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 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...

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

Parina Katyal

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

Parina Katyal

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Parina Katyal

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