By: Devansh Dubey
The Jammu and Kashmir High Court in the Case of A K Engineers and Contractors Pvt Ltd v. Union Territory of J&K concluded that the arbitration agreement which is part of the contract concluded between the parties will also cover disputes arising out of additional work undertaken by parties even if there is no formal agreement validating the same.
The analysis of the court can be seen as a pro-arbitration move in the Indian landscape specifically in cases of construction disputes where parties might overlook concluding a specific contract for every work that they are undertaking in the course of their commercial relationship.
Facts of the Case
The Union Territory of J&K published a Notice Invited Tender (NIT) for the building of a single-lane bridge on January 11, 2014. AK Engineers and Contractors Pvt Ltd was chosen as the successful bidder, and the parties entered into an agreement on April 26, 2014.
The contract included an arbitration clause. However, before the start of the project, there was a public announcement increasing the scope and expense of work, but without any formal revision to the previous agreement or a separate agreement. As a result, a two-lane bridge was built instead of the previously agreed-upon single-lane bridge.
A dispute arose between the parties regarding the payment for the execution of the work, prompting AK Engineers and Contractors Pvt Ltd to file a writ petition, which was dismissed by the High Court with a direction to consider the claim within 6 weeks; however, when Union Territory of J&K failed to make any payments, AK Engineers and Contractors Pvt Ltd invoked the arbitration clause and approached the Court for the appointment of the arbitrator under Section 11 of the Arbitration and Conciliation Act.
The Union Territory of J&K relied on Article 299 of the Indian constitution and reasoned that there could be no contract by implication. They further stated section 7 of the Arbitration and Conciliation Act, states that agreements must be in writing to invoke an arbitration.
The AK Engineers and Contractors Pvt Ltd primarily relied on a twofold counter, firstly they stated section 7(4)(b) of the Arbitration and Conciliation Act, 1996, contending that the exchange of communications plainly proves the presence of a written agreement, and therefore the other side cannot rely on Article 299 of the Constitution to contest the existence of a contract.
Further, even if no additional contract existed, the advantage of the apparent lack of a contract cannot be taken, as there was an acknowledgment of completion of work with their consent and approval. Further, Referring to Section 70 of the Indian Contract Act, it was contended that accountability under this provision cannot be avoided since the task was not performed pro bono and there was due consideration.
Analysis of the Court
The Court noted that the petitioner was initially required to construct a single-lane bridge, but the scope of the work was increased and a two-lane bridge was constructed instead. The respondent also took administrative actions such as revising the DPR, approving the design for a two-lane bridge, and carrying out the work by the revised DPR, even though no agreement was executed for the additional work and no changes were made to the original work.
The Court found that the original contract’s arbitration clause extended to any dispute arising from additional work undertaken without the execution of a formal agreement.
As a result, the petition was granted, and Justice (Retd.) M.K. Hanjura was appointed as the sole arbitrator.
Pro Arbitration step for Complex transactions
India in the status quo is focused on rapid infrastructure development. In such a scenario when parties enter into contractual relationships and they opt for arbitration as the mode of dispute resolution. In such situations, the commercial reality analysis as proposed by many distinguished commentators in arbitration suggests that “the arbitration clause of a main overarching agreement between parties can extend to subsequent contracts concluded under the same economic transaction even if the subsequently concluded contracts do not have an arbitration clause.”
This judgment does not only concur with the commercial reality analysis but also takes a step further where it extends the applicability of the arbitration clause of a contract to disputes arising out of work concluded in the economic transaction, even if there is no formal contract outlining the same.
It can be seen as a move to encourage arbitration in disputes where the original contract concluded between parties does not specifically outline every work that is to be undertaken by the parties. Subsequently, when a dispute arises out of a task that is not mentioned in the original contract, such a dispute can also be submitted to arbitration, if the party can prove that the task constituted an integral part of the commercial contract concluded between the parties. Even when the parties did not outline such a task in the contract or amend the contract to specifically include the task within the purview of the contract in a written form, such a dispute is covered under the ambit of the arbitration agreement.
The judgment does not demarcate what shall be constituted as integral or not integral in a transaction, however, a reasonable approach can be taken and general business practices of the industry and general norms relating to the nature of the dispute can be analyzed to understand if the work forms as an integral part of the transaction or not. Such an approach can be an indicator to assess the parties’ intent on whether they want to settle a dispute arising from a specific work in their transaction through arbitration.
Takeaways for future arbitrations
One of the reasons parties opt for arbitration is because it requires less paperwork and formality compared to litigation, The specific intention of the parties can be seen while they are entering into business relationships with other entities, even if they are not formalizing their agreements through paperwork and giving them effect in writing, the judgment gives enough credibility to the oral communications that took place between the parties as an indication to submit their disputes to arbitration as they arose out of a single transaction.
This judgment can also be seen as a guide in interpreting the intent of the parties concerning arbitration when they enter into complex transactions. For, instance, the administrative actions undertaken by the respondent signified their intent to submit the dispute to arbitration without the existence of a formal affirmation on their part. Moreover, it also indicates the applicability of the principle of estoppel against the party. They willingly took some steps in furtherance of their intent after entering into a transaction. Actions to the contrary would have been an indicator of a change in the intent of the party and as an implication, it may have signified their lack of consent to extend the applicability of the arbitration clause of the initial agreement to any additional work subsequently concluded between the parties.
The Judgment will also serve as a guide for future tribunals in determining the scope of an arbitration agreement. The arbitrators will be able to extend the applicability of clauses to additional tasks placing reliance on the judgment. It will also serve as a valid reasoning for courts to assess the validity of an arbitral award pronounced in such cases, as such cases have an obvious threat of getting set aside on the grounds provided under section 34(2)(iv) which is applicable in cases where tribunals extend the scope of the agreement beyond its intended purview and pronounce the award.
Conclusion
In this article, the author has tried to analyze the probable implications of the recent judgment pronounced by the J&K High Court in the Case of AK Engineers and Contractors Pvt Ltd v. Union Territory of J&K. The reasoning of the court signifies a pro-arbitration approach where the court has extended the purview of the arbitration agreement to an additional work concluded between the same parties stating that as it was an integral part of the transaction. Further, an explicit written agreement to cover the work under the ambit of the arbitration agreement was not required. The judgment will serve as a guide in cases of complex disputes submitted to arbitration in India, where parties do not specifically demarcate every task that needs to be undertaken in the course of their commercial relationship in the underlying contract. The reasoning is also valuable to assess the intent of parties in future transactions of similar nature. This is an encouraging step for more parties to opt for arbitration as it also in a way resolves the issue of challenge to awards at the enforcement stage on the grounds that the arbitral tribunal pronounced an award in a dispute which is beyond the scope of the arbitration agreement.
Author’s bio:
Devansh Dubey is a third-year law student at National Law Institute University, Bhopal.
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