Two comments on Alva Aluminum

Written by  //  December 5, 2010  //  Corporate Law and Business  //  Comments Off on Two comments on Alva Aluminum

Much has been said, here and elsewhere, about the decision of the Supreme Court in Patel Engineering and the subsequent clarification of its true scope in Boghara Polyfab. The purpose of this post is not to add to that material, but to instead highlight two interesting conclusions the Supreme Court reached three weeks ago in Alva Aluminum v Gabriel India Ltd. One of these conclusions is commonplace, but serves to reiterate the importance of the Boghara Polyfab clarification, while the other has interesting implications for evidentiary presumptions in assessing claims of lack of actual authority.

The case arose out of two agreements that a Thai company and an Indian company had entered into. The first of these, in relation to which no dispute arose, was an agreement signed in 2008 for the purchase by the Indian company of a substantial quantity of aluminum ingots.  This contract was negotiated and signed on behalf of the Indian company by one of its officers – S. Sengupta. However, disputes arose in relation to a second contract the parties (allegedly) entered into, and the Indian company declined to make payment and complete the contract. That contract contained a clause that, although unfortunately worded,[1] indicated that the parties had agreed to resolve disputes through binding arbitration. The contract had been negotiated and signed not by Mr. Sengupta, but by another officer – Sandeep Dabir.

In an arbitration claim for around $350,000 brought by the Thai company, the Indian company denied the existence of the arbitration clause, upon the ground that Mr. Dabir had not possessed any authority to conclude a contract on behalf of the company, although it conceded that he had been authorised to negotiate it. A petition was duly filed under s. 11 of the Arbitration and Conciliation Act, 1996, for the appointment of an arbitrator, and two issues arose – first, whether the designate under s. 11 is required or entitled to consider the existence of the contract, and secondly, if so, the means of adjudicating the claim of lack of authority on the merits.

On the first issue, the designate, Thakur J., correctly held that he was bound by authority to conclude that he is required to consider whether an arbitration clause exists. We have previously charted the course of the law on appointment, and it suffices here to briefly recapitulate it. While Patel Engineering was clear that the appointment power is a substantive and not administrative jurisdiction, doubt arose as to the relative competence of the designate and the Tribunal with regard to certain types of challenges. The most prominent examples are contentions that the claim is no longer live, that the contract has been discharged either by completion or supervening impossibility, that it was procured by undue influence, misrepresentation or fraud, that it was void entirely or that it did not extend to the dispute in question. In Boghara Polyfab, the Court offered guidance by classifying these claims into those the designate is required to consider, those he is entitled to consider, and those as to which he is required to defer to the Tribunal. In keeping with Patel Engineering, the Court found that a majority of the claims listed above fall into either the first or second category, and that continues, despite some doubt arising out of an unreported judgment of the Court, to be good law. As a result, Thakur J. held that the contention that the contract is void for lack of authority was clearly within the scope of the s. 11 jurisdiction.

It is instructive to compare this result with the classic decision in English law (House of Lords, 2007) on the subject of appointment of arbitrators in such circumstances – Fiona Trust v Privalov. Lord Hoffman observed that the approach in construing an arbitration clause must be informed by the principle that the question is essentially whether the “parties intended” a certain type of objection to be resolved by the Tribunal. The speech specifically classified an objection that the agent “entirely lacked” authority to conclude the contract as one that will typically defeat the jurisdiction of the Tribunal, as opposed to one that he “exceeded” authority that he did have. Patel Engineering, of course, makes any such inquiry irrelevant in India.

The second point that arises out of Alva Aluminum is Thakur J.’s treatment of the substantive contention that Mr. Dabir lacked authority. Four reasons emerge from his rejection of this contention – first, that it is clear that the parties were doing more than “just negotiating”; secondly, that the contention that Mr. Dabir’s signature was obtained by misrepresentation or fraud failed for want of materials; thirdly, the claim of lack of actual authority failed because the respondent did not adduce any evidence to demonstrate that it had taken “disciplinary action” against Mr. Dabir for exceeding his authority, which was within its “special knowledge”; and finally that in any event the petitioner had no reason to believe that Mr. Dabir had not been authorised to sign, especially since it was conceded that he had been authorised to negotiate.

While this conclusion is correct in the circumstances of the case, it should be noticed that the first and second reasons are not directly relevant to a claim of absence of actual authority, and that the fourth is relevant only if the court is making a finding of ostensible authority. Thakur J.’s third reason, on the other hand, seems to be a reference, although not expressly, to s. 106 of the Indian Evidence Act, 1872, which provides that the burden of proving a fact within “especially within the knowledge of a person” is on that person. It is submitted that this part of the judgment must be considered to be authority only for the narrow proposition that s. 106 may be invoked to defeat lack of actual authority claims, and not for the wider proposition that such a claim may be defeated only by showing that steps were taken against the errant agent.

[1]In case both parties are unable to resolve any disputes amicably in connection to the contract or breach thereof, results from the arbitration carried out in accordance with laws of India shall be final and binding upon both parties. Arbitration charges and any other charges in this connection shall be borne or reimbursed by the losing party.” It leaves the door open for an argument, although unattractive, that the clause envisages not the submission of disputes to the Tribunal but only an obligation to abide by the result of arbitration that is submitted. A court is likely to take the view that the clause must be construed as an arbitration agreement in order to not render it otiose.

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