Incorporating Arbitration Clause Via Subsequent Circular Isn't Valid Unless Explicitly Mentioned And Included In Original Agreement: Calcutta High Court

The bench held that without mutual intent to integrate the arbitration clause from another document into the current contract between the parties, there's no valid arbitration agreement.

Brief Facts:

The matter pertained to a tender issued by the Respondent for hiring heavy earth-moving machinery and coal removal. The Applicant emerged as the successful bidder and was awarded the contract through a letter of acceptance and subsequent work order and agreement. However, the Respondent alleged that the Applicant failed to fulfill the conditions of the tender, leading to the termination of the contract by the Respondent.

During the course of events, Coal India Limited (CIL), the Respondent's subsidiary, introduced a Circular mandating arbitration for resolving disputes with private contractors. Clause 2 of the Circular established a procedure for settling disputes through arbitration for future contracts, while Clause 5 addressed disputes arising in existing contracts, requiring mutual consent for arbitration.

The Applicant sought arbitration through an application in 2022, which was initially dismissed on the grounds of lacking a valid arbitration clause. The Applicant, however, contended that Clause 5 of the Circular was erroneously relied upon and argued that Clause 2 was relevant and applicable. It argued that the Circular amended the contract's dispute resolution clause and therefore incorporated an arbitration clause by reference. Therefore, it approached the Calcutta High Court (“High Court”) and filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

On the other hand, the Respondent argued against reviewing the dismissal order, stating that there were no apparent errors warranting a review.

Observations by the High Court:

The High Court noted that the power to review judicial decisions is not inherent but must be explicitly granted by statute. This power must be exercised strictly within the confines delineated by the relevant statutory provisions. It reiterated that a review application cannot be utilized as a backdoor appeal. Rather, the jurisdiction of a reviewing court is limited and can only be invoked on specific grounds: the discovery of new and crucial evidence, the identification of a mistake or error glaring on the face of the record, or for any other substantial reason.

The High Court noted that Section 7 of the Arbitration Act outlines the requisites for an arbitration agreement, emphasizing the necessity of a written agreement signed by the parties or contained in documents that clearly demonstrate their intention to arbitrate disputes. Notably, an arbitration clause may be incorporated into a contract by reference to another document, provided there is a clear indication of the parties' consent to arbitration.

Crucially, it held that the determination of whether an arbitration clause contained in a separate document has been validly incorporated into the contract hinges on the principles of interpretation. This underscores the importance of discerning the parties' intent to submit disputes to arbitration, thus ensuring the efficacy and enforceability of the arbitration agreement.

The High Court referred to the decision of the Supreme Court in M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696, where the Supreme Court laid down essential principles regarding the incorporation of arbitration clauses from one document into another by reference. The Supreme Court held that:

Firstly, for an arbitration clause from another document to be incorporated into a contract by reference, the contract must clearly reference the document containing the arbitration clause. This reference should unmistakably indicate an intention to include the arbitration clause in the contract. Additionally, the arbitration clause itself must be appropriate for application to disputes under the contract and must not contradict any terms of the contract.

Secondly, the Supreme Court clarified that a general reference to another contract in a contract does not automatically incorporate the arbitration clause from the referred document into the contract. Instead, the arbitration clause can only be incorporated into another contract through a specific reference to that clause.

Thirdly, when a contract specifies that it is to be executed according to the terms of another contract, this reference incorporates only the provisions relating to execution, not necessarily including the arbitration agreement.

Fourthly, if a contract stipulates that the standard terms and conditions of a trade or professional institution apply, including any provision for arbitration, such terms are deemed incorporated by reference, especially if the parties acknowledge their familiarity with or understanding of these terms.

Lastly, the Supreme Court distinguished between mere reference to a document and incorporation of a document into a contract. While incorporation implies lifting the entire content of the document into the contract, mere reference indicates the adoption or borrowing of specific portions of the document for application to the contract.

The High Court noted that mere communication or policy decisions regarding arbitration are insufficient to establish a valid arbitration agreement unless explicitly referred to and included in the original contract between the parties. The absence of a clear reference in the contract to incorporate the arbitration clause from another document renders any subsequent attempt to enforce arbitration clauses ineffectual.

The High Court held that there was no valid incorporation of the arbitration clause from the Circular into the contract between the parties. While the Circular expressed a desire to make arbitration a mechanism for dispute resolution, it did not constitute a conscious acceptance of the arbitration clause by both parties as part of their contract. Consequently, the High Court dismissed the application.

Case Title: Dhansar Engineering Company Private Limited Vs Eastern Coalfields Limited

Case Number: RVWO/38/2023; IA NO: GA/1/2023

Mrs. Amrita Panda, Adv. Mr. Daipayan Basu Mallick, Adv. Mr. Arkaprava Sen, Adv. Mr. Sayantan Kar, Adv. …for review applicant

Mr. Mainak Das, Adv. Mrs. Priti Banerjee, Adv. …for respondent

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