ALTERNATIVE DISPUTE RESOLUTION

03-10-2022
IRAC ANALYSIS

Askash Industries Ltd. (Seller) and Amber Diamond Ltd. (Buyer) have entered an
oral contract for the selling and purchase of an equipment. They have also
Summary: exchanged several emails regarding the specifications of equipment and arbitration
clause in the contact. Unfortunately, Buyers’ company has backed out before the
contract could have been formalised which has led to the present dispute. The
Claimant in this case is the Askash Industries Ltd. (Seller) claiming reimbursement
of the damages for the materials purchased in order to sell the equipment to the
Respondent-Amber Diamond Ltd. (Buyer). Respondent has claimed that the
Arbitral Tribunal does not have the jurisdiction to hear the present dispute because
of a non-existent contract and arbitration clause or an arbitration agreement.

Issue: Whether an arbitration agreement exists between Askash Industries Ltd. (Seller) and
Amber Diamond Ltd. (Buyer) under section 7 of the Arbitration and Conciliation
Act, 1996?
Whether the Arbitral Tribunal has the jurisdiction to initiate arbitration arising out
of the dispute between Askash Industries Ltd. and Amber Diamond Ltd. under
Section 16 of the Arbitration and Conciliation Act, 1996?
Whether Amber Diamond Ltd.’s and Askash Industries Ltd. have a valid contract
under Section 10 of the Indian Contract Act, 1872?

1. Amber Diamond Ltd. (‘Buyer’) and Askash Industries Ltd. (‘Seller’) entered
into an agreement for sale of a piece of equipment to be designed according
to the buyer’s specifications. The contract was initiated by the buyer’s parent
Facts:
company and is still in the process of finalisation.
2. In the email conversations between one of the buyer’s subsidiaries
companies and the seller, there are discussions about technical specifications
of the equipment as well as proposal for addition of an arbitration clause in
the contract.
3. The subsidiary company made no commitment regarding this. Rather, it
asked made it clear that they will have to discuss the same with their parent
company, Amber Diamond Ltd. There were no further discussions or
negotiations made regarding the arbitration clause.
4. The seller has purchased raw material necessary for the production of the
equipment according to the oral agreement. Before the contract is finalised,
the buyer loses interest in purchasing the equipment.
5. The seller suffers from damages and has requested the buyer to reimburse
the amount spent on preparing for the equipment on the basis breach of its
de facto contractual obligations. He has also initiated an arbitration
proceeding against the parent company Amber Diamond Ltd. on the basis of
an oral arbitral agreement.
6. The buyer has objected to the Jurisdiction of the Arbitral Tribunal.

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 ALTERNATIVE DISPUTE RESOLUTION
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IRAC ANALYSIS

Rule of Law: 1. Doctrine of kompetenz-kompetenz:

Section 16 of the Arbitration and Conciliation Act, 1996 has been framed in
accordance with Article 16 of the UNCITRAL Model law, which embodies
elemental jurisprudential doctrine i.e., “Kompetenz – Kompetenz”. This doctrine
empowers the court or an arbitral tribunal to rule on its ‘own’ jurisdiction.
2. Section 7 of the Arbitration and Conciliation Act, 1996:
“Arbitration Agreement” means an agreement by the parties to submit to arbitration
all or certain disputes which have arisen or which may arise between them in respect
of a defined legal relationship, whether contractual or not. An arbitration agreement
may be in the form of an arbitration clause in a contract or in the form of a separate
agreement. An arbitration agreement shall be in writing. An arbitration agreement
is in writing if it is contained in a document signed by the parties, an exchange of
letters, telex, telegrams or other means of telecommunication [including
communication through electronic means] which provide a record of the agreement;
or an exchange of statements of claim and defence in which the existence of the
agreement is alleged by one party and not denied by the other. The reference in a
contract to a document containing an arbitration clause constitutes an arbitration
agreement if the contract is in writing and the reference is such as to make that
arbitration clause part of the contract.
3. Section 16 clause (1) of the Arbitration and Conciliation Act, 1996
Competence of arbitral tribunal to rule on its jurisdiction including ruling on any
objections with respect to the existence or validity of the arbitration agreement, and
for that purpose an arbitration clause which forms part of a contract shall be treated
as an agreement independent of the other terms of the contract and a decision by the
arbitral tribunal that the contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause.
4. Section 10 of the Indian Contract Act, 1872:
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 hereby expressly declared to be void.
The primary objective of Alternative Dispute Resolution is minimal judicial
intervention. Kompetenz-kompetenz or Principle of Competence is the
Analysis jurisdictional principle to empower an adjudicating body to exercise on the issues
on its own jurisdiction submitted before it. Through this, the present Tribunal shall
rule whether they have the jurisdiction to hear the present dispute or not. In Olympus
Supertructures Pvt. Ltd. v. Meena Vijay Khetan & Ors, it was ruled that the arbitral
tribunal has the power to decide upon matters of its own jurisdiction as per Section
16(1) of the Arbitration and Conciliation Act, 1996.
Under Section 16 of the Arbitration and Conciliation Act, 1996 the arbitral tribunal
has been granted the power to rule on the objections raised by either of the parties

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IRAC ANALYSIS

on the existence/validity of the arbitration clause/agreement. Article 16 of the Model

Law says that the tribunal can rule on its own jurisdiction regarding the objection
raised by either of the parties on the existence or validity of the arbitration
agreement. For this purpose, the main contract would be considered as separate from
the arbitration agreement/clause (Doctrine of Separability). Such a plea will be
considered as a preliminary question or in an award in merits.
This dispute is also a similar case where there are questions of existence of
arbitration agreement and also a written contact. The two parties never signed it and
there was no ‘effective date’. The contract was still in process before the
Respondent’s revoked the contract. Whereas, the claimants are arguing that its an
oral contract. An oral agreement is as equally valid, as a written one. The legality,
of an oral agreement, cannot be questioned, if it falls under the ambit of the
requirements stated in section 10 of the Indian Contract Act, 1872. This was
substantiated by the Delhi High Court, in the case of Nanak Builders and Investors
Pvt. Ltd. vs. Vinod Kumar Alag AIR 1991 Delhi 315, whereby the Court held that
even an oral agreement can be a valid and enforceable contract. Therefore, in the
strict sense, it is not essential that a contract must be in writing unless specified by
law or the parties themselves contemplate the reduction of terms of the agreement
to writing.
There are several requirements that must be met in order to form an oral contract.
The following provides a basic list of oral contract requirements:
- The terms of the contract must be valid and legally enforceable;
- It must contain the necessary elements found in all contracts (e.g., offer,
acceptance, consideration, and mutuality or a “meeting of the minds”); and
- The oral agreement must not violate laws or regulations that are meant to
prohibit oral agreements, such as contracts that fall under the Statute of
Frauds (i.e., those that must be in writing).
The two parties were in the process of contract finalisation which clarifies that there
was an intention to create legal relationship. The position of intention is different in
common law and Indian law. In common law intended to create a contract is an
essential part to form a binding contract and consideration in a contract only has an
evidentiary factor. In Indian law, the scenario is different, in India consideration is
considered an essential part of a contract, and the existence of consideration proves
intention to create legal relations. The emails exchanged by the parties will prove
the intention to contract but consideration was never given by the parent company
or its subsidiary company. Even before the agreement could become contract under
Section 2(h) of the Indian Contract Act, 1957, the claimant began discharging its
duties according to the agreement. Therefore, this oral contract claimed by the
Seller will fall under Section 2(i) of the Indian Contract Act which states that an
agreement which is enforceable by law at the option of one or more of the parties
thereto, but not at the option of the other or others, is a voidable contract.

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There is no separate arbitration agreement or an arbitration clause. A mere proposal

cannot be accepted as the same. Also, it is mandatory for an arbitration agreement
to be in writing. There was no agreement by the subsidiary company and clearly
asked for follow up which was never made on emails. Therefore, this dispute shall
not have been submitted by claimant to arbitration in the first place. A mere
agreement to agree or negotiate is not legally enforceable. Supreme Court of India,
in the matter Kerala State Electricity Board and Anr. Vs. Kurien E. Kathilal and Anr.
(MANU/SC/0231/2018) held that the High Court should not have referred the
parties to arbitration without a joint memo or a joint application of the parties, when
there was no arbitration agreement between the parties. Thus, in the absence of an
arbitration agreement between the parties, a written consent of parties by way of
joint memo or joint application is necessary for the court to refer the parties to
arbitration. Oral consent given by the counsel of the parties is not sufficient for the
reference of the parties to arbitration. Applying this judicial precedent in our present
scenario, neither there is any consent by the Respondent or any arbitration clause or
agreement.
So, the arbitration tribunal does not have the jurisdiction to hear the dispute between
Askash Industries Ltd. (Seller) and Amber Diamond Ltd. (Buyer) because of a non-
existent arbitration agreement or clause under Arbitration and Conciliation Act,
1996. Therefore, the Askash Industries Ltd. (Seller) would not be sought relief,
damages or remunerations under the Arbitration and Conciliation Act, 1996. The
This case is of a voidable oral contract where one party has backed out and there a
Conclusion non-existent arbitration agreement under section 7 of the Arbitration and
Conciliation Act, 1996. The contract is not valid under the definition of contract
under section 2 clause (i) and (h) of the Indian Contract Act, 1857. The Arbitral
Tribunal has the right to adjudicate on its own jurisdiction because of the principle
of Competence or Kompetenz-kompetenz. This has been enshrined and adopted
from the UNCITRAL Model Law on International Commercial Arbitration (1985)
in the Arbitration and Conciliation Act, 1996 under Section 16. After hearing the
case, the court would be sure of the non-existent arbitration and contract clauses
giving no relief for the claimant. They were at fault for performing the contract
before it even became functional or came into existent resulting in a loss for the
claimant company.
1. If There Is No Arbitration Agreement Between The Parties, The Court
Cannot Refer The Parties To Arbitration Without A Joint Memo Or Written
Application By The Parties - Arbitration & Dispute Resolution - India
References (mondaq.com)
2. Arbitration Proceedings without an Arbitration Clause • Aceris Law
3. What Makes a Contract Invalid? - LawDepot Blog
4. The Arbitration and Conciliation Act, 1996|Legislative Department |
Ministry of Law and Justice | GoI
5. A1996-26.pdf (legislative.gov.in)
6. Oral Agreement Enforceability In India (ipandlegalfilings.com)
7. https://www.mondaq.com/india/contracts-and-commercial-
law/65442/contracting-under-indian-or-english-law-part-1-the-indian-legal-
framework

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