This post analyses the law on contract formation in India through the recent case of Trimex International Fze Limited v. Vedanta Aluminium Limited (MANU/SC/0057/2010: 2010 (1) SCALE 574).
Trimex International FZE Limited (“Trimex”), the petitioner, applied to the Supreme Court of India (“SC” or “Court”) under Section 11(6) of the Indian Arbitration and Conciliation Act, 1996 (Act) for the constitution of an arbitral tribunal. Section 11(6) reads:
"Where, under an appointment procedure agreed upon by the parties
(a) A party fails to act as required under that procedure; or
(b) The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) A person, including an institution, fails to perform any function entrusted to him or it under that procedure,
A party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment."
Vedanta Aluminium Ltd., the respondent (“Vedanta”) objected to the application, arguing that there was no contract between the parties and therefore there was no agreement between the parties to refer disputes to arbitration. [See, SBP & Co. v. Patel Engineering Limited MANU/SC/1787/2005: AIR 2006 SC 450: 2005(3) Arb.LR 285 (SC), where the Supreme Court held in case the respondent objected to an application made under Section 11 for the appointment of the arbitral tribunal, the court had to decide on the existence of the arbitration clause and then alone refer the dispute to arbitration or appoint an arbitrator]. A single bench of the SC, consisting of Justice P. Sathasivam, had to decide whether there was a contract and consequently, an arbitration agreement, between the parties.
Trimex is a company registered under the laws of Dubai and is engaged in the business of minerals trading. Vedanta is an Indian company whose business involves aluminium as a major raw material. A detailed chronology of facts is provided below.
09.10.2007 Discussions between Trimex and Vedanta seemed to have taken place for delivery of two lakh metric tonnes of Bauxite. In furtherance of the discussions, Trimex wrote to Vedanta stating that they would have to agree on the technical specifications of the Bauxite cargo and once reached an agreement on the same, they would reach an agreement on the freight.
10.10.2007 Vedanta apparently (by email) asked Trimex to improve upon their proposal, which was refused (by email) by Trimex on the same day. Vedanta relented, but asked Trimex to give two proposals- one for two lakh metric tonnes and the other for a merely two shipments of bauxite. Trimex was asked by Vedanta to give separate proposals on CIF basis and on FOB basis.
15.10.2007 Trimex made a proposal (“Proposal”) to supply Bauxite (through email). Trimex further stated that it would remain open until 12 PM on 16.10.2007, in view of the continuous increase in freights. The Proposal also provided for certain conditions of sale, including those relating to price conditions, liability, payment of interest, governing law and dispute resolution. The Term regarding dispute resolution read: “arbitration in Mumbai courts” (Though this clause seems to suggest reference of disputes to arbitration, such a clause carries a great deal of risk because a court may refuse reference to arbitration if it is contended by the other party that parties intended the disputes to be referred to courts and not arbitration.. Parties need to be a bit more careful when they propose a dispute resolution clause) Vedanta made certain comments on the Proposal and requested Trimex to provide the rates on FOB basis. On the same date, Trimex responded rejecting the acceptability of Vedanta’s comments and refused to provide quotes on FOB basis.
16.10.2007 Vedanta responded, requesting Trimex, inter alia, to provide rates CIF Kakinada and the break up of price quoted. Trimex stated that they had extended the time for acceptance by one hour and asked Vedanta if they were willing to accept their offer. After further correspondences, Vedanta agreed to the Proposal of Trimex but also stated that they would like to have an option to terminate the contract after two shipments of bauxite. However, despite the time having expired, Vedanta wrote to Trimex accepting Trimex’s proposal for all the five shipments.
17.10.2007 Trimex, relying on the agreement with Vedanta, approached a Bauxite supplier in
Australia who agrees to provide the shipments and entered into a Charter Party with a ship owner at . On the same date, Vedanta informed Trimex that their agent was not taking enough initiative to handle the first shipment of the cargo. Oslo, Norway
20.10.2007 Trimex provided the schedule of shipments, as agreed with the Ship owners, to Vedanta and stated that they would have to execute an agreement with Vedanta and agree on the modalities of a Letter of Credit. Further Trimex also requested Vedanta to provide a draft agreement
26.10.2007 Meeting held between Trimex and Vedanta where, as per the Minutes of the Meeting, Vedanta recognised the acceptance of Trimex’s Offer. The Minutes provided, inter alia, “[a]s per Trimex offer No. TID/F/223/2007 dated 15th October 2007 and accepted by VAL [Vedanta], the price is on CIF-FO basis. As per Trimex under such a situation the berthing responsibility should be with VAL” Further, the Minutes provided that parties would finalize the contract.
30.10.2007 The terms of the contract were provided by Trimex to Vedanta
02.11.2007 Trimex sent the terms of the Charter Party as received from the owners of the ship to Vedanta. Further, Trimex requested Vedanta to finalise the contract and the Letter of Credit.
08.11.2007 Formal agreement was sent by Vedanta to Trimex which contained, inter alia, the following arbitration clause.
The Parties hereto shall endeavour to settle all disputes and differences relating to and/or arising out of the Contract amicably.
In the event of the Parties failing to resolve any dispute amicably the same shall be referred to Arbitration in accordance with the Arbitration and Conciliation Act 1996, as is prevalent in
. Each Party shall be entitled to nominate an Arbitrator and the two Arbitrators so nominated shall jointly nominate a third presiding Arbitrator. The Arbitrators shall give a reasoned award. India
The place of arbitration shall be Mumbai,
Maharashtra in accordance with Indian Law and the language of the arbitration shall be English.
The Parties further agree that any arbitration award shall be final and binding upon both the Parties."
The Parties hereto agree that the Seller shall be obliged to carry out its obligations under the Contract even in the event a dispute is referred to Arbitration.”
On the same day, Trimex gives certain clarifications on the “draft contract”. However, Trimex had no comments on the above arbitration clause
09.11.2007 Formal Bauxite Sales Agreement with Rio
for the supply of 225000 tonnes of Bauxite Tinto, Australia
12.11.2007 According to Vedanta, Vedanta asks Trimex to hold the next consignment of Bauxite till further notice. Trimex replied stating that Vedanta would have to indemnify Trimex for any claims from the ship owner for any delay/ cancellation of the shipments.
13.11.2007 Trimex said that it was impossible to hold the consignment and asked Vedanta to purchase the same.
Meanwhile, the ship owners nominated the ship for loading the material on 28.11.2007
16.11.2007 Trimex terminated the contract and reserved its right to claim damages against Vedanta
18.11.2007 Trimex gave a formal notice to ship owners informing them about the termination of the Charter Party
19.11.2007 The ship owner made a claim for US $ 1 million
30.11.2007 Trimex asked Vedanta to pay US $ 1 million as compensation for loss because of the estimated loss for the shipments and US $ 0.8 million as compensation for loss of profit and other costs due to the termination of the contract. Vedanta rejected the claim for the compensation.
27.02.2008 and 31.03.2008 Trimex and the ship owner agreed on a mutual settlement. According to the settlement, Trimex agreed to pay US $ 600,000 in two instalments. The said instalments were paid on 27.02.2008 and 31.03.2008
01.09.2008 Trimex called upon Vedanta to pay compensation to it and treat the notice as a notice invoking arbitration under Cl. 29 of the Formal Agreement if Vedanta failed to pay the same. Trimex nominated Justice Shiv Shankar Bhatt, a retired Judge of the Karnataka High Court as the arbitrator from its side and requested Vedanta to nominate its own arbitrator.
14.11.2008 Vedanta rejected the notice invoking arbitration on the ground that there was no concluded contract between the parties.
Hence, Trimex approached the Supreme Court under Section 11(6) of the Act for the appointment of arbitrator.
When an application is made to a court under Section 8 or 11 of the Act, and the same is contested, the threshold question that the court has to decide is whether there was an agreement to refer any dispute to arbitration or not arbitration.
In such cases, the respondent usually raises an objection the application contending that there was no arbitration agreement between the parties. In the instant case, Vedanta raised such an objection. It contended that there was no contract between the parties because:
- the email dated 15.10.2007 and acceptance thereof could not be construed as a contract because the terms of the agreement were vague and ambiguous. Further, the parties had not even agreed upon various essential terms such as price, delivery point, insurance, time schedule, transfer of title, demurrage etc.
- it was always the intention of the parties that a formal contract would be signed between the parties.
Decision:The Contract was concluded on 17.10.2007 when, in terms of Section 4 of the Indian Contract Act, 1872, the acceptance was communicated to Trimex. Section 4 of the Indian Contract Act, 1872 reads:
Section 4 of the Indian Contract Act, 1872 states:
“Communication when complete.-The, communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.
The communication of an acceptance is complete,-
as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the, knowledge, of the proposer.”
Against contention of ambiguity, the court held that there was an agreement on essential terms. The court held that commercial parties often enter into an agreement on material terms and enter into a formal agreement later. Simply because parties intended to enter into a formal agreement does not prevent the contract reached from being enforced. The court relied on decisions of the Court of Appeal and the Privy Council and held that the Indian Law was no different from English Law on the said point.
In view of the fact that there was an arbitration agreement between the parties, the Court appointed, pursuant to Clause 6 of the Proposal, Justice B.N. Srikrishna as arbitrator and fixed Mumbai as the venue of arbitration.
Broadly, there are two aspects to this case: one, whether there was a concluded contract between Trimex and Vedanta; two, whether there was an arbitration agreement between the parties.
Existence of a Contract: To recount the facts briefly, on 15.10.2007 Trimex made a proposal for supply of bauxite on certain terms such as price conditions, liability, payment of interest, governing law and dispute resolution. Vedanta needed more information on price. Hence, it requested Trimex to give more information on the price. After making some comments on the terms, which were not accepted by Trimex, Vedanta agreed to the Trimex’s proposal on 16.10.2007. At this stage, the parties seemed to have reached a consensus. Now, the question here would be whether this consensus would constitute a contract. According to Trimex, it did; but from Vedanta’s point of view, it did not, because the terms of the proposal were vague and ambiguous. The court decided that there was no vagueness or ambiguity in the terms.
The contention in this case that there was no contract because the terms of the Proposal were vague is not correct for two fundamental reasons. One, the contract law does not mandate the parties to agree any specific term. It only necessitates that the agreement between the parties must not be uncertain. Section 29 provides:
“Agreements void for uncertainty: Agreements, the meaning of which is not certain, or capable of being made certain, are void.
(a) A agrees to sell to B " a hundred tons of oil ". There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified' description, known as an article of commerce. There is no uncertainty here to make the agreement void.
(c) A, who is a dealer in cocoanut-oil only, agrees to sell to B "one hundred. tons of oil". The nature of A's trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of cocoanut-oil.
(d) A agrees to sell to B " all the grain in my granary at Ramnagar ". There is no uncertainty here to make the agreement void.
(e) A agrees to sell B " one thousand maunds of rice at a price to be fixed by C ". As the price is capable of being made certain, there is no uncertainty here to make the agreement void.
(f) A agrees to sell to B " my white horse for rupees five hundred or rupees one thousand". 'There is nothing to show which of the two prices was to be given. The agreement is void.”
In fact, the Indian Contract Act seems to indicate that the subject matter of the contract must be capable of being identified and the price must be “capable of being made certain”. (See the illustrations to Section 29 above) The parties may agree not to agree on certain aspects and leave it either for the law to decide the same or for negotiation between them if and when situation necessitates so. In this regard, contract law performs the important function of reducing the transaction costs of the parties by supplying default rules, which the parties have an option to contract around. [Ian Ayres and Robert Gertner brought an important insight into the law, in general, and contract law, in particular- the dichotomy of default rules and mandatory rules. According to them, contract law provides for certain rules which could be contracted-around by parties willing to do so. Mandatory rules are those rules which cannot be contracted-around. See, Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87 (1989)].
One of the critical functions of the default rules is to supply default rules to govern the rights and liabilities of the parties who do not wish to incur costs in contracting-around the default rules and providing for elaborate contracts. (This transaction cost reduction function of laws is, in many cases, inadequate for the parties because of several reasons. For example, the nature of a business might necessitate contract performance to be in a particular manner, or the risks in a particular business might warrant additional protection to a party. Standard Contracts play a major role in addressing these inadequacies of default rules). In the instant case, there was an agreement between Trimex and Vedanta as to the quantity to be supplied and the price. That alone was sufficient for the court to enforce the contract. Hence, the court decided, and rightly so, that there was a contract between Trimex and Vedanta when the email accepting the proposal of Trimex was complete, and a contract was formed when the said email was opened by the personnel of Trimex.
Two, businesses, in practice, hardly wait for lawyers to haggle on the “notwithstandings” and the “whearases”. After a bidder (in case of contracts entered into after inviting bids) submits the bid and the successful bidder is chosen, the fact is communicated to the bidder through a Letter of Intent or a Letter of Acceptance containing commercial and other significant terms of the transaction. Such Letter of Intent or Acceptance is usually taken as the document governing the rights and liabilities of the parties till a formal contract is entered into by the parties. However, it may so happen that it becomes necessary for the parties to come to a consensus. In such cases, even issuing a Letter of Intent or Letter or Acceptance becomes a drawn-out exercise. In such cases, parties simply agree on a few terms that they consider important. An agreement, thus reached, does not in any way fall short of a formal contract in terms of enforceability. Contract law does not, and courts should not shun from such contracts simply because they are not elaborate- the common example being purchase of a ticket in the bus. Except for the passenger providing the destination and the bus ticket providing for the price, there hardly exists any term of contract exchanged between the parties. Yet, such a transaction is recognised as a contract.
It was well within the knowledge of Vedanta that Trimex had to enter into a contract with the ship owner for the delivery of Bauxite to Vedanta. Trimex had urged Vedanta to confirm the latter’s acceptance so that it could enter into a contract with the ship owner. Hence, the intention of the parties to bind each other for their respective promises before Trimex entered into a contract with the ship owner was clear. Relying on the consensus between Trimex and Vedanta, the former entered into with the ship owner. The fact of existence of the contract between Trimex and the ship owner was communicated to Vedanta. Hence, the court was right in rejecting the contention of Vedanta that there was no contract in existence.
It is surprising to note that the court did not cite even a single decision of the Supreme Court on certain issues that arose in the instant case. On the issue as to as to whether there was a contract in existence in furtherance of exchange of correspondences between the parties, the Supreme Court had, in Rickmers Verwaltung GNBH v. Indian Oil Corporation Limited (AIR 1999 SC 504: (1999) 1 SCC 1: MANU/SC/0726/199), clearly contemplated that possibility of exchange of correspondence amounting to contract between parties (Perhaps, the proposition was so well established that the court did not deem it important to cite a case on the said point). On the issue as to whether a bargain between the parties who intend to enter into a formal agreement subsequently is binding or not. a three judge Bench of the Supreme Court had, in Kollipara Sriramulu v. T. Aswathanarayana and Ors. (AIR 1968 SC 1028: MANU/SC/0019/1968), held:
“[A] mere reference to a future formal contract will not prevent a binding bargain between the parties. The fact that the parties refer to the preparation of an agreement by which the terms agreed upon are to be put in a more formal shape does not prevent the existence of a binding contract. There are, however, cases where the reference to a future contract is made in such terms as to show that the parties did not intend to be bound until a formal contract is signed. The question depends upon the intention of the parties and the special circumstances of each particular case.”
Instead the court, at first, cited few decisions of the English courts and, after suggesting that the “Indian law has not evolved a contrary position”, then held cited a Privy Council decision on the above propositions. Usually, it would be expected of the court to cite the most relevant decision in the Indian law on the point (Citing all the decisions of the Supreme Court on the said issues may not be prudent practice. But the court could have cited at least one or a few of the Supreme Court decisions that had either established the said principles or had been extensively dealt with the said issue) and then cite judgements of courts of other jurisdictions.
Arbitration Agreement: On 01.09.2008, a claim-cum-notice invoking arbitration under Clause 29 of the Formal Agreement was served upon Vedanta, wherein Trimex appointed a retired Judge of the Karnataka High Court as one of the arbitrators and asked Vedanta to appoint an arbitrator so that the two arbitrators so nominated could, in terms of the said Clause 29, appoint the third arbitrator. Trimex had contended before the court that there was an arbitration agreement between the parties because Vedanta had no comments to offer on the arbitration clause in the Formal Agreement. It is true that the terms of the Formal Agreement were never agreed upon. While negotiations were taking place between the parties on the Formal Agreement, Vedanta had no comment to offer on the arbitration clause. Yet, there was no arbitration agreement between the parties in terms of Clause 29 of the Formal Agreement because the Agreement was still under negotiations. The rationale for the same ought to be understood in the context of how negotiations take place between commercial entities. During negotiations, parties might want to revisit and renegotiate certain clauses despite having reached a prior consensus on the same. Causes for such renegotiation may be manifold. For instance, a party might have used the arbitration clause to bargain for a better term. But if the other party does not agree for the latter term, the former party might want to get an arbitration clause which is in its favour. It is possible that such renegotiation to occur. In the instant case, though there was no deviation by Vedanta on the clause suggested by Trimex, there was no arbitration agreement between the parties in terms of Clause 29 of the Formal Agreement because Clause 29 was not finally agreed to between Trimex and Vedanta, and therefore, there was no arbitration agreement between the parties in terms of Clause 29 of the Formal Agreement. Hence the court, rightly, found that the arbitration was to be conducted not in terms of the arbitration clause found in the Formal Agreement but in terms of the agreement reached between the parties by email.
Conclusion:Contract law, for that matter, business law in general, must take into consideration the practices of business and law must be expounded by the legislature and the courts to implement the business decisions between consensual parties. Hence, the concepts of contract law and their legal consequences should ideally represent business practices, unless the overt intent of the law is to a secure a specific consequence.