Arbitration clause in tax invoice is binding

Posted On - 9 February, 2023 • By - Renjith Nair

An arbitration agreement is an agreement between the contracting parties through which disputes that might crop up between the parties are to be resolved by arbitration. It is not only a common but also a very crucial feature of commercial contracts of our times. Under the Arbitration and Conciliation Act, 1996 (Act), certain attributes[i] must be present for an agreement to be considered as an arbitration agreement. Such an agreement has to be in writing and can be gathered from correspondence consisting of letters, fax messages, telegrams or even telex messages. This wide scope of an arbitration agreement has given rise to an issue of whether an arbitration clause printed on an invoice would also constitute a binding arbitration agreement.

In Bennett Coleman & Co. Ltd. v. MAD (India) Pvt. Ltd. (Bennett Coleman Case), the Bombay High Court was again faced with this issue.

Facts of the case

Bennett Coleman & Co. Ltd. (Bennett Coleman), a news and media company would publish certain advertisements in newspapers and other physical or virtual media platforms on the orders of MAD (India) Pvt. Ltd. (MAD India), an advertising company. Subsequently, Bennett Colman would raise invoices upon MAD India for payment towards the work of publication of advertisements. As MAD India defaulted in making timely payment of the invoice amount, Bennett Coleman invoked the arbitration clause printed on the invoices. MAD India disputed the validity of an arbitration clause printed at the back of the invoices and eventually Bennett Coleman approached the Bombay High Court for appointment of an arbitrator.

Ruling of the court

The Court analyzed the meaning of the term ‘arbitration agreement’ provided under the Act. It held that there is no strict format for an arbitration agreement, however, an arbitration agreement must have the following essentials:

(i)  the parties must mutually intend to settle their dispute by a private tribunal; and

(ii) the arbitration agreement must be in writing (although not necessarily signed by the parties[ii]).

Further, the High Court noted that the Act clarifies that an arbitration agreement is said to be in writing if such an agreement is claimed by one party and the existence of the agreement is not denied by the other party. The High Court also noted that in the present case, the parties had clearly acted upon the invoices and there was no denial of the invoices by MAD India. Therefore, the arbitration clause contained in the invoices which clearly stipulate a reference to arbitration deserve to be construed as a valid arbitration agreement. Accordingly, the Bombay High Court held that an arbitration clause in a tax invoice would amount to a valid arbitration agreement if the invoice were accepted by the party receiving it without disputing the arbitration clause. The High Court also appointed an arbitrator to decide the disputes and differences between the parties.

Our thoughts

It is well settled that an arbitration agreement is an independent agreement. Therefore, if the arbitration clause satisfies the essentials of an arbitration agreement, it is valid and binding on the parties. The judgment of the Court in Bennett Coleman Case is in line with the scheme of the Act which specifically provides that if the existence of an arbitration agreement is not denied, it will constitute a valid arbitration agreement.

However, this judgment must be cautiously noted by commercial parties who routinely transact without executing a properly negotiated contract, while exchanging correspondences and invoices. Such parties should ensure that they are aware of the terms and conditions of the documents, letters or invoices exchanged between them as an intention to arbitrate may be imputed even if such documents contain an unsigned arbitration clause. It will serve the parties well to clearly refute the existence of an arbitration clause in such documents if they are not in agreement to arbitrate the dispute.

Authors: Renjith Nair, Altamash Qureshi and Shrishti Mishra

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i] Section 7 of the Act

[ii] Radha Kanta Dass v. Baerlein Bros. Ltd