Supreme Court: Specific Reference Required to Incorporate Arbitration Clause in Another Contract, General Reference is Ineffective

Supreme Court: Specific Reference Required to Incorporate Arbitration Clause in Another Contract, General Reference is Ineffective

The Supreme Court has reaffirmed that arbitration cannot be invoked solely based on an arbitration clause in a separate contract unless the main contract explicitly incorporates that arbitration clause.

Overturning the conclusions of the High Court, the Bench, consisting of Justices B.R. Gavai and Sandeep Mehta, ruled that if the main contract does not expressly refer to incorporating the arbitration clause from another contract, then the parties must resolve their dispute according to the settlement method specified in the main contract.

In the judgment authored by Justice B.R. Gavai, it was emphasized, drawing from the precedent set in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited. “It could thus be seen 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 the 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 or performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.”

The Supreme Court made the aforementioned observation while adjudicating a petition filed by NBCC (India) Ltd., challenging the ruling of the Delhi High Court. The High Court had directed the parties to settle their dispute through arbitration, even though there was no explicit reference to arbitration as the chosen method of dispute resolution.

The crux of the dispute that culminated in the litigation was centered on a main contract, namely a Letter of Intent (LOI), executed between the parties. The LOI stipulated that the terms and conditions outlined in another contract (DVC) would be applicable to the LOI with necessary modifications. While the LOI itself did not include an arbitration clause and specified resolution of disputes through the Civil Court, the DVC prescribed dispute resolution through arbitration.

Following the emergence of the dispute, the respondent petitioned for the appointment of an arbitrator pursuant to Section 11(6) of the Arbitration and Conciliation Act, 1996. The High Court, in granting the application, acknowledged that the LOI explicitly referenced the arbitration clause present in the DVC.

Dismissing the High Court's stance, the Supreme Court ruled that the High Court's decision was flawed as it incorrectly inferred that the arbitration clause outlined in DVC would extend to the LOI, notwithstanding the absence of a specific reference in the LOI incorporating the arbitration clause from the DVC.

The Supreme Court, in M.R. Engineers and Contractors Private Limited, observed that when parties enter into a contract and make a general reference to another contract, such a general reference does not automatically incorporate the arbitration clause from the referred document into the contract between the parties. Instead, the arbitration clause from another contract can only be incorporated into the contract, where such a reference is made, through a specific reference to the arbitration clause.

The court elucidated that there exist two forms of contracts between the parties: (i) the two-contract case, characterized by a main contract and another contract containing an arbitration clause, and (ii) the one-contract case, where only a single main contract outlines the standard terms and conditions appended to it.

In distinguishing between Inox Wind Limited v. Thermocables Limited and M.R. Engineers and Contractors Private Limited, the court clarified that the present case does not fall under the single-contract scenario, where a general reference to a standard form suffices for incorporating the arbitration clause. Instead, it pertains to a two-contract scenario, necessitating a specific reference to the arbitration clause of another contract for incorporation.

In the case of Inox Wind Limited, the court noted that while a general reference to an earlier contract may not suffice for incorporating an arbitration clause into a subsequent contract, a general reference to a standard form is adequate for such incorporation. The court agreed with the judgment in M.R. Engineers and Contractors Private Limited but emphasized that a general reference to a standard form of contract, along with those of trade associations and professional bodies, would be enough to include the arbitration clause.

In the specific instance of Inox Wind Limited, the court found that a purchase order issued by the appellant clearly stated that the supply would be in accordance with the terms mentioned therein and the attached standard terms and conditions. The respondent confirmed acceptance through a letter. As the case was deemed a single-contract scenario and not a two-contract case, the court ruled that the arbitration clause mentioned in the terms and conditions would be applicable.

In this statement, the court emphasizes that simply referencing the terms and conditions of the first contract in the second contract does not automatically make the arbitration clause applicable to the second contract. Instead, the arbitration clause becomes applicable only if there is a specific mention or reference to it in the second contract. This underscores the importance of clarity and specificity in incorporating arbitration clauses from one contract to another.

The court's view in this matter is that the situation at hand does not involve the direct 'incorporation' of the arbitration clause from one contract into another, but rather a'reference' to it. Therefore, a general reference alone does not result in the arbitration clause being automatically included. Additionally, Clause 7.0 of the LOI, which forms part of the agreement, explicitly specifies that any dispute between NBCC and the respondent must be resolved solely through civil courts with jurisdiction in Delhi. This reinforces the court's interpretation of the dispute resolution mechanism outlined in the contract.

The court concluded that the Delhi High Court erred in allowing the application of the respondent. Consequently, the appeals were allowed, and the impugned orders were quashed and set aside.