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January 10, 2011 The curious case of the ‘unauthorized’ employee Whether such an arbitration
agreement is valid and binding? The
Supreme Court of India (“Court”) has,
in the case of Alva Aluminium Ltd.,
Bangkok (“Petitioner”) Vs. Gabriel
India (“Respondent”) Ltd., by
its order dated November 16, 2010 in Arbitration Petition 2 of 2010, inter alia, reinforced the
principle of “indoor management”
and held that a party seeking to avoid a contract (containing an arbitration
agreement) on grounds of the signatory (its own officer) having no authority
to execute the same, needs to prove its case beyond doubt with valid
material. Further, a heavy burden of proof lies upon the party who seeks to
challenge validity of a contract on the allegation of misrepresentation,
fraud or coercion. The Court proceeded to appoint an arbitrator under the
said Agreement (defined hereunder). Brief
Facts: The
parties had ongoing commercial relations and had executed a contract for sale
of Aluminum Alloy Ingots, being Contract No. 073/2008 dated July 30, 2008 (“Agreement”). The said Agreement
had undergone several rounds of negotiation before execution including with
two officers of the Respondent. Disputes
arose between the parties under the said Agreement and the Petitioner
thereafter invoked arbitration (“Notice”).
At the late stage during the exchange of ongoing correspondence and legal
notices, the Respondent replied (“Reply”)
and contended that (i) the Agreement was not signed by an authorised person
(on its behalf); and (ii) the signature of the (allegedly) unauthorized
person had been obtained by misguiding, enticing and misdirecting him and the
Agreement was therefore not enforceable as being void and unenforceable. The
Petitioner sent a rejoinder to the said Reply and thereafter, the Respondent
continued to contend that there was no valid contract (and therefore no valid
arbitration agreement) between the parties. In these circumstances, the
Petitioner filed a petition before the Court seeking appointment of an
arbitrator. Order: The
Court, after hearing the parties, recorded that the two questions which arose
were: 1.
Whether the Court was required to determine
the existence of an arbitration agreement between the parties? And 2.
Whether any such agreement had indeed been
executed between the parties to the proceedings, to call for the appointment
of an arbitrator for adjudication of the disputes and differences that had
arisen between the parties? The
Court relied upon its various earlier decisions including SBP & Co. V/s Patel Engineering Ltd.
(2005 (8) SCC 618) and held that it was required to determine the existence
of an arbitration agreement before appointing an arbitrator. Thereafter, upon
a perusal of the correspondence exchanged between the parties during the
negotiations, the Court held that the documents executed were suggestive of
the parties having finalized and signed a contract. The
Court noted that, therefore, the question to be decided was whether such
agreement between the parties is valid and enforceable. The Court considered
the following to come to a conclusion that a legally valid contract had
indeed come into existence between the parties which contained an arbitration
clause for adjudication of disputes that may arise between them. a.
That it was the Respondent’s own case that
the said officer had been authorised to negotiate the terms of the Agreement.
Having been empowered to negotiate the terms of the Agreement, it could not
be said that the said officer was induced or defrauded into signing the same.
b.
That the document, information and
correspondence, when taken in their totality (especially in light of the
Agreement), did not show that the parties were merely negotiating a contract; c.
That the Respondent had failed to place on
record any charter of duties and powers of the said officer, nor any material
to show that any action was taken against the said officer for the alleged
transgression of the limits of his authority and the consequent disciplinary
action taken against the officer. That the Petitioner had no reason to
believe or suspect that the concerned officer with whom they were dealing did
not have the authority to execute the Agreement. Failure of the Respondent to
place such evidence which was in its special knowledge on record must give
rise to an adverse inference against the Respondent. d.
That the Respondent’s contention (that
their officer had been misguided, enticed and misdirected) was not backed
with any particulars when, in law, a heavy duty lay upon the Respondent to
prove such an allegation. The Court therefore upheld the
validity of the Agreement and proceeded to appoint a Sole Arbitrator to
adjudicate the dispute between the parties.
Analysis: The
instant case brings to the fore significant questions that arise in numerous
day-to-day transactions entered into by companies today. Ensuring that the
person entering into such agreements for and on behalf of a company is duly
authorised and empowered by necessary corporate actions has now assumed
paramount importance and it is recommended that prior to the execution of any
agreement, the authority of such person duly verified. A
charter of duties for employees or a board resolution empowering a person to
perform certain actions for and on behalf of a company is becoming essential.
Such documents will show the extent of authority of an officer of the
company. Further, in the event an officer of a company transgresses his
permitted authority, it is important that the company adopt disciplinary
proceedings within reasonable time against such a person and take necessary
steps to safeguard the interest and liabilities of the company under the
agreement signed without authority You
can direct your queries or comments to the authors |
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