Introduction
While entering into a transaction, companies often invoke multiple standard terms from other agreements, instead of reproducing all applicable terms in a single contract. Such clauses are not set out in the main contract signed by the parties, but are instead found in separate, pre-existing documents that have been referred to in the main contract, by which the parties agree that the standard terms that have been mentioned, should be considered a part of the main contract. This practice enables faster and smoother implementation of contracts and allows some standard clauses to remain unchanged, thus providing greater certainty to business. However, if the arbitration clause itself is located in a secondary document, it might lead to a dispute (between the parties) regarding the appropriate dispute resolution procedure.
This issue rose to prominence in NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd.[1] (“NBCC”), where the Supreme Court (“the Court”) decided on the difference between an arbitration clause deemed to be ‘incorporated’ into an agreement and it being merely ‘referred’ to.
Statutory Framework
Section 7(5) of the Arbitration and Conciliation Act, 1996 (“A&C Act”), provides that an arbitration agreement may be constituted by a reference in a written contract to another document containing the arbitration clause. However, it also provides a caveat that the reference must be such that it makes the arbitration clause a part of the contract. Section 7(5) of the A&C Act is reproduced below:
“The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”
However, this provision has a lacuna, namely that it does not specify the conditions that need to be satisfied to ensure that the reference to a document makes the arbitration clause a part of the contract. This is the question that the Court dealt with in the NBCC case.
The NBCC case
The case arose when the appellant issued a tender invitation for a construction project, referring to other tender documents including the general conditions of contract (“GCC”), special conditions of contract, bill quantity, etc. Accordingly, the respondent had submitted the bid and was awarded the contract for construction. When disputes arose between the parties, the respondent issued a notice to the petitioner, invoking arbitration and seeking consent to appoint a sole arbitrator, under clause 3.34 of the GCC. The respondent then approached the Delhi High Court under Section 11(6) of the A&C Act, which appointed an arbitrator to adjudicate the dispute between the parties.
The appellant challenged this before the Court by arguing that the Letter of Intent (“LOI”) was a part of the agreement as per clause 10. Further, though clause 2 of the LOI stated that all terms and conditions as contained in the tender shall apply mutatis mutandis, it also stated that where the terms and conditions have been expressly modified by the appellant, the same would not be applicable between the parties. Hence, the appellant argued that since clause 7 of the LOI stated that disputes shall be subject to the jurisdiction of the courts in Delhi, the provision regarding arbitration in clause 3.34 of the GCC would not apply.
The Court relied upon its previous decision in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited[2] (“MR Engineers”), wherein the Court had held that an arbitration clause in another document would get incorporated into a contract by reference if the following conditions were fulfilled: first, the contract should contain a clear reference to the documents containing the arbitration clause; second, the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract; and third, the arbitration clause should be capable of application in respect of disputes under the contract and should not be repugnant to the terms of the contract. Further, MR Engineers held that a general reference would not have the effect of incorporating the arbitration clause from the referred document. It could only be incorporated into the contract by specific reference to the arbitration clause. However, it noted that where the contract stipulated that the conditions of contract of one of the parties (to the contract) shall form a part of their contract, the arbitration clause forming a part of such general conditions of contract will apply to the contract between the parties.
The Court in the NBCC case opined that Section 7(5) of the A&C Act provided for a conscious acceptance of the arbitration clause from another document, with the intention to incorporate the arbitration clause into the contract clearly present among the parties. The Court also relied upon its earlier decision in Inox Wind Limited v. Thermocables Limited,[3] (“Inox Wind”), which had affirmed MR Engineers to hold that while a general reference to an earlier contract was insufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough.
Inox Wind was a single-contract case because of which the arbitration clause as mentioned in the terms and conditions was applicable. However, the Court held that the present dispute was a two-contract case, because of which a reference in the main contract to the provisions of the GCC would not ipso facto lead to the incorporation of the arbitration clause in the main contract unless a specific reference was made thereto. Hence, the Court held in the NBCC case that though there was ‘reference’ to the GCC, it did not have the effect of incorporating the arbitration clause, since the LOI, which was also a part of the agreement, specifically excluded its application.
One Contract and Two Contract Cases
The theory of incorporation by reference in a ‘single contract case’ and ‘two contract case’ was not developed by the Supreme Court of India, but was imported from the UK jurisprudence. It was laid down in the English case of Habas Sanai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal Sal[4] (“Sometal Sal”),and affirmed by the Queen’s Bench in SEA 2011 Inc. v. ICT Ltd.[5] It expounded that a ‘single contract case’ is one where the arbitration clause is contained in a standard form contract to which there is a general reference in the contract between the parties. However, where the arbitration clause is contained in some other contract, and a reference is made thereto to incorporate it in the contract between the parties, it is a ‘two-contract case’. Hence, the incorporation by general reference in a single contract is valid, but in a ‘two-contract case’, the reference to the arbitration clause of the referenced contract must be specific.
The court in Sometal Sal had considered the following scenarios, where scenario (1) is a single contract case and scenarios (2), (3) and (4) are two contract cases.
- A and B make a contract in which they incorporate standard terms. These may be the standard terms of one party set out on the back of an offer letter or an order, or contained in another document to which reference is made; or terms embodied in the rules of an organisation of which A or B or both are members; or they may be terms standard in a particular trade or industry.
- A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties.
- A and B make a contract incorporating terms agreed between A/B and C.
- A and B make a contract incorporating terms agreed between C and D.
The Supreme Court has used this principle in many cases, from Inox Wind, and NBCC mentioned above, to other decisions, such as in Giriraj Garg v. Coal India Ltd.[6] (“Giriraj Garg”). In Giriraj Garg, the Court had considered whether reference to an arbitration clause contained in the 2007 scheme, in individual sale orders, would be sufficient to incorporate the arbitration clauses in the current contract. The Court had held that the facts fell under the “single contract case”, where the arbitration clause was contained in a standard form document, i.e., the 2007 scheme, which was referenced in the individual sale orders issued.
Conclusion
In the NBCC case, the Apex Court had to hold against the validity of the reference to arbitration, despite its pro-arbitration leaning. The decisions discussed above highlight the need for parties to a contract to be vigilant about dispute resolution clauses in cases where terms are spread out across multiple documents, which a contract may refer to. Given the Supreme Court’s observations, parties to a commercial agreement ought to explicitly provide for a dispute resolution clause in the final contract, instead of merely relying on reference to other documents. This would ensure greater certainty about the intent of the parties to arbitrate and ensure the validity and enforceability of the arbitration clause.
For further information, please contact:
Juvraj Singh, Partner, Cyril Amarchand Mangaldas
juvraj.singh@cyrilshroff.com
[1] NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. 2024 SCC OnLine SC 323
[2] M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) 7 SCC 696
[3] Inox Wind Limited v. Thermocables Limited (2018) 2 SCC 519
[4] Habas Sanai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal Sal, (2010) EWHC 29 (Comm)
[5] SEA 2011 Inc. v. ICT Ltd., 2018 EWHC 520 (Comm)
[6] Giriraj Garg v. Coal India Ltd., (2019) 5 SCC 192
