LoA Not Issued, But Bid Documents Establish Contractual Relationship - Arbitration Clause Can Be Invoked : Orissa High Court

Parina Katyal

30 Sep 2022 9:00 AM GMT

  • LoA Not Issued, But Bid Documents Establish Contractual Relationship - Arbitration Clause Can Be Invoked : Orissa High Court

    The Orissa High Court has ruled that where a tenderer/bidder is declared as a 'Preferred Bidder', the arbitration clause incorporated in the tender document can be invoked by the bidder, even if no tender is awarded to it and no formal contract is concluded between the parties. The Court held that the arbitration clause contained in the tender document, which provided for referring...

    The Orissa High Court has ruled that where a tenderer/bidder is declared as a 'Preferred Bidder', the arbitration clause incorporated in the tender document can be invoked by the bidder, even if no tender is awarded to it and no formal contract is concluded between the parties.

    The Court held that the arbitration clause contained in the tender document, which provided for referring the disputes which arose prior to the execution of the contract to arbitration, is an arbitration agreement in terms of Section 7 of the Arbitration and Conciliation Act, 1996 (A&C Act).

    The Single Bench of Chief Justice S. Muralidhar reiterated that at the stage of referring the parties to arbitration, the Court is only required to exercise the power of prima facie judicial review regarding the existence of an arbitration agreement.

    The respondent Mahanadi Coalfields Ltd. issued a notice inviting tender for setting up a Washery. The petitioner- M/s. Jhar Mining Infra Private Ltd., submitted its bid. The respondent issued a Letter of Intimation (LOI) to the petitioner, declaring it the lowest bidder. The LoI provided that a Letter of Acceptance/ Letter of Award (LoA) would be subsequently issued to the petitioner after the receipt of environmental clearance (EC).

    The petitioner accepted the LoI and provided assistance to the respondent in obtaining the environmental clearance for the project. Thereafter, the respondent cancelled the tender and the LoI issued to the petitioner.

    The petitioner issued a notice to the respondent invoking the arbitration clause contained in the tender document.

    The respondent, in its reply to the said notice, contended that cancellation of the tender and the LoI by the respondent was not a dispute covered under the arbitration clause, as contained in the tender document. Hence, the petitioner filed a petition under Section 11(6) of the A&C Act before the Orissa High Court, seeking appointment of an arbitrator to adjudicate the disputes between the parties.

    The respondent- Mahanadi Coalfields Ltd., submitted before the High Court that no Letter of Award (LoA) was issued to the petitioner and that it was only issued an LoI. Thus, the respondent argued that there was no contractual relationship between the parties since there was no formal contract entered into between them. Hence, it averred that the petitioner cannot be considered a 'selected bidder'.

    The respondent added that the arbitration clause present in the tender document/ General Terms and Conditions of the Contract (GTC) is applicable only to a successful bidder after an agreement is executed between the parties.

    The petitioner- M/s. Jhar Mining Infra, contended that since the LoI issued by the respondent was accepted by the petitioner, it constituted a binding contract between the parties and hence, the petitioner was a 'successful bidder' in terms of the tender documents. The petitioner added that the respondent, by requiring the petitioner to facilitate and assist it in obtaining the environmental clearance and other statutory clearances, considered the petitioner as a 'selected bidder'. Hence, the petitioner contended that the parties intended to create a binding contract by issuing the LoI. It further argued that the arbitral tribunal is competent to rule on its own jurisdiction and decide on the existence of an arbitration agreement under Section 16 of the A&C Act; therefore, the parties should be relegated to arbitration.

    The Court observed that as per the tender documents, the 'LoA' is defined as an official communication issued by the respondent, notifying the Bidder about the acceptance of its Bid and for inviting him to sign the Contract. The Court noted that though an LoA was not issued to the petitioner and there was no concluded contract between the parties, however, the respondent by issuing the LoI acknowledged the petitioner as the lowest bidder and the 'Preferred Bidder'. The bench added that there was prima facie merit in the contention of the petitioner that by accepting the LoI, a contractual relation came into existence between the parties.

    Further, the Court referred to the arbitration clause contained in the tender document, which provided that all disputes arising during the course of execution of the contract between the tenderer and the tenderee shall be settled by an in-house mechanism, failing which it shall be referred to arbitration.

    The Bench noted that the Supreme Court in Bharat Sanchar Nigam Limited versus Telephone Cables Ltd. (2010) had held, in the facts of that case, that unless a purchase order was placed in a tender, the General Terms and Conditions of the Contract (GTC), which included the arbitration agreement, would not come into existence or operation and would not become a part of the contract.

    The Court further referred to the decision of the Apex Court in Vidya Drolia versus Durga Trading Corporation (2020), where it was held that at the stage of referring the parties to arbitration, the Court is only expected to exercise the power of prima facie judicial review regarding the existence of an arbitration agreement.

    Refuting the contention of the respondent that there was no arbitration agreement between the parties in terms of Section 7 of the A&C Act, the Court held that though there may not be a concluded contract between the parties; however, it cannot be said that there was no contractual relationship between them.

    The Court added that the use of the term "during the course of execution" in the arbitration clause, obligated the parties to refer the disputes arising even prior to the actual execution of the contract to arbitration.

    "While therefore, there may not be a concluded formal contract, it would not be entirely correct for MCL to contend that there is no contractual relationship whatsoever between the parties. The reference in Clause 4(A).37 to the disputes arising "during the course of execution" has to be understood as disputes arising even prior to the actual execution of the contract, since clause 1.3.2.5 envisages obligations of the parties at a stage even prior to the formal execution of the contract."

    The Court thus ruled that the prima facie test, as provided for by the Apex Court in Vidya Drolia (2020), was satisfied in the present case.

    "The Court is therefore, satisfied, on a prima facie judicial review in the sense in which the expression is used in Vidya Drolia (supra) by the Supreme Court, that the Petitioner does have an arguable case as regards the existence of an arbitration agreement between the parties and the conditions for its invocation of have prima facie been fulfilled. Nevertheless, in terms of the law explained in the above decisions, it would be still open for the MCL to apply to the Sole Arbitrator under Section 16 of the Act to invite a ruling on the existence of a valid arbitration agreement in terms of the aforementioned clauses referred to hereinbefore. If such an application is filed, it will be decided independent of the observations in this judgment.", the Court said.

    The Court thus appointed a sole Arbitrator and referred the parties to arbitration.

    Case Title: M/s. Jhar Mining Infra Private Limited versus CMD, managing Coalfields Ltd. & Ors.

    Dated: 27.09.2022 (Orissa High Court)

    Counsel for the Petitioner: Mr. Gautam Misra, Sr. Advocate

    Counsel for the Respondents: Mr. Debaraj Mohanty, Advocate

    Citation: 2022 LiveLaw (Ori) 145 

    Click Here To Read/Download Order

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