Arbitration clause binding despite unsigned contract if parties had acted upon its terms: Supreme Court

The Supreme Court recently held that an unsigned contract containing an arbitration clause could still bind parties if they had accepted and acted upon its terms [Glencore International AG vs. Shree Ganesh Metals & Anr.].

A Bench of Justices Sanjay Kumar and Satish Chandra Sharma held that refusal to refer such disputes to arbitration would be “unsustainable.”

It set aside orders of the Delhi High Court which had held that no arbitration agreement existed between the parties.

The Supreme Court noted that the respondent had performed key obligations under the 2016 contract, including furnishing letters of credit and lifting part of the contracted goods, thereby demonstrating acceptance of the contract and its arbitration clause.

It underlined that a party could not later rely on absence of its signature to evade obligations when its own conduct had shown clear consent.

“The mere fact that the contract was not signed by the respondent would not obviate from this principle when the conduct of the parties, in furtherance of the contract, clearly manifested acceptance of the terms and conditions contained therein, including the arbitration agreement,” the bench noted.

The dispute arose from a series of zinc supply transactions between a Swiss commodity trading company (Glencore International) and an Indian metal manufacturer (Shree Ganesh Metals).

Earlier contracts dating back to 2011 and 2012 had arbitration clauses referring disputes to the London Court of International Arbitration. In March 2016, the parties negotiated another contract for supply of 6,000 metric tonnes of zinc. The terms were finalised through an exchange of emails, with the Indian company suggesting a modification in pricing formula, which was accepted by the seller.

Thereafter, the seller issued a formal contract reflecting the modified terms and went on to supply 2,000 metric tonnes of zinc under it.

Invoices raised under this contract were honoured, and standby letters of credit were opened by the buyer’s bank explicitly referring to the 2016 contract. In subsequent correspondences too, the buyer referred to this very contract, assuring performance of obligations.

When disputes arose over further supplies and pricing, the Indian company filed a civil suit in Delhi, seeking to declare invocation of the letters of credit invalid.

The seller invoked the arbitration clause and sought reference of the matter to arbitration under Section 45 of the Arbitration and Conciliation Act, 1996.

A single-judge of the Delhi High Court rejected the application, holding that there was no concluded contract as the buyer had not signed it.

A Division Bench of the High Court later upheld this view, finding that the parties were not ad idem on arbitration.

This led to the appeal before the Supreme Court.

The apex court disagreed with the High Court's view.

It referred to the emails, invoices, correspondence and letters of credit, all of which confirmed that the 2016 contract had been acted upon in full.

It emphasised that under the law, an arbitration agreement need only be in writing, and signatures were not a mandatory requirement if consent could be inferred from conduct.

The Bench relied on earlier rulings including Govind Rubber Ltd. v. Louis Dreyfus Commodities Asia Pvt. Ltd. and Caravel Shipping Services Pvt. Ltd. v. Premier Sea Foods Exim Pvt. Ltd., to reiterate that commercial contracts with arbitration clauses must be interpreted in a manner that gives effect to the parties’ intention rather than invalidating it.

“For construing an arbitration agreement, the intention of the parties must be looked into... If it can be prima facie shown that the parties are at ad idem, then the mere fact of one party not signing the agreement cannot absolve it from liability under the agreement,” the Court observed.

Hence, it allowed the appeal and restored the seller’s application seeking reference to arbitration and directed the referral court to proceed accordingly.

Senior Advocate Gourab Banerji instructed by Sumeet Lall, Partner, Sidhant Kapoor, Legal Director, Palak Rawat, Associate, CSL Chambers represented Glencore International AG.

Senior Advocate Vinay Garg along with advocates Piyush Sharma, Karunesh Tandon, Aditya Dikshit and Sonal Jain represented Shree Ganesh Metals.

[Read Judgment]