Electronic copy available at: http://ssrn.com/abstract=2060866

Formation of Contract through Emails in India: A Case Comment on Trimex v. Vedanta

Badrinath Srinivasan*

This short essay1 analyses the recent developments in the law on contract formation in India through the case of Trimex International Fze Limited v. Vedanta Aluminium Limited.2 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 (1996 Act or Act) for the constitution of an arbitral tribunal.3 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.4 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.5

Facts: 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

* B.A. (Law) LL.B. (S.D.M. Law College, Mangalore, India), LL.M. (West Bengal National University of Juridical Sciences Kolkata, India). The author is presently working at Bharat Heavy Electricals Limited, India. The views stated herein are his own and do not represent the views of Bharat Heavy Electricals Limited. 1 The paper is based on a blog post published by the author in the Practical Academic Blog. The said post is

available at http://practicalacademic.blogspot.com/2010/03/trimex-v-vedanta_02.html last visited on 23 November 2010. 2 MANU/SC/0057/2010: 2010 (1) SCALE 574. Also available at http://indiankanoon.org/doc/658803/ last

visited on 20th November 2010. 3 Section 11(6) of the Act 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. 4 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 only then refer the dispute to arbitration or appoint an arbitrator. 5 A Single Judge of the Supreme Court hears such matters as a Designate of the Chief Justice of the

Supreme Court. Under the Section 11 of the Act the power to constitute the arbitral tribunal in case of failure to constitute the arbitral tribunal is normally accorded to the Chief Justice of the High Court. However, in case the arbitration agreement is an international commercial arbitration agreement, the power is accorded to the Chief Justice of India (i.e., the Chief Justice of the Supreme Court). See Sections 11(12)(a) and 11(12)(b) to the Act.

Electronic copy available at: http://ssrn.com/abstract=2060866

aluminium as a major raw material. A detailed chronology of the facts is provided below.6

05.09.2007 Trimex made an offer for 45000 metric tonnes of Bauxite (of Australian origin). Upon the offer, Vedanta issued a purchase order accepting the said Offer.

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.7

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.8 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 Vedantas 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

6 The norm in judgements is to state the facts as a statement as opposed to the method employed in this

paper. While it is acknowledged that the standard practice is to provide a statement of facts, it is easier for the reader to better appreciate the facts if it is in the form used here. 7 CIF and FOB are terms used in international trade. They are shortened forms for a set of rules concerning

terms such as costs and risks associated with delivery, transportation of goods and passing of risk in goods. These commercial terms (and many others) have been standardised by the International Chamber of Commerce (ICC) and is called INCOTERMS. The INCOTERMS have been updated and INCOTERMS 2010 will take effect from 1 January 2011. See, For explanations pertaining to CIF and FOB contracts, visit http://www.iccwbo.org/incoterms/preambles/pdf/CIF.pdf last visited on 23 November 2010 and http://www.iccwbo.org/incoterms/preambles/pdf/CIF.pdf last visited on 23 November 2010 8 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.

accepting Trimexs 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 Oslo, Norway. On the same date, Vedanta informed Trimex that their agent was not taking enough initiative to handle the first shipment of the cargo.

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 Trimexs 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 A formal contract providing, inter alia, for the following arbitration clause was sent by Vedanta.

29. Arbitration 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 India. 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. 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 accepted most of the terms but gave certain clarifications on the draft contract.

09.11.2007 Formal Bauxite Sales Agreement with Rio Tinto, Australia for the supply of 225000 tonnes of Bauxite

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 Clause 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 89 or 11 of the Act, and the same is contested for want to a valid arbitration agreement, the threshold question that the court has to decide is whether there was an agreement to refer the dispute to 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 of the following reasons:

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,

9 Section 8 of the Act states:

Power to refer parties to arbitration where there is an arbitration agreement: (1) A judicial authority before which an action is brought in a matter, which is the subject of an arbitration agreement, shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

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 court disagreed with the contentions of Vedanta that no contract was formed.

According to it, the Contract was concluded on 17.10.2007 when, in terms of Section 4 of the Indian Contract Act, 1872 (Contract Act), the acceptance was communicated to Trimex.10 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, (Retd.) Justice B.N. Srikrishna as arbitrator and fixed Mumbai as the venue of arbitration.

Appraisal 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 Trimexs 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 Vedantas point of view, it did not, because the terms of the proposal were vague and ambiguous.

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

10 Section 4 of the Contract Act provides:

"Communication when complete: The communication of a proposal is complete when it becomes 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 at to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete -as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it;as against the person to whom it is made, when it comes to his knowledge.

agreement between the parties must not be uncertain.11 In fact, the 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".12 These are all the parties must agree upon.13 The parties may agree not to agree on certain aspects and leave it either for the law to decide the same or may postpone the negotiation on the same to a future date after the conclusion of the contract if and when situation dictates 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.14 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. One of the critical functions of the law (in general and contract law in particular) 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.15 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.

11 Section 29 of the Contract Act provides:

Agreements void for uncertainty: Agreements, the meaning of which is not certain, or capable of being made certain, are void. Illustrations (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 I is nothing to show which of the two prices was to be given. The agreement is void. 12

See, Illustrations, to Section 29 of the Contract Act, Supra, note 14. 13

In cases of certain agreements, such as collaboration agreements, which involve performance of several obligations by both the parties, it becomes necessary, from an enforceability point of view, to reduce the consensus to a proper instrument. See, Vinod Seth v. Devinder Bajaj & Anr. (2010) 8 SCC 1: JT 2010 (8) SC 66: MANU/SC/0424/2010. 14

Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87 (1989) 15

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.

Two, businesses, in practice, hardly wait for lawyers to haggle on the "notwithstandings" and the "whearases". After a bidder (in case of contracts concluded 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 signed 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. Hence, the 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 latters 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.

The court cited, with approval, the oft-cited decision of the English Court of Appeal in the case of Pagnan SpA v. Feed Products Ltd.16 It is, however, surprising to note that the court did not cite even a single Indian decision of 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, n Rickmers Verwaltung GNBH v. Indian Oil Corporation Limited17, clearly contemplated that possibility of exchange of correspondence amounting to contract between parties.18

16 [1987] 2 Lloyd's Rep. 601

17 AIR 1999 SC 504: (1999) 1 SCC 1: MANU/SC/0726/1998

18 Perhaps, the proposition was so well established that the court did not deem it important to cite a case on

the said point. See, for example, the following cases discussing the issue of formation of contract through exchange of correspondences: Karnataka Bank Ltd. v. SEBI available at http://indiankanoon.org/doc/1703967/ last visited on 23 November 2010, Keshav Krishna Londhe v. Adarsha Gruha Nirman Sahakari Sanstha Limited and Ors. 2005(5) Bom CR 404: MANU/MH/0642/2005, Falcon Retreat Pvt. Ltd. v. EDC Ltd. & Ors. 2006(3) Bom CR 171: MANU/MH/0233/2006, Marg Constructions Ltd. v. South India Corporation (Agencies) Limited and Ors., Dresser Rand SA v. BINDAL Agro Chem Ltd. and K.G. Khosla Compressors Ltd. AIR 2006 SC 871: 2006(1) Arb. LR 171 (SC): (2006) 1 SCC 751: MANU/SC/0151/2006, Food Corporation of India v. Garg Rice Mills 140 (2007 )DLT 361: MANU/DE/7551/2007, Karam Chand Thapar v. Akaljot Singh Sekhon MANU/MH/0535/2005, Dr. K.Kuppusamy v. Anna University available at http://indiankanoon.org/doc/540555/ last visited on 23 November 2010, PVR Pictures v. Studio 18 2009 (41) PTC 70 (Del): MANU/DE/0895/2009.

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. held19:

"[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."

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

19 AIR 1968 SC 1028: MANU/SC/0019/1968

contract law and their legal consequences should ideally represent business practices as was in this case, unless the overt intent of the law is to a secure a specific consequence.