Arbitration Agreements in Invoices – Barking Up the Wrong Tree?

By: Ridhi Arora (Gujarat National Law University, Gandhinagar)


Within the meaning of Order XXXVII of the Code of Civil Procedure, invoices have been considered as “written contracts” in recovery suits. This interpretation is seen across decisions of the Bombay and Madras High Courts. However, to apply this interpretation uniformly would be erroneous because invoices cannot be considered a written contract in the context of every dispute sought to be adjudicated through the means of arbitration. Invoices raised by one party against the other in a commercial contract occasionally provide for certain terms and conditions that might not have been provided in the contract entered into between the two parties. However, one party cannot unilaterally enforce terms and conditions in an invoice which are not agreeable to the other party. In the same vein, an arbitration clause contained in an invoice that has not been mutually agreed upon, would, therefore, not be a valid arbitration agreement in the eyes of law.

In this context, the author has firstly discussed the constituents of a valid arbitration agreement and secondly, whether Courts have found an effective arbitration agreement in an invoice.

THE SCHEME OF A VALID ARBITRATION AGREEMENT

In Chloro Controls Private Limited v. Severn Trent Water Purification, the Supreme Court laid down conditions which must be satisfied while construing the validity of an arbitration agreement, (i) arbitration is based on an agreement between the parties and is consensual; (ii) arbitration is a final resolution to the dispute between the parties; and (iii) it is considered as a substitute to court litigation and results in an award that is binding on both parties. These conditions must be read with an exhaustive list that was laid down by the Supreme Court and Section 7 of the Arbitration and Conciliation Act, 1996  (“Act”) which lays down the constituents of a valid arbitration agreement. The provision in the Act provides that an arbitration agreement may not necessarily be found in a contract, but must mandatorily be in writing.

An arbitration agreement, while following the statutory conditions of Section 7 of the Act, can be provided in any form or manner. Recently, in Mahanagar Telephone Nigam Ltd. v. Canara Bank & Ors., the Apex Court held that an arbitration agreement need not be in any particular form. The principal requirement is the intention of the parties to enter into an arbitration agreement, which must be ascertained through any clause in a contract, document, or correspondence between the parties. An arbitration agreement in an invoice, while not an ideal arbitration clause that is seen across standard contracts, would not be invalidated on the grounds that it was not provided for in the contract.

In standard forms of contracts and purchases made over the Internet, a buyer is in the agreement with the terms and conditions even though he does not provide his signature. The mere absence of his signature does not nullify his agreement to the acceptance of the terms and conditions while making a purchase on the Internet or in a standard form of contract. Therefore, a signature is not the sole relevant factor taken into consideration while deducing whether there is an agreement over certain terms and conditions. This proposition was applied to the provisions of the Act by the Supreme Court of India in Govind Rubber Limited Vs Louis Dreyfus Commodities Asia Private Limited emphasizing that the intention of a party is more relevant in expressing their acceptance of an arbitration agreement than signatures over documents.

The Apex Court held that signature of both the parties is not a formal requirement under Section 7(4)(b), Section 7(4)(c) and Section 7(5) of the Act. It was recognized that the absence of the signature of one party would not delegitimize the existence of an arbitration agreement if it could be proved that there was a meeting of minds between the parties, on a prima facie basis. If the meeting of minds is proved between the parties in an agreement containing an arbitration clause, the arbitration clause would be binding on both the parties even in the absence of a signature, which may at times be absent on an invoice. Therefore, the mere absence of signatures by anyone of the parties on an invoice cannot be considered a ground to reject the existence of an arbitration agreement between both the parties evidenced in the invoice.

CONDUCT OF THE PARTIES – AN ESSENTIAL DETERMINANT IN CONSTRUING MEETING OF MINDS

In order for the arbitration agreement contained in an invoice to be binding, the terms and conditions provided in the invoice must be agreed to by both parties. The Delhi High Court held that merely acknowledging the delivery of goods on an invoice does not tantamount to acceptance of the terms stipulated in an invoice. In the absence of any communication between the parties accepting the terms of the invoice, the arbitration clause contained in the invoice could not be considered to be a valid arbitration agreement. Acceptance of the terms of the invoice expressly was, therefore, construed to be an essential ingredient considered by courts while adjudicating the validity of arbitration clauses in invoices.

However, in certain cases, parties may not agree to the terms and conditions of the invoice by an express communication. The judgment of the Bombay High Court in Lewis W. Fernandez v. Jivatlal Partapshi And Ors. recognizes the conduct of the parties as a determinant factor in construing the validity of invoices. If invoices are accepted by the conduct of the parties, the conditions contained in the invoice would become binding on them. Similarly, in Scholar Publishing House Pvt. Ltd. v. Khanna Traders, the Delhi High Court held that years of the commercial relationship and the acceptance of similarly drafted invoices containing the arbitration clause would constitute an acceptance of the terms of the invoice, and thereby, the arbitration agreement. This interpretation by the Courts is beneficial as it lays emphasis on the conduct of parties in determining whether an arbitration clause becomes binding on both the parties, in the absence of any express communication indicating agreement over the terms in the invoice.

In Shri Kailash Nath Agarwal v. M/S Aaren Exports & Ors, the Delhi High Court held that since the respondents had not placed any documents or bills on the record to show the purchase of the goods, the invoices raised by the appellants providing for the purchase between the parties would be binding on the parties. The invoices raised by the appellants were the only evidence of the transaction between the parties and contained an arbitration clause, which the Court held to be a valid arbitration agreement. It was presumed that since the bills were the only proof of transactions between the parties, the inclusion of the arbitration clause in the invoice was not done unilaterally.

These settled principles of law were more recently followed by the Delhi High Court in Parmeet Singh Chatwal v. Ashwani Sahni wherein it was observed that the manner in which the signature of the petitioner is affixed on an invoice containing an arbitration clause is helpful in identifying whether the parties intended to resort to arbitration to settle their disputes. The Hon’ble Court also observed that the font in which the arbitration clause had been produced in the invoice was too small for the petitioner to even notice, and could not be construed to be a valid arbitration agreement that would become binding on both the parties. The arbitration clause in an invoice should be provided in a legible font that can be read by the other party as this would reduce ambiguity and would make the person who has read the terms and agreed to them to give effect to such terms.

CONCLUSION

An invoice is a valid testament of a transaction that has taken place between the parties, but the stipulations in an invoice are not binding at all times. Unless there is a prior agreement binding the parties by the terms of the invoice, the terms become binding only through the conduct of the parties. The same is true for an arbitration clause in an invoice, which is why the Delhi High Court has recognized that there can be no straightjacket method to determine whether arbitration clauses contained in invoices would be binding arbitration agreements. The relevant factor that the Courts have taken into consideration is the intention of the parties to have their disputes settled by arbitration, whether provided in the contract or the invoices. By providing arbitration agreements in some invoices for certain transactions, the parties may exclusively decide to settle their disputes arising out of those transactions by arbitration and not all disputes from transactions that take place between them. The interpretation taken by Courts while construing the validity of such clauses is influenced by the commercial relationship between the parties and an arbitration agreement has been considered to be a commercial document, and it is imperative for Courts to give effect to the substantive rights stemming from such an agreement, and not invalidate it.


(Ridhi is a 2nd-year undergraduate student of Law and Arts at Gujarat National Law University, Gandhinagar with a keen interest in arbitration law.)

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