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Delhi High Court Rules Arbitration Clause in Invoices Prima Facie Valid Over Conflicting Purchase Order Jurisdiction Clause

New Delhi: The Delhi High Court, in a significant ruling under Section 11(6) of the Arbitration and Conciliation Act, 1996, has held that an arbitration clause contained in invoices can constitute a prima facie valid arbitration agreement between parties, even if the initial purchase orders included a jurisdiction clause pointing towards court litigation.

The decision, delivered by Justice Prathiba M.Singh , came in a petition filed by SRF Ltd. seeking the appointment of a sole arbitrator to resolve disputes with M/s Jonson Rubber Industries Ltd.

Background of the Dispute

SRF Ltd. supplied 'Belting Fabric Material' to Jonson Rubber Industries Ltd. based on purchase orders issued in December 2019. SRF claimed that the material was supplied through seven invoices in February 2020, amounting to over Rs. 50.71 lakhs, plus interest and GST. SRF invoked arbitration based on clause 22 of the terms and conditions stipulated in these invoices after issuing a legal demand notice.

Conflicting Clauses and Parties' Arguments

The core of the dispute lay in the existence of a valid arbitration agreement. SRF Ltd. argued that each invoice contained an arbitration clause on the reverse side, which was incorporated by reference ("general terms and conditions given overleaf") and was binding as the invoices were received and partially paid against.

Jonson Rubber Industries Ltd. countered, arguing that the disputes arose from the original purchase orders, which contained a jurisdiction clause stating: "Jurisdiction for Arbitration/Dispute - Only Delhi Court shall have jurisdiction to try any dispute concerning in the Purchase Order". They contended that this clause reflected the true consensus between the parties and that the arbitration clause on the invoices was unilateral, not properly received, and not agreed upon. They also pointed to inconsistencies in how SRF applied interest charges compared to the invoice terms.

Court's Analysis and Reliance on Precedent

Justice Singh examined the requirements for a valid arbitration agreement under Section 7 of the 1996 Act, noting that it must be in writing and reflect the parties' agreement to refer disputes to arbitration. The court emphasized the principle laid down by the Supreme Court in Vidya Drolia v. Durga Trading Corporation , which mandates courts to refer matters to arbitration unless a prima facie case of non-existence of a valid arbitration agreement is established. The onus is on the party denying the existence of the agreement.

The Court cited the Supreme Court's observation in Vidya Drolia : "The court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding." And significantly, "The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis... 'when in doubt, do refer'."

The court also relied on previous judgments of the Delhi High Court in Swastik Pipe Ltd. I & II and a Bombay High Court decision in Bennett Coleman & Co. Ltd , which, in similar circumstances involving arbitration clauses in invoices, had referred parties to arbitration, especially where there was a running account or acknowledgement of invoices. The court also noted that the Supreme Court had set aside a Bombay High Court decision in Concrete Additives and Chemicals Pvt. Ltd. which had held against the existence of an arbitration clause in invoices, finding in that case that the invoices with terms and conditions were acknowledged.

Analyzing the conflicting clauses, Justice Singh found the purchase order's "Jurisdiction for Arbitration/Dispute" clause ambiguous. While it mentioned jurisdiction in Delhi, its title referenced both 'Arbitration' and 'Dispute', suggesting that arbitration was contemplated. Crucially, it did not explicitly exclude arbitration. In contrast, the invoices explicitly contained a clear arbitration clause.

Given the parties' regular business dealings, the acknowledgement and partial payment against invoices explicitly incorporating the arbitration clause, and the mandate under Vidya Drolia to refer disputes unless a strong prima facie case against arbitration exists, the court found the respondent's objections untenable. The question of whether partial payments were specifically for these invoices was deemed a matter of evidence for the arbitral tribunal.

Decision and Implications

The Delhi High Court allowed the petition, referring the dispute to the Delhi International Arbitration Centre (DIAC) for the appointment of a sole arbitrator. The court imposed costs of Rs. 25,000 on the respondent.

This judgment reinforces the principle that arbitration clauses contained in commercial documents like invoices, particularly in the context of ongoing business relationships and acknowledged transactions, can be considered prima facie valid arbitration agreements, aligning with the pro-arbitration stance of Indian courts. It underscores that ambiguous clauses or technical objections may not prevent reference to arbitration under Section 11 unless the non-existence of an agreement is clearly established.