Holding

Part I of the Arbitration and Conciliation Act, 1996 applies to international commercial arbitrations unless excluded, the petition is maintainable, and the questions of contract existence, non‑est status, and third‑party joinder are for the arbitrator, with no waiver of the British arbitration rules.

Summary

Mis Aurohill Global Commodities Ltd., a Cyprus‑based exporter, entered into a draft purchase order with Mis M.S.T.C. Ltd. for the sale of steel billets. The purchase order contained an arbitration clause mandating disputes be resolved in London under the rules of Great Britain and a jurisdiction clause conferring exclusive jurisdiction to British courts. After a dispute, Aurohill served a legal notice proposing that the Arbitration and Conciliation Act, 1996 govern the procedural law, to which M.S.T.C. replied in principle but claimed the contract was non‑est and that no waiver of the British rules occurred. Aurohill filed an application under Section 11(9) read with 11(5) of the Act for appointment of an arbitrator. The Supreme Court held that Part I of the Act applies to international commercial arbitrations even when held outside India unless the parties expressly exclude it, and therefore the petition was maintainable. The Court ruled that questions of whether the draft purchase order formed a binding contract, its non‑est status, and the joinder of the ultimate buyer are matters for the arbitral tribunal. The respondent’s reply did not waive the British arbitration rules, so those rules continue to govern the proceedings. The petition was disposed of without any order as to costs.

Issues considered

Whether Part I of the Arbitration and Conciliation Act, 1996 applies to international commercial arbitrations held outside India.
Whether the petition for appointment of an arbitrator is maintainable despite the respondent’s claim that the draft purchase order is non‑est and that no arbitration agreement exists.
Whether the existence and validity of the contract, its alleged non‑est status, and the necessity of joining the ultimate buyer are questions for the arbitral tribunal.
Whether the respondent’s reply to the legal notice constitutes a waiver of the British Rules of Arbitration, allowing the Indian Act to govern procedural law.

Legislation cited

Arbitration and Conciliation Act, 1996s. 11(5), s. 11(9), s. 16

Subjects

International commercial arbitrationArbitration Act applicabilityNon‑est contractWaiver of arbitration rulesArbitration clauseJurisdiction clauseAppointment of arbitratorBritish Rules of Arbitration

Judgment

MIS AUROHILL GLOBAL COMMODITIES LTD. A
v.
MIS M.S.T.C.LTD.

JULY 31, 2007

[S.H. KAPADIA, J.] B

Arbitration and Conciliation Act, I 996:

Applicability of the Act-To international commercial arbitration--
Held: The Act is applicable to internatiOnal commercial arbitration held C
outside India, unless any or all the provisions of the Act have been excluded
by an agreement between the parties expressly or by implication.

s. I I (9) rlw s. I I (5)-Appointment of arbitrator-International
commercial transaction-One of the contesting Companies purchasing goods D
on behalf of a third Company from the other contesting Company-Issuance
of Draft Purchase Order by the purchasing Company-Arbitration clause
specifying applicability of British law of arbitration-Dispute regarding
·transaction-Legal notice by selling Co,;,pany-Proposing therein ·to be
governed by the Act-Acceptance thereof by the purchasing Company-
Petition for appointment of arbitrator-Maintainability questioned-On the E
ground that it· was based on non est contract-Held: The petition is
maintainable as the Act is applicable also to international commercial
arbitration-The questions regarding validity of the contract and non-joinder
of the third company to be decided by the arbitrator-However, British law
of arbitration would be applicable to the arbitral proceedings as per the F
terms of the arbitration clause.

In an international transaction, respondent-Company was to purchase
goods on behalf of a third company from the petitioner-company. After
negotiations between both the companies, respondent-Company issued a Draft
Purchase Order and the same was accepted by the petitioner-company. In the G
Arbitration clause of the Draft Purchase Order specified settlement of
disputes in accordance with rules of arbitration of Great Britain and the
jurisdiction of the Court was spetified to be o(London.

After a dispute regarding the transaction arose, petitioner sent a legal
689 II
690 SUPREME COURT REPORTS [2007) 8 S.C.R.

A notice to the respondent for settlement of the dispute through arbitration
proposing to be governed by Arbitration and Conciliation Act, 1996 for the
purpose of procedural law and Indian Contract Act as substantive iaw. The
respondent by his reply to the notice agreed in principle to be guided by the
Arbitration Act.

B Petitioner filed an application for appointment of Arbitrator under the
Act. Respondent-Company objected to the maintainability of the petition on
the grounds that the petition was based on the contract which was non est as
the Dntft Purchase Order did not constitute a valid and binding contract
between the parties; and that this Court could not appoint an arbitrator of its
C own choice, as the arbitration clause specified applicability of British law of
arbitration.

Petitioner -:ontended that respondent would be deemed to have waived
his right to be governed by the British Law in view of its reply to the legal
notice agreeing to be guided by the Indian Law.
D
Disposing of the petition, the Court

HELD: 1. Provisions of Part I of the Arbitration and Conciliation Act,
1996 are equally applicable to international commercial arbitration ("ICC")
held outside India, unless any or all the provisions have been excluded by an
E agreement between the parties, expressly or by implication, therefore, where
arbitratfon is to be carried out as per rules of lCC, parties can deviate only to
the extent permissible. (Para 12( (695-A)

Bhatia International v. Bulk Trading S.A. and Anr., (2002) 4 SCC 105,
relied on.
F
. 2. In the present case, the petitioner-company has filed this petition
un:ler Section 11(9) read with Section 11(5) of Arbitration and Conciliation
Act, 1996. Section 11 falls in Part I. The alleged contract is an international
transaction, therefore, this Court has the power to appoint an arbitrator in
accordance with the terms of the contract. Under the Act, the arbitnil tribunal
G has very wide powers. The powers of the courts have been curtailed'. The
arbitral tribunal's authority under Section 16 of the Act is not confined to
the width of its jurisd.iction but goes .to the very root of its jurisdiction.
Therefore, it cannot be said that the arbitration petition was misconceived
·and not maintainable in law. (Para 13) (695-B, C, DJ
H
AUROHILLGLOBALCOMMODITIES LTD. v. M.S.T.C. LTD. 691

r_..,. Secur Industries Ltd v. Godrej and Boyce Mfg. Co. Ltd and Anr., (2004) A
3 SCC447, relied on.

3. The question as to whether the Draft Purchase Order acquired the
character of a concluded contract or not and the question as to whether the
contract was non est can only be decided by the arbitrator. Therefore, the
aforestated question have got to be decided by arbitration proceedings. The B
objections raised on behalf of the respondent the arbitration proceedings were
not maintainable on account ofnon-joinder of third Company who was the
ultimate buyer also is required to be raised by the respondent before the
arbitrator. Therefore, the arbitration petition was maintainable under the Act
(Para 13) (695-D, E) C
4. The reply to the legal notice concurred only in principle to the offer
made by the petitioner to be guided by the 1996 Act so far as the procedural
law is concerned. Further, it cannot constitute a waiver because it is a without
prejudice concurrence. In the circumstances, the parties shall abide by the
terms of the alleged contract Moreover, it is well settled that parties have to D
stand by the terms of the contract The present case relates to an international
-~
transaction. The parties entered into the alleged contract with open eyes. They
agreed to settle their disputes by arbitration in London and in accordance
with the rules ofarbitration ofGreat Britain. Moreover, vide clause 20 of the
alleged contract the parties argued that the competent court in Great Britain
alone shall have exclusive jurisdiction to decide all matters including E
arbitration proceedings to be instituted. Reading clauses 19 and 20 conjointly,
it is clear that the procedural law application to the arbitration proceedings
had to be the British Rules of Arbitration. In the circumstances, it is not
possible for this Court to substitute the British Rules of Arbitration by the
procedural law under the 1996 Act. [Para 14) F
CIVIL APPELLATE JURISDICTION: Arbitration Petition No.8 of2007

. Under Section 11 (6) of the arbitration an_d Conciliation Act, 1996.

Sunil Kumar, Shree Prakash Sinha, Abhishek Singh, Anshuman Kr.& G
Shekhar Kumar. for the Petitioner.

Chetan Sharma, Ramini Taneja and Anil Shrivastav for the Respondent.

The Judgment of the Court was delivered by

H
•
j

r
692 SUPREME COURT REPORTS [2007) 8 S.C.R.

A KAPADIA, J. I. Mis Aurohill Global Commodities Ltd. has filed an
arbitration application herein under Section 11(9) read with Section 11(5) of
the Arbitration and Conciliation Act, 1996 (the "said Act") for the appointment
of arbitrators to settle the dispute between the said company and Mis M.S.T.C.
Ltd. (PSU). The facts giving rise to this petition briefly are as follows.

B 2. Petitioner company is based in Cyprus having its offices in Russia
and India. Petitioner has been exporting steel products for more than a
decade.

3. Vide letter dated 2.3.2005, Mis Sunvijay Rolling and Engineering Ltd.,
Nagpur placed an order on the petitioner for supply of 5000 MT of Billets.
C Accordingly, on 10.3.2005 petitioner forwarded proforma invoice to the said
Sunvijay Rolling and Engineering Ltd. for the required quantity of Billets for
a total consideration of US $ 22,25,000. Payment was to be made through ·
irrevocable confirmed-letter of credit ("LC") payable 100% at sight Petitioner's
banker was Mis BNP. Subsequently, Mis Sunvijay Rolling and En~ineering
D Ltci. informed the petitioner that they prefer to buy the Billets through Mis
M.S.T.C. Ltd. (respondent herein).

4. On 24.3.2005 a Draft Purchase Order dated 24.3.2005 was issued by
Mis M.S.T.C. Ltd. which was accepted by the petitioner. It is the.case of the
petitioner that the said purchase order was issued as a result of negotiations
E ·between the petitioner and Mis M.ST.C. Ltd .. According to the petitioner,
this constituted a contract between the parties at Kolkata. The date ofshipment
was 15.5.2005 and payment was to be made through irrevocable LC to be
opened by First Class Indian Bank. The LC was to be made operative only
after receipt of credential report from Dan & Bradstreet. Clauses 19 and 20 of
F the Purchase Order read as under:
"19. ARBITRATION:

Any disputes, controversies and/or claims arising out of or relating
to this agreement or any modification thereto, or any alleged breach
or cancellation thereof, which cannot be settled amicably between
G Seller and buyer, shall be settled by arbitration in London,. arid in
accordance with rules of arbitration of the _Great Britain arbitration
and the award in pursuance thereof shall be binding on the parties.

(emphasis supplied)

H 20. JURISDICTION:
AUROHILL GLOBAL COMMODITIES LTD. v. M.S.T.C. LTD. [KAPADIA, J.] 693
The competent court under the laws applicable in Great Britain alone A
shall have exclusive jurisdiction to decide all matters, disputes and
controversies relating to this contract, including arbitration proceedings
instituted or to be instituted. The jurisdiction of court will be London."

5. On 29.3.2005 Mis M.S.T.C. Ltd. requested Mis Indian Overseas Bank,
Kolkata for opening of an irrevocable LC. Accordingly, Mis Indian Overseas B
Bank informed the petitioner's bankers that LC has been opened on the
request of Mis M.S.T.C. Ltd. and that the petitioner was the beneficiary under
the LC. The date of expiry of the LC was 5.6.2005. The last date of shipment
was 15.5.2005. The LC was to operate only after receiving confirmation from
the Opening Rank. C
6. On 20.4.2005 the petitioner's banker confirmed the LC. The LC was
payable against presentation of FCR (a receipt of confirmation) of goods at
the port of loading.

7. On 10.5.2005 it is allegi::d that the petitioner received the requisite D
confirmation on which basis the petitioner prepared the goods for shipment.
I -'°i' The goods arrived at the port in Ukraine and a FCR was issued to this effect.
The said receipt was presented to the bank along with the documents. However
on 13.5.2005 Mis Sunvij!!Y Rolling and Engineering Ltd. addressed a letter to
the petitioner to suspend all the dispatches on the LC opened by Mis
M.S.T.C. Ltd. On the same day, the petitioner informed Mis Sunvijay Rolling E
and Engineering Ltd. that it was not possible to suspend the dispatches as
the goods were already placed at the port. Mis Sunvijay Rolling and
Engineering Ltd. requested the petitioner vide letter dated 23.5.2005 to decrease
the price by US $ 50 PMT. The petitioner was further informed that the LC
would remain suspended till the petitioner agrees to decrease in the price. The F
petitioner refused to reduce the price. On 26.5.2005 the bankers of Mis
M.S.T.C. Ltd. stated that the LC was inoperative as certain conditions were
not satisfied, namely, non execution of the performance guarantee. According
to the petitioner herein, there was no such requirement in the alleged contract
dated 24.3.2005.
G
8. Ultimately, on 31.5.2005 Mis M.S.T.C. Ltd. infonned the petitioner that
the LC stood cancelled.

9. On 23.8.2006 a legal Notice was given by the petitioner requesting Ml
s M.S.T.C. Ltd. to settle the dispute through arbitration before a sole arbitrator.
By the said Notice, the petitioner stated that it was aggreable to be governed H
694 SUPREME COURT REPORTS (2007) 8 S.C.R.

A by Arbitration and Conciliation Act, I 996 for the purposes of procedural law
as the substantive law applicable was the Indian Contract Act. In response
to the said Notice, Mis M.S.T.C. stated vide reply dated 19.9.2006 that the
alleged contract was non est and that the above Purchase Order did not
constitute a valid and binding contract between parties. They contended that
the Purchase Order was a draft and that it never became a binding contract
B since the conditions preceding did not materialize. M/s M.S.T.C. Ltd. further
contended that there was no concluded contract, much less an agreement to
arbitration. _However, without prejudice to the aforestated contentions, Mis
M.S.T.<;. Ltd., in its reply, stated that if the petitioner insisted on arbitration y~
'then it had no option but to concur in principle to be guided by the said
C Act for the purpose of procedural law as well as the substantive law, namely,
the Indian Contract Act. One of the contentions raised on behalf of the
,
I==
petitioner herein is that vide letter dated 19.9.2006 Mis M.S.T.C. Ltd. had
waived its option to be governed by the Rules of Arbitration of Great Britain I
as mentioned in clause 19, quoted above.

D I 0. By way of counter, Mis M.S.T.C. Ltd. submitttd that the arbitration ~
petition was not maintainable as it was based on an alleged contract, which,
in any event, was non est as it did not constitute and as it did not acquire
the character of a valid and binding contract between the parties. According
y l
\:=
to Mis M.S.T.C. Ltd. the Draft Purchase Order on which the petitioner has
E made its claim was a provisional one and never matured in terms of a binding t
or conclusive contract and since there was no contract there was no arbitration
agreement and,_ therefore, the present petition was misconceived and ~
inappr~priate. According to Mis M.S.T.C. Ltd. the Draft Purchase Order ~
l-
cannot be vested with the trapping of a binding or .conclusive contract and,
therefore, the said Order did-not constitute an arbitration agreement. It was
F further submitted by M/s M.S.T.C. Ltd. that, in any event, this Court cannot
appoint an arbitrator of its own choice as the ·arbitration clause itself states
that all disputes and/or claims arising out of the agreement for alleged breach
shall be settled by arbitration in London and in accordance with the rules of
arbitration of Great Britain.

G I I. Two questions arise for determination. Firstly, whether the question
as to whether the Draft Purchase Order constituted a concluded contract and/
or whether such contract was non est could be decided by me in this petition
in which the petitioner has sought the appointment of an arbitrator.

12. In the case of Bhatia International v. Bulk Trading S.A. and Anr.,
H
AUROHILLGLOBALCOMMODITIES LTD. v. M.S.T.C. LTD. [KAPADIA,J.) 695

reported in [2002] 4 SCC I 05 this Court held that provisions of Part I of the A
Arbitratior.o and Conciliation Act, 1996 are equally applicable to international
commercial arbitration ("ICC") held outside India, unless any or all the
provisions have been excluded by an agreement between the parties, expressly
or by implication, therefore, where arbitration is to be carried out as per rules
of ICC, parties can deviate only to the extent permissible.

13. In the present case, Mis Aurohill Global Commodities Ltd. has filed
this petition under Section l I(9) read with Section 11(5) of the said Act.
Section I I falls in Part I. The alleged contract is an international transaction,
therefore, this Court has the power to appoint an arbitrator in accordance with
the terms of the contract. Under the said Act, the arbitral tribunal has very C
wide powers. The powers of the courts have been curtailed. The arbitral
tribunal's authority under Section 16 of the said Act is not confined to the
width of its jurisdiction but goes to the very root of its jurisdiction [see: Secur
Industries Ltd. v. Godrej & Boyce Mfg. Co. Ltd. and Anr., [2004] 3 SCC 447].
In the present case, therefore, the question as to whether the Draft Purchase
Order acquired the character of a concluded contract or not and the question D
....... as to whether the contract was non est can only be decided by the arbitrator.
Therefore, the aforestated question have got to be decided by arbitration
proceedings. In my view, therefore, there is no merit in the contention advanced
on behalf of Mis M.S. T.C. Ltd. that the arbitration petition was misconceived
and not maintainable in law. Before concluding on this point, one of the E
objections raised on behalf of Mis M.S.T.C. Ltd. was that, in any event, the
arbitration proceedings were not maintainable on account of non-joinder of
Mis Sunvijay Rolling and Engineering Ltd., who was the ultimate buyer. In
my view, the objection was also required to be raised by Mis M.S.T.C. Ltd.
before the arbitrator. Therefore, on the first issue, I am of the view that the
arbitration petition was maintainable under the said Act. F
14. The second question which arises for determination in the present
case is whether by virtue of reply dated 19.9.1996 to the legal notice given
by the petitioner, Mis M.S.T.C. Ltd. could be said to have waived its ri<>ht
to claim holding of arbitration proceedings in accordance with the Brit~h
Rules of Arbitration as mentioned in clause 19, quoted above. To recapitulate, G
on 23.8.2006 a legal notice was given by the Advocate for the petitioner to
M.S.T.C. Ltd .. After stating of the facts and submission, petitioner requested
Mis M.S.T.C. Ltd. to give its consent for settlement of disputes throu<>h
arbitration befor~ a ~ole arbitrator. By the said legal notice, petitioner propos:d
t~e place of arb1trat10n at New Delhi instead of London. By the said Notice, H
696 SUPREME COURT REPORTS [2007) 8 S.C.R.

A the petitioner stated that it was agreeable to be governed by the said Act so
far as the procedural law is concerned. According to the petitioner, vide letter
dated 19.9.2006 addressed by the Advocate for M/s M.S.T.C. Ltd., the
respondent agreed in principle to be guided by the said Act so far as the
procedural law was governed and this letter, therefore, constituted waiver on t~:,..
B the part of M/s M.S.T.C. Ltd. to be governed by the British Rules of Arbitration
as mentioned in clause 19, quoted above. There is no merit in the contention
advanced on behalfof the petitioner. The letter dated 19.9 .2006 addressed by
the Advocate for M/s M.S. T.C. Ltd. concurred only in principle to the offer
made by the petitioner to be guided by the said 1996 Act so far as the
procedural law is .concerned. Further, it cannot constitute a waiver because
C it is a without prejudice concurrence. In the circumstances, the parties shall
abide by the terms of the alleged contract. Moreover, it is well settled that
parties have to stand by the terms of the contract. We have before us an
international transaction. Petitioner is a company registered in Cyprus. The
parties entered into the alleged contract with open eyes. They agreed to settle
their disputes by arbitration in London and in accordance with the rules of
D arbitration of Great Britain. (emphasis supplied by me). Moreover, vide
clause 20 of the alleged contract the parties argued that the competent court
in Great Britain alone shall have exclusive jurisdiction to decide all matters
including arbitration proceedings to be instituted. Reading clauses 19 and 20
conjointly, it is clear that the procedural law application to the arbitration
E proceedings had to be the British Rules of Arbitration. In the circumstances,
it is not possible for this Court to substitute the British Rules of Arbitration
by the procedural law under the said 1996 Act.

15. Accordingly, I hold that the question as to whether there existed a
concluded contract, the question as to whether the alleged contract was non
F est and the question as to whether M/s Sunvijay Rolling and Engineering Ltd.
was necessary and proper party are all questions to be decided in the arbitration
proceedings and, to that .extent, this petition is maintainable under the
Arbitration and Conciliation Act, 1996. However, as stated above, there is no
waiver of the British Rules of Arbitration and, therefore, the parties are bound
G by the terms of the arbitration clause no. 19 quoted hereinabove.

16. Accordingly, the arbitration petition stands disposed of with no
order as to costs.

K.KT. Arbitration Petition disposed of.