.

It is evident from the tenor of the Court’s decision that it is largely in favor of enforcing the intention to arbitrate and is in line with the UNCITRAL Model Laws and the Act. The Court has very aptly upheld the object of the Act and restricted the role of courts by referring the parties to arbitration. The decision focuses upon the intention of both parties to arbitrate and for formation of a concluded contract, by virtue of e-mail correspondences and the action of the Petitioner pursuant to the correspondence. In light of this decision, parties entering into negotiations must be very careful in wording their correspondence and clearly and categorically indicate that a simple “yes” or “no” does not imply acceptance of the complete proposal, lest the contract be considered concluded.


Authored by: Ashutosh Chandola

1 1955 (2) AllER 493.
2 The judgment was pronounced on January 22, 2010.
3 (2006) 1 SCC 751.
4 [1987] 2 LLR 619.

 

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