Patna High Court Refers Nalanda Cafeteria Dispute To Arbitration, Holds Conduct Can Establish Agreement

The Patna High Court on 18 June allowed an appeal filed by the Bihar State Tourism Development Corporation Ltd. against the contractor operating Nalanda Cafeteria, set aside the order of the Additional District Judge rejecting a Section 8 application, and directed reference of the dispute to arbitration under Clause 40 of the allotment letter.

Justice Khatim Reza held that conduct of parties such as acceptance of an allotment letter, payment of licence fees and continued commercial operation can establish a binding intention to arbitrate even in the absence of a formally executed agreement. The Bench observed:

“Moreover, the plaintiff has acted upon the allotment letter and continued the commercial business for running Nalanda Cafeteria, Nalanda and accepted to pay the payment of license fees for succeeding year. The clause contained in the allotment letter clearly stipulate a reference to arbitration deserve to be construed as an arbitration clause.”

The dispute arose from the management of Nalanda Cafeteria in Nalanda. The Bihar State Tourism Development Corporation had originally granted a licence in 2007. Following a Notice Inviting Tender issued on 18 September 2012 the contractor again emerged as the highest bidder and was issued an allotment letter on 16 October 2012 for a maximum period of five years commencing from 28 October 2012.

The contractor deposited Rs. 6,97,756 towards the first year licence fee and service tax and continued operating the cafeteria. However no formal licence deed was executed between the parties.

When the contractor failed to deposit the security amount for the succeeding year the Corporation granted time till 31 January 2013 warning that the allotment would stand cancelled in default. Instead of complying, the contractor sought extension of time and instituted a title suit seeking protection of possession adjustment of Rs. 95,125 from the security amount and consideration of alleged renovation expenses of about Rs. 15 lakh.

On 18 February 2013 the trial court passed an ex parte status quo order restraining the Corporation from interfering with the contractor's possession. The Corporation thereafter filed an application under Section 8 of the Arbitration and Conciliation Act 1996 relying on Clause 40 of the allotment letter seeking reference of the dispute to arbitration. The Additional District Judge rejected the application on 28 October 2013.

Aggrieved, the Corporation approached the High Court under Section 37(1)(a) of the Act challenging the refusal to refer the dispute to arbitration. It contended that Clause 40 constituted a valid arbitration agreement and that the contractor had acted upon the allotment letter by depositing licence fees seeking extensions and continuing operations. The contractor on the other hand argued that in the absence of a signed licence deed the requirements of Sections 7 and 8 of the Act were not satisfied.

Rejecting the contention the Court held that the contractor had consistently acted in terms of the allotment letter and never objected to its conditions. It further held that non execution of a formal agreement could not defeat the existence of an arbitration clause when parties had acted upon the arrangement and were ad idem. It held:

“The terms and conditions mentioned in the allotment letter was never objected by the plaintiff-respondent and he accepted the same by depositing the license fees for the first year and requested some time for depositing the security money. It can be prima facie shown that parties are ad idem. Mere non signing the agreement cannot absolve the plaintiff from liability under the agreement.”

The Bench also held that the trial court had erred in concluding that the Corporation had waived its objection to civil court jurisdiction noting that the objection had been specifically raised in the written statement as well as the Section 8 application.

Accordingly the High Court set aside the order dated 28 October 2013 and directed the Trial Court to refer the dispute to arbitration in accordance with Clause 40 of the allotment letter dated 16 October 2012.

Appearances for appellant (Bihar State Tourism Development Corporation Ltd.): Senior Advocate Mr. P.K. Shahi Nand Advocate Ms. Anukriti Jaipuriyar.

Appearances for respondent (Amit Kumar): Senior Advocate Mr. Shashi Shekhar Dwivedi and Advocates Mr. Prasoon Kumar, Mr. Krishna Mohan Mishra.