THE AUTHOR:
Rohan Gulati, LL.M. Candidate, National University of Singapore
Introduction
Tracing back to 1958, with less than 3 weeks for adopting the United Nations Convention on Recognition and Enforcement of Foreign Arbitral Awards (1958) (“Convention”), the draftsmen mulled over a provision for recognizing and enforcing arbitration agreements. This late addition to the Convention prescribed a ‘maximumrequirement’ of having an agreement in writing, which has now fostered adequate grounds for debate due to emerging trends in global trade and e-commerce.
A recent decision of the Supreme Court of India (“Supreme Court”) in Glencore v. Shree Ganesh Metals lends credence in favour of reconsidering the maximumrequirement set out under the Convention. In the same breath, the decision reveals a troubling inconsistency in the Arbitration and Conciliation Act, 1996 (“the Act”), as it fails to recognize the ‘second alternative’ for recognition and enforcement of an arbitration agreement. Accordingly, this analysis opens with a brief background and decision of the Supreme Court; and subsequently moves to address critical concerns under the Act and plausible workarounds to ensure that India does not lose hope of its long-standing dream.
Background
Glencore International AG (“Glencore”), a Swiss company handling the business of mining and commodity trading, entered into a series of contracts with Shree Ganesh Metals (“SG Metals”) for the supply of zinc metals. All contracts contained identical arbitration clauses with London as the seat of arbitration. A fifth contract was proposed to purchase 6,000 metric tons of zinc metal from Glencore. SG Metals only negotiated the provisional price and exchanged some email correspondence with Glencore. On 11 March 2016, Glencore sent the duly signed version of the contract to SG Metals after incorporating the negotiated terms and modalities of the transaction (“Contract”).
Interestingly, the Contract remained unsigned by SG Metals, but it continued to discharge its obligations, including the acceptance of 2,000 metric tons of zinc metal supplied by Glencore. Subsequently, another series of correspondence revealed that SG Metals understood its payment obligations under the unsigned Contract.
Disputes arose when SG Metals failed to furnish the Letter of Credit (“LC”) for September 2016, and Glencore encashed the previous LCs. SG Metals proceeded to file a civil suit before the High Court of Delhi (“High Court”), inter alia, claiming recovery of US$1,200,000 and a permanent injunction against encashment of further LCs by Glencore. In response, Glencore filed an application under Section 45 of the Act seeking a referral to arbitration owing to the existence of an arbitration clause in the unsigned Contract. This request for referral was refused by the High Court and later affirmed in appeal on the premise that there was no record to show that SG Metals had, either expressly or impliedly, agreed to the terms and conditions set out in the unsigned Contract.
Issue
The Supreme Court was concerned with a singular issue of determining whether there is a binding arbitration agreement between Glencore and SG Metals in view of the unsigned Contract.
Decision
Whilst determining the issue, the Supreme Court ostensibly based its decision on the ‘second alternative’ of an agreement in writing, i.e., inferring the validity of an arbitration agreement through an exchange of communications such as emails, which provides a record of agreement. Along with invoking the second alternative to an agreement in writing, it was held that SG Metals cannot blithely bank upon its own failure to sign the said Contract and now renege from the binding terms and conditions contained therein. One of the most crucial factors that weighed-in against SG Metals was its communication regarding modifying the provisional prices, that was subsequently accepted by Glencore as it shared the Contract for signing by SG Metals.
Thereafter, the Supreme Court relied upon Govind Rubber Limited v. Louis Dreyfus Commodities Asia Private Limited, 2014 INSC 1042 (searchable here), to hold that an arbitration clause must be interpreted in a manner to give effect to the same rather than invalidate it. Coupled with this, it reiterated that at the referral stage, the scope of inquiry is limited to prima facie proof of the existence of an arbitration agreement. Subsequently, through the doctrine of Kompetenz-Kompetenz, the validity and existence of an arbitration agreement may be decided by the arbitral tribunal.
Accordingly, the Supreme Court set-aside the orders passed by the High Court, restored the application filed by Glencore, and directed the parties to be referred to arbitration.
Analysis
The Legislative Gap: Absence of the Second Alternative under the Act
Whilst the decision of the Supreme Court is laudable and seemingly aligns with India’s ever-growing pro-arbitration approach, we must not lose sight of the fact that it fails to address the glaring gap between the Convention and the Act.
Section 45 of the Act mirrors Article II of the Convention, as India adopted the Convention under Part II of the Act, with its own municipal flavour. Section 44(a) of the Act stipulates that an agreement must be in writing. However, both Sections 44 and 45 of the Act do not recognize the ‘second alternative’ which is stipulated under Article II(2) of the Convention, i.e., recognition and enforcement of an arbitration agreement which is contained in an ‘exchange’ of letters or telegrams. The reason for creating the second alternative was to acknowledge international trade practices at the time, in order to bypass the strict signature requirements by the parties. With the advent of trade and e-commerce, the second alternative has been increasingly applied to ensure that the Convention is aligned with evolving global trends of exchanging communications.
The second alternative finds no whisper of mention under Sections 44 and 45 of the Act. Presumably, this gap has been overlooked due to more beneficial provisions available under the Act, such as Section 7 (under Part I) of the Act, which duly recognizes the second alternative of exchange of communications. However, Part I and more specifically Section 7 of the Act, only applies to an arbitration seated in India. A safe harbour approach may be guided towards a reference to the first schedule under the Act that covers the Convention in its current form. This may not primarily address persisting issues, but may be a workaround.
Nonetheless, the gap between the Convention and the Act leaves room for ambiguity and offers opportunities for dissatisfied respondents to wriggle out of arbitration altogether. It is equally unfortunate that this gap persists despite repeated amendments to the Act.
Tacit Acceptance: Expanding the Boundaries of Written Agreement
Pertinently, the decision of the Supreme Court leans in favour of an implied or tacit acceptance of the arbitration clause solely due to SG Metals’ performance of its obligations. At the same time, the decision does not address the fact that principles of tacit acceptance are not within the realm of the Convention. Even in terms of exchange of correspondence, it is paramount that the communication is expressly accepted by the party in writing.
In the absence of such express exchange of communication, it is evident that the Supreme Court endorsed the view that tacit acceptance through performance of contractual obligations would suffice for a referral. Even otherwise, this view finds some strength from the amended provisions of Article 7(3) of the UNCITRAL (United Nations Commission on International Trade Law) Model Law on International Commercial Arbitration (2006), which seeks to plug the gap by recognizing an arbitration agreement concluded by conduct.
Whilst tacit acceptance or conclusion of an arbitration agreement by conduct may now be valid, it certainly calls into question the requirements set out under Article II of the Convention, which still mandate an agreement in writing. Given the diversified use of communications such as emails, text messages, audio-visual recordings et al., the maximum standard of requirement has perhaps been reduced to a minimum requirement. Interestingly, it has been recommended that the modes of communication under Article II(2) of the Convention be non-exhaustive, which again favours the second alternative.
To circumvent any growing concerns, there may be two plausible alternatives to ensure that the object and purpose of the Convention are not defeated.
- Firstly, recognition and enforcement of arbitration agreements that are not in writing must be interpretated with the aid of the afore-stated recommendation, if required; and/ or
- Secondly, invoke Article VII of the Convention (more-favourable-rights provision) to exit the Convention and apply provisions from domestic law that would ensure an arbitration agreement is duly recognized and enforced.
Conclusion
The decision of the Indian Supreme Court is bound to set a strong precedent for tacit acceptance of, or implied, arbitration, as it reinforces India’s pro-arbitration stance. However, the basic framework continues to witness challenges that require harmonization with the Convention. At the same time, the time is ripe to reconsider the minimum standards under Article II of the Convention to ease-out enforcement proceedings.
In sum, features such as enforcement-friendliness, a pragmatic approach, flexibility, and non-formalism are perhaps the new cornerstones of modern-day arbitration law, aligning with the Convention’s fundamental ethos and intent.
ABOUT THE AUTHOR
Rohan Gulati is an Indian-qualified dispute resolution lawyer, currently pursuing an LL.M. in International Arbitration and Dispute Resolution from the National University of Singapore. Prior to joining NUS, he was engaged as an Associate for over 3 years with PSL Advocates and Solicitors, a leading disputes boutique in India, specializing in commercial dispute resolution with a niche focus on construction law.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
