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U.P Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. And Others
Factual and Procedural Background
The appellant, a State of Uttar Pradesh undertaking, and the first respondent, Indure Pvt. Ltd., explored a joint venture to bid for a contract floated by the U.P. State Electricity Board. A draft joint-venture agreement dated 22-6-1984 (containing an arbitration clause at Clause 14) was forwarded by the appellant to the respondent but remained unsigned by the appellant. On 27-6-1984 the respondent returned the draft, deleting Clause 10 and materially altering Clause 12, and affixed its signature and seal. Tenders were submitted on 30-6-1984, but the appellant unilaterally withdrew them on 23-2-1985. The respondent thereafter sought damages and invoked arbitration under Clause 14, nominating its arbitrator and calling upon the appellant to nominate one. Contesting the existence of any concluded agreement or arbitration clause, the appellant filed a petition under Section 33 of the Arbitration Act, 1940 before the Delhi High Court.
By judgment dated 10-4-1992 in OMP No. 62 of 1992, a learned Single Judge of the High Court held that a concluded contract, including Clause 14, had come into existence and that the arbitrators had jurisdiction. Challenging that view, the appellant obtained special leave and preferred the present appeal before the Supreme Court.
Legal Issues Presented
- Whether the correspondence between the parties culminated in a concluded contract, thereby incorporating Clause 14 as a binding arbitration agreement.
- Whether, in the absence of such a concluded contract, any valid arbitration agreement existed under Section 2(a) of the Arbitration Act, 1940.
- Whether arbitrators can conclusively determine their own jurisdiction in respect of the existence or validity of an arbitration agreement, or whether that question lies exclusively with the court under Section 33.
- Whether the appellant, having once nominated an arbitrator, was estopped by acquiescence from disputing the arbitral jurisdiction.
Arguments of the Parties
Appellant's Arguments
- The modifications made by the respondent (deletion of Clause 10 and alteration of Clause 12) constituted a counter-offer; no officer competent under the appellant’s Articles of Association ever accepted or executed it.
- Without consensus ad idem on material terms, no concluded contract—and therefore no arbitration clause—could arise; the arrangement, at best, was a contingent contract rendered void under Section 32 of the Contract Act because the underlying event (award of work by the Electricity Board) never materialised.
- Any prior participation before the arbitrators was a mistake; jurisdictional issues must be determined by the court under Section 33, and acquiescence cannot confer jurisdiction.
Respondent's Arguments
- The appellant accepted the counter-offer by conduct: it proceeded jointly to submit tenders, received the respondent’s signed agreement and bank draft, and never communicated rejection until much later.
- Reliance was placed on passages from Chitty on Contracts (para 53 – acceptance by conduct; para 99 – agreement in principle) and the doctrine of “indoor management” to contend that external parties were entitled to assume the appellant’s officers had authority.
- By nominating its own arbitrator, the appellant had submitted to arbitration and was estopped from subsequently challenging jurisdiction.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ramji Dayawala & Sons (P) Ltd. v. Invest Import, (1981) 1 SCC 80; AIR 1981 SC 2085 | Consensus ad idem is essential; a counter-offer and silence do not necessarily constitute acceptance; absence of agreement on material terms negates a concluded contract. | The Court relied on this decision to reinforce that unilateral alteration of essential terms prevents formation of a binding contract, thereby negating any arbitration agreement embedded within it. |
Court's Reasoning and Analysis
The Supreme Court applied Sections 3, 4, 7, 10, 31, and 32 of the Indian Contract Act to emphasise that a contract requires absolute and unqualified acceptance. The respondent’s deletion of Clause 10 and alteration of Clause 12 constituted a counter-proposal that shifted joint to unilateral liability, a “material alteration” precluding consensus ad idem. Because the appellant never signed or otherwise accepted this counter-proposal through an authorised officer—as required under Articles 125 and 126(xii) of its Articles of Association—no concluded contract arose.
The Court rejected the respondent’s reliance on “acceptance by conduct,” noting that submission of tenders was unilateral and later withdrawn; without the Electricity Board’s award, the arrangement remained a contingent contract unenforceable under Section 32. The doctrine of indoor management was held inapplicable to the formation of government or public-undertaking contracts, which must be executed by duly authorised officers.
On arbitral jurisdiction, the Court cited Section 33 and leading commentary (Russell on Arbitration; Bachawat’s Law of Arbitration) to reiterate that only a court can finally decide the existence or validity of an arbitration agreement; arbitrators cannot confer jurisdiction upon themselves. Consequently, the appellant’s earlier participation did not estop it from seeking judicial determination.
Holding and Implications
Appeal Allowed. The Court declared that no valid arbitration agreement existed between the parties; therefore, the reference to arbitration was illegal and the arbitrators lack jurisdiction to proceed. The High Court’s contrary conclusion was set aside, and costs of Rs 15,000 were awarded to the appellant.
Implications: The decision underscores that (i) a written arbitration clause is ineffective without a concluded underlying contract; (ii) courts retain exclusive authority under Section 33 to decide the existence and validity of an arbitration agreement; and (iii) public undertakings are not bound by contractual documents unless duly executed by authorised officers. No new legal doctrine was created, but the judgment reinforces strict adherence to contract-formation principles before arbitration can be invoked.
K. Ramaswamy, J.— Leave granted.
2. This appeal by special leave arises from the judgment and order passed on 10-4-1992 by the Delhi High Court in OMP No. 62 of 1992.
3. The appellant filed an application under Section 33 of the Arbitration Act, 1940 (for short “the Act”) for declaration that there exists no agreement between the appellant and the first respondent, Indure Pvt. Ltd. on the basis of which a dispute for a claim of Rs 1,68,73,628 could be referred for arbitration as the agreement set up by the respondent was non est and alternatively the dispute was not arbitrable under the agreement. Accordingly it sought declaration to set aside the said agreement. The learned Single Judge of the High Court in the impugned order held that the draft agreement dated 22-6-1984 contains provision for arbitration under clause (14) and the appellant is bound thereby; consequently, the arbitrators are entitled to arbiter the dispute.
4. The dispute arose in the backdrop of the facts that the U.P State Electricity Board had floated tenders for construction, supply and erection of mechanical equipment and construction work including consultancy services. Last date for submission of the tender was 30-6-1984. The appellant-Nigam, an Undertaking of State of U.P had purchased tender documents from the Board on 6-2-1984. The respondent approached the appellant for their joint participation to submit the tenders to the Board. In furtherance thereof, negotiations were set afoot and they decided to enter into an agreement in that behalf and ultimately draft agreement dated 22-6-1984 was sent to the respondent for signature. The appellant did not sign the draft agreement. On 27-6-1984, the respondent sent a counter-proposal deleting clause (10) of the agreement suggested by the appellant and materially altering clause (12) therein after signing the same. The tenders were submitted on 30-6-1984, i.e, the last date for submission of tenders; but before negotiating with the Board on 23-2-1985 the appellant had withdrawn the tenders. On 25-2-1985, the respondent had offered in its letter to the Board agreeing to undertake the entire contract by itself and offered to complete the formalities with the Board. Simultaneously, on 3-3-1985, the respondent sent a notice through its counsel claiming damages stating therein that there was no arbitration agreement between the parties. On 21-1-1986, the respondent had further sent a notice nominating an arbitrator on its part and called upon the appellant to nominate its arbitrator. The respondent purported to have exercised that right under clause (14) of the draft agreement proposed by the appellant on 22-6-1984 alleging that they had accepted the same by letter dated 27-6-1984. The appellant by letter dated 28-2-1986 disputed the existence of the arbitration agreement and also asserted that no concluded contract existed between the parties. It was further stated therein that deletion of material clause (10) of the draft agreement and material alteration of clause (12) constituted substantial modification of the draft agreement and consequently it did not accept the counter-proposal of the respondent and that, therefore, no valid agreement came into existence which was admitted by the respondent in their letter dated 5-3-1985. The question of appointing an arbitrator on their behalf did not arise. However, without prejudice to their right to claim that no valid agreement, much less arbitration agreement, was in existence, they nominated an arbitrator on their behalf to arbiter on the question “whether there existed any valid or subsisting agreement between the parties and whether there existed any valid and binding arbitration clause between the parties?” Since the arbitrator nominated by them expired, the respondent called upon the appellant to nominate another arbitrator. At that stage the appellant filed the above petition under Section 33 of the Act.
5. The High Court found that the respondent returned the agreement duly signed but after deleting clause (10) and materially altering clause (12) thereof. There was no communication by the appellant refusing or negativing the alterations made in the draft agreement. Tenders were submitted on 30-6-1984 after receipt of the modified agreement. Till 1-3-1986, the respondent had not received any communication disowning the contract between it and the appellant. Clause (14) of the agreement contained an arbitration clause for adjudication of the disputes. The withdrawal of the tenders by the appellant caused damages as claimed by the appellant in the notice. Therefore, the respondent called upon the appellant to nominate their arbitrator to adjudicate the dispute intimating in their letter appointment of the arbitrator on their part. From this there emerged a concluded contract containing clause (14) providing for arbitration for adjudication of the disputes.
6. As stated earlier, the High Court came to the conclusion that from the correspondence between the parties there emerged a concluded contract. After due discussion between the parties the draft agreement duly signed with official seal of the respondent affixed thereon was communicated to the appellant on 27-6-1984 which contained clause (14) which formed an integral part of the contract. The modifications suggested by the respondent were acted upon by the appellant. At no point of time was it suggested by any communication that the modifications were not accepted. On the other hand, tenders were submitted on 30-6-1984 for the joint participation of the appellant and the respondent. The respondent had sent a bank draft for a sum of Rs 2 lakhs on 29-10-1984. “(I)t is clear that the petitioner had accepted the agreement and in such an eventuality, the petitioner cannot deny the existence of arbitration clause.” “Therefore, from the conduct of the petitioner the inference can be drawn that the agreement had come into force the moment it was signed by the respondent and sent the same to the petitioner and the petitioner though did not sign it but acted upon it which amounts to indirect acceptance.”
7. Section 3 of the Indian Contract Act, 1872 envisages communication of proposal, acceptance of proposal and the revocation of the proposal and acceptance. Communication of proposal is complete under Section 4 when it comes to the knowledge of the person to whom it is made. Communication of an acceptance is complete — as against the proposer, when it is put in the course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. Under Section 7 “in order to convert a proposal into a promise, the acceptance must (1) be absolute and unqualified; (2) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted…”. Under Section 10 “all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void”. Section 31 defines “contingent contract” to mean “a contract to do or not to do something, if some event, collateral to such contract, does or does not happen”. A contingent contract to do or not to do anything, if an unforeseen future event happens, cannot be enforced by law, under Section 32, unless and until that event has happened. If the event becomes impossible, such contract becomes void. Section 2(a) of the Act defines “arbitration agreement” to mean “a written agreement to submit, present or future differences, to arbitration, whether an arbitrator is named therein or not”. To constitute an arbitration agreement, there must be an agreement between the parties, viz., the parties must be ad idem. The parties are not ad idem unless they agree to the terms and conditions mentioned in the agreement. As seen, under the Contract Act unless there is an agreement, i.e, there is an acceptance of the proposal, the contract is not complete. It is seen that the draft agreement dated 22-6-1984 was sent to the respondent for acceptance. Admittedly, clause (10) was deleted and clause (12) was materially altered unilaterally to convert joint liability to individual liability of the appellant. It would, therefore, be a counter-proposal signed by the respondent and communicated to the appellant. At this juncture, it is relevant to notice the Articles of Association of the appellant-Company, a State Government Undertaking. Article 125 of the Articles of Association gives power to the Board of Directors of the appellant-Company and Article 126, clause (xii) confers power on the Board of Directors “to refer claims or demands, by or against the Company to arbitration”. Under Article 125, the Company has the control and the competent authority has power to sign the contract on behalf of the Company. After the counter-proposal was signed by the respondent, the appellant had not signed any contract to bind the parties.
8. From this factual matrix, the question arises: whether there emerged any concluded contract pursuant to which the parties are bound by the terms and conditions of the tenders submitted to the Board and for further performance? It is seen that the tenders were not jointly signed by the appellant and the respondent but were unilaterally submitted to the Board by the appellant and were later on withdrawn. There did not exist any concluded contract between the Board and the appellant for the performance of the work as per terms and conditions of the tenders floated by the Board. Under Section 32 it was a contingent contract until it was accepted by the Board. In this background, the question emerges: whether there is an arbitration agreement between the parties? It is seen that clause (14) of the agreement [subject to the dispute whether it is arbitrable under clause (14) which is yet another issue with which we are not concerned] independently does not come into existence unless there is a concluded contract pursuant to the proposal made by the appellant on 22-6-1984 or a counter-proposal by the respondent dated 26-6-1984. It is not the case of the respondent that there exists any such independent arbitration agreement.
9. Shri R.F Nariman, the learned counsel for the respondent, therefore, contended that the counter-offer made by the respondent amounts to acceptance by conduct of the appellant and he placed reliance on paras 53 (Acceptance by conduct) and 99 (Agreement in principle only) of Chitty on Contract. Para 53 provides that “an offer may be accepted by conduct. For example, an offer to buy goods can be accepted by supplying them; and an offer to sell goods, made by sending them to the offeree, can be accepted by using them”. The substance of para 99 is that parties may reach agreement in principle but the details may be worked out at a later date. There is no dispute to the proposition of law but two factors have to be kept in mind, viz., when the counter-offer was made by the respondent and whether the unilateral offer amounts to acceptance by submitting the tenders by the appellant to the Board. We find that it does not amount to acceptance of counter-proposal. It is seen that admittedly, clause (10) which thrusts responsibility on the first respondent was deleted in the counter-proposal. In clause (12), for joint responsibility unilateral liability was incorporated. In other words the respondent disowned its material responsibilities. Unless there is acceptance by the appellant of those conditions no concluded contract can be said to have emerged. It is seen that the appellant is a government undertaking and unless contract is duly executed in accordance with the Articles of Association, the appellant is not bound by any such contract. Shri Nariman sought to rely on the passage from Palmer on Companies Law containing that it is an indoor management between the appellant and its officers. When the negotiations were undertaken on behalf of the appellant, the respondent was led to believe that the officer was competent to enter into the contract on behalf of the appellant. When the counter-proposal was sent, the appellant had not returned the proposal. Therefore, it amounts to acceptance and thus the concluded contract came into existence. We fail to appreciate the contention. As seen, the material alterations in the contract make a world of difference to draw an inference of concluded contract. The joint liability of the parties was made unilateral liability of the appellant. Thereby, the respondent sought to absolve itself from the liability of further performance of the contract with the Board. Similarly, clause (10) which contains material part of the terms for the performance of the contract with the Board was deleted. Thereby, there is no consensus ad idem on the material terms of the contract which contains several clauses. In the absence of any consensus ad idem on the material terms of the contract to be entered into between the parties, there emerged no concluded contract. Apart from the draft agreement and the counter-proposal, there is no independent contract for reference to arbitration. Clause (14) which is an integral part of the draft agreement proposed by the appellant and the counter-proposal is the foundation for reference to the arbitration.
10. Section 31(2) of the Act provides that notwithstanding anything contained in any other law for the time being in force and save as otherwise provided in the Act, all questions regarding the validity, effect or existence of an award or an arbitration agreement between the parties to the agreement or persons claiming under them shall be decided by the court in which the award under the agreement has been, or may be, filed, and by no other court. Section 33 envisages that any party to an arbitration agreement or any person claiming under him desiring to challenge the existence or validity of an arbitration agreement or an award or to have the effect of either determined shall apply to the court and the court shall decide the question on affidavits. Under the proviso, if the court deems it just and expedient, it may set down the application for hearing on other evidence also and may pass such orders for discovery and particulars as it may do in a suit.
11. In Law of Arbitration by Justice Bachawat (2nd Edn.) at p. 19 of Chapter II it is stated that “to constitute an arbitration agreement, there must be an agreement, that is to say, the parties must be ad idem. The parties are not ad idem if there is an arbitration clause in the bought note while there is none in the sold note. To be enforceable, the agreement must be made by the free consent of the parties”.
12. We find no force in the contention of Shri Nariman that the appellant had submitted to the jurisdiction of the arbitrators and having nominated the arbitrator, they are estopped to go back upon it. Acquiescence does not confer jurisdiction.
13. The arbitrability of a claim depends on the construction of the clause in the contract. The finding of the arbitrator/arbitrators on arbitrability of the claim is not conclusive as under Section 33; ultimately it is the court that decides the controversy. It being a jurisdictional issue, the arbitrator/arbitrators cannot clothe themselves with jurisdiction to conclusively decide the issue. In Russel on Arbitration (19th Edn.) at p. 99 it is stated thus:
“It can hardly be within the arbitrator's jurisdiction to decide whether or not a condition precedent to his jurisdiction has been fulfilled. It has indeed several times been said bluntly that an arbitrator has no power to decide his own jurisdiction and in one case where rules of an institution prepared to conduct arbitrations gave the arbitrator such power, the court will ignore this when asked to enforce the award, and decide the question itself. However, an arbitrator is always entitled to inquire whether or not he has jurisdiction. An umpire faced with a dispute whether or not there was a contract from which alone his jurisdiction, if any, can arise adopt one of a number of courses. He can refuse to deal with the matter at all and leave the parties to go to court, or he can consider the matter and if he forms the view that the contract upon which the claimant is relying and from which, if established, alone his jurisdiction can arise is in truth the contract, he can proceed accordingly.”
14. In Law of Arbitration by Justice Bachawat (2nd Edn.) at p. 155 it is stated that “the question whether matters referred to were within the ambit of clause for reference of any difference or dispute which may arise between the parties, it is for the court to decide”. The arbitrator by a wrong decision cannot enlarge the scope of the submission. It is for the court to decide finally the ambit of the clause in dispute or any clause or a matter or a thing contained therein or the construction thereof. We, therefore, hold that the arbitrators cannot clothe themselves with jurisdiction to decide conclusively the arbitrability of the dispute. It is for the court under Section 33 or on appeal thereon to decide it finally. The appellant, therefore, is not estopped to challenge the action and to seek a declaration under Section 33.
15. The clear settled law thus is that the existence or validity of an arbitration agreement shall be decided by the court alone. Arbitrators, therefore, have no power or jurisdiction to decide or adjudicate conclusively by themselves the question since it is the very foundation on which the arbitrators proceed to adjudicate the disputes. Therefore, it is rightly pointed out by Shri Adarsh Kumar Goel, learned counsel for the appellant that they had by mistake agreed for reference and that arbitrators could not decide the existence of the arbitration agreement or arbitrability of the disputes without prejudice to their stand that no valid agreement existed. Shri Nariman contended that having agreed to refer the dispute, the appellant had acquiesced to the jurisdiction of the arbitrators and, therefore, they cannot exercise the right under Section 33 of the Act. We find no force in the contention. As seen, the appellant is claiming adjudication under Section 33 which the court alone has jurisdiction and power to decide whether any valid agreement is existing between the parties. Mere acceptance or acquiescing to the jurisdiction of the arbitrators for adjudication of the disputes as to the existence of the arbitration agreement or arbitrability of the dispute does not disentitle the appellant to have the remedy under Section 33 through the court. In our considered view the remedy under Section 33 is the only right royal way for deciding the controversy.
16. Since the tenders — the source of the contract between the parties — had not transformed into a contract, even if the proposal and counter-proposal are assumed to be constituting an agreement, it is a contingent contract and by operation of Section 32 of the Contract Act, the counter-proposal of the respondent cannot be enforced since the event of entering into the contract with the Board had not taken place.
17. In Ramji Dayawala & Sons (P) Ltd. v. Invest Import (1981) 1 SCC 80, AIR 1981 SC 2085, a two-Judge Bench of this Court considered the existence of the contract and arbitration clause thereunder. This Court had held that in the facts of a given case acceptance of a suggestion may be sub silentio reinforced by the subsequent conduct. Where there is a mistake as to terms of a document, amendment to the draft was suggested and a counter-offer was made, the signatory to the original contract is not estopped by his signature from denying that he intended to make an offer in the terms set out in the document. Where the contract is in a number of parts it is essential to the validity of the contract that the contracting party should either have assented to or taken to have assented to the same thing in the same sense or as it is sometimes put, there should be consensus ad idem. In that case a sub-contract was signed and executed by the Managing Director of the appellant-Company but part of the contract was altered subsequently since counter-proposal was given by the respondent. This Court had held that one such case is where a part of the offer was disputed at the negotiation stage and the original offeree communicated that fact to the offeror saying that he understood the offer in a particular sense; this communication probably amounts to a counter-offer in which case it may be that mere silence of the original offeror will constitute his acceptance. Where there is a mistake as to the terms of the documents as in that case, amendment to the draft was suggested and a counter-offer was made, the signatory to the original contract is not estopped by his signature from denying that he intended to make an offer in the terms set out in the document; to wit, the letter and the cable. It can, therefore, be stated that where the contract is in a number of parts it is essential to the validity of the contract that the contracting party should either have assented to or taken to have assented to the same thing in the same sense or as it is sometimes put, there should be consensus ad idem. It was held that there was no consensus ad idem to the original contract. It was open to the party contending novatio to prove that he had not accepted a part of the original agreement though it had signed the agreement containing that part.
18. As found earlier, there is no signed agreement by a duly competent officer on behalf of the appellant. The doctrine of “indoor management” cannot be extended to formation of the contract or essential terms of the contract unless the contract with other parties is duly approved and signed on behalf of a public undertaking or the Government with its seal by an authorised or competent officer. Otherwise, it would be hazardous for public undertakings or Government or its instrumentalities to deal on contractual relations with third parties.
19. In view of the fact that Section 2(a) of the Act envisages a written agreement for arbitration and that written agreement to submit the existing or future differences to arbitration is a precondition and further in view of the fact that the original contract itself was not a concluded contract, there existed no arbitration agreement for reference to the arbitrators. The High Court, therefore, committed a gross error of law in concluding that an agreement had emerged between the parties, from the correspondence and from submission of the tenders to the Board. Accordingly it is declared that there existed no arbitration agreement and that the reference to the arbitration, therefore, is clearly illegal. Consequently arbitrators cannot proceed further to arbiter the dispute, if any. The conclusion of the High Court is set aside.
20. The appeal is accordingly allowed with costs quantified at Rs 15,000.
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