When Supreme Court drew distinction between ‘reference’ and ‘incorporation’ of arbitration clause in agreements

In a recent case before the Supreme Court, NBCC (India) Limited V/s Zillion Infraprojects Pvt. Ltd [2024 SCC Online Sc 323], the Court discussed when an arbitration clause can be considered to be ‘incorporated’ in an agreement as opposed to being a mere ‘reference’ to arbitration.

Background of the case

The appellant, a public limited company and government of India undertaking, was engaged in the construction of power plants and other infrastructure projects on EPC and/or PMC basis. The respondent was a private limited company engaged in the construction and infrastructure sector.  

The respondent was awarded a contract for the construction of the weir across river Damodar at Jharkhand. The respondent, inter alia, also submitted the General Conditions of Contract, Special Conditions of Contract, Bill of Quantity, etc. (collectively referred to as, “Tender Documents”).

Disputes arose between the parties and the respondent invoked arbitration and sought consent from the appellant for the appointment of a former High Court Judge as the sole arbitrator. 

As the appellant failed to reply to the arbitration notice, the respondent filed an application under Section 11(6) of the Arbitration Act. The High Court vide an interim order allowed the arbitration petition and appointed a former Judge of the Delhi High Court as the sole arbitrator and confirmed the same vide its final judgment and order.

Aggrieved by the above orders, the appellant filed appeals before the Supreme Court and challenged both the interim order and the final judgement and order. 

Submissions of the parties

The appellants' case:

The appellants submitted that inter alia, as per the terms and conditions as contained in the tender issued by the Damodar Valley Corporation, it was specifically stated that various conditions, that is, contractual, financial and technical, mentioned in the documents contained in the Letter of Intent [LOI] shall be binding on the respondent for the execution of works and they shall form a part of the agreement. Clause 10.0 also stated that the LOI shall form a part of the agreement. Clause 7.0 of the LOI stated that the jurisdiction for the redressal of a dispute shall only be the civil courts of Delhi alone, and that the laws applicable to the contract between the parties shall be the laws enforceable in India.

The appellants averred that as per Clause 2.0 of the LOI issued by the Damodar Valley Corporation, all terms and conditions as contained in the tender shall apply mutatis mutandis, and where the terms and conditions have been expressly modified by the appellant, the same would not be applicable.

It was the appellants' case that a mere reference to the terms and conditions without there being an incorporation in the LOI would not make the lis between the parties amenable to the arbitration proceedings.

The appellants submitted that unless the LOI specifically provided for the incorporation of the arbitration clause, a mere reference to the arbitration proceedings would not be permitted in view of the provisions of sub-section (5) of Section 7 of the Arbitration Act.

The respondents' response:

The respondents argued that that there is a specific reference in Clause 2.0 of the LOI to the terms and conditions in the tender issued to the appellants.

According to the respondents, the only modification was under Clause 3.34 of the Additional Terms and Conditions of Contract - under which the jurisdiction was vested with the court in the city of Kolkata -, whereas in the LOI, the jurisdiction would be vested in the civil courts having jurisdiction in Delhi alone. It was the respondents' case that the learned single judge of the Delhi High Court had already and rightly considered this aspect while appointing the sole arbitrator for the disputes and as such, no interference was warranted in the impugned order.

The Supreme Court's analysis and order

The Court perused the documents produced before it and heard the parties.

The Court discussed the law laid down in the case of MR Engineers and Contractors Private Limited vs. Som Datt Builders Limited [(2009) 7 SCC 696] and discussed its points of distinctions from Inox Wind Limited vs Thermocables Limited [(2018) 2 SCC 519].

Based on the judgment passed in the case of MR Engineers and Contractors Private Limited [supra], the Court observed that:

“… this Court has held that when the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. It has been held that the arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause. It has further been held that where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.”

The Court read sub-section (5) of Section 7 of the Arbitration Act and opined that a reference to the document in the contract should be such that shows intent to incorporate the arbitration clause contained in the document into the contract.

In the case of Inox Wind Limited [supra], though the Supreme Court agreed with the view held in MR Engineers and Contractors Private Limited  [supra], it has differed and held that though a general reference to an earlier contract is not sufficient for the incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough for the incorporation of the arbitration clause.

While perusing the facts of the case in Inox Wind Limited (supra), the Court found that the purchase order issued by the appellant therein categorically mentioned that the supply would be as per the terms mentioned therein and in the attached standard terms and conditions. The respondent therein, by his letter, had confirmed its acceptance.

The Court held that it was a case of a ‘single-contract’ and not ‘two-contract case’ and, therefore, the arbitration clause as mentioned in the terms and conditions would be applicable.

The Court opined that the present case was a ‘two-contract’ case and not a ‘single contract’ case.

While perusing the documents produced before it, the Court observed that Clause 3.34 of the Additional Terms and Conditions of Contracts provided for a reference of the dispute to the sole arbitration of the Secretary, CEO of Damodar Valley Corporation, Kolkata-54 or to a person appointed by him for that purpose.

However, according the LOI, Clause 1.0 stated that the documents stated in the LOI shall also form part of the agreement; Clause 2.0 clarified that all terms and conditions as contained in the tender issued to the appellant shall apply mutatis mutandis except where these have been expressly modified by the appellants; Clause 7.0 specifically provided that the redressal of dispute between the parties shall only be through civil courts having jurisdiction of Delhi alone; and Clause 10.0 further provided that the LOI shall also form a part of the agreement.

The Court observed that Clause 7.0 of the LOI specifically uses the word “only” before the words “be through civil courts having jurisdiction of Delhi alone” and that this proves the intention between the parties.

The Court reiterated that when there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/ reference thereto.

The Court opined that that the present case is not a case of ‘incorporation’ but a case of ‘reference.'  As such, a general reference would not have the effect of incorporating the arbitration clause, especially since Clause 7.0 of the LOI clearly stated that the redressal of the dispute between the parties has to be only through civil courts having jurisdiction of Delhi alone.

The Court quashed the impugned order and allowed the appeals.  

What are ‘One contract case’ and ‘two contract case’?

‘Two contract case’, are those cases where reference is made to a secondary document which is executed by at least one party different from the parties to the contract in question.

In a two contract case, typically, the terms to be incorporated are contained in a contract between one or more different parties.

‘One contract' cases are those cases where a reference is made to standard terms in a contract.

Conclusion

The Court concluded that the present case was a ’two contract case’ as the respondent was bound by the terms and conditions under the tender and the LOI issued by Damodar Valley Corporation to the appellant and that it had an overriding effect on any other document executed by the appellant and the respondent.  The Court relied on the use of the word “only” before the words “be through civil courts having jurisdiction of Delhi alone” to determine the intent of the parties and accordingly passed its orders.

The key takeaway from this judgment is that it is important to be vigilant about the clauses for dispute resolution when commercial terms are contained in multiple documents. It is imperative to draft clear and unequivocal terms to ensure the validity and enforceability of the arbitration clause. As alternative dispute resolutions rise, it becomes important for the parties to discuss and decide issues regarding jurisdiction and forums at the outset itself to avoid litigation costs and valuable time.

About the authors: Mahua Roy Chowdhury is the Managing Partner of Royzz & Co. The article has been co-authored by Advait B.