Arbitration and Conciliation Act, 1996 — Section 11(6A) — Scope of enquiry — At stage of appointment of arbitrator, Court’s jurisdiction is confined to prima facie existence of arbitration agreement and nothing more — Questions relating to arbitrability, accord and satisfaction, limitation or merits are to be left to arbitral tribunal under Section 16 — Doctrine of Kompetenz-Kompetenz reaffirmed. (Paras 20–21, 42)

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Arbitration and Conciliation Act, 1996 — Section 11(6A) — Scope of enquiry —

At stage of appointment of arbitrator, Court’s jurisdiction is confined to prima facie existence of arbitration agreement and nothing more — Questions relating to arbitrability, accord and satisfaction, limitation or merits are to be left to arbitral tribunal under Section 16 — Doctrine of Kompetenz-Kompetenz reaffirmed.

(Paras 20–21, 42)

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Section 11 — Non-existence of arbitration agreement — Exception —

Though courts ordinarily lean in favour of reference (“when in doubt, refer”), where even on a prima facie view no arbitration agreement exists, Court is justified in refusing reference — Present case falls within such exception.

(Para 42)

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Letter of Intent (LOI) — Nature — Whether concluded contract —

Letter of Intent is ordinarily a precursor to a contract and not the contract itself — It signifies intention to enter into contract subject to fulfilment of conditions — Where LOI contemplates issuance of work order and execution of formal agreement, no binding legal relationship arises.

(Paras 30–31, 34–36)

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LOI — “Promise to make a promise” — Effect —

Where LOI merely sets out preliminary steps and contemplates future formal agreement and work order, it constitutes “promise to make a promise” and not a binding contract — No enforceable contractual obligation arises.

(Paras 31, 33–36)

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Arbitration agreement — Section 7 — Requirement of legal relationship —

Existence of arbitration agreement requires defined legal relationship between parties — In absence of concluded contract or binding relationship, arbitration clause cannot be invoked.

(Paras 27–28, 36)

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Section 7(5) — Incorporation of arbitration clause — “Reference” vs “Incorporation” —

Mere general reference to tender documents in LOI does not amount to incorporation of arbitration clause — Specific reference showing intention to incorporate arbitration clause is mandatory — Distinction between “reference” and “incorporation” reiterated.

(Paras 37–39)

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Tender documents — Arbitration clause — Incorporation — Failure —

Where:

• LOI contains only general reference to tender conditions, and
• no specific incorporation of arbitration clause is made,

arbitration clause in tender documents cannot be read into LOI.

(Paras 39–40)

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Conduct of parties — Relevance — Formation of contract —

Submission of bank guarantees and correspondence pursuant to LOI constitute preliminary compliance — In absence of work order and formal agreement, such conduct does not establish concluded contract.

(Paras 34–35, 41)

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High Court — Error under Section 11 —

High Court erred in:

• assuming existence of arbitration agreement, and
• overlooking specific denial by appellant regarding concluded contract —

Appointment of arbitrator unsustainable.

(Para 29)

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RATIO DECIDENDI 

At the stage of Section 11, the Court must confine itself to the prima facie existence of an arbitration agreement; where a Letter of Intent does not create a binding contract and merely contains a general reference to tender documents without specific incorporation of the arbitration clause, no arbitration agreement exists and reference to arbitration must be refused.

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RESULT

• Appeal allowed
• High Court order appointing arbitrator set aside
• Liberty to pursue alternative remedies granted

(Para 43)