Arbitration Clause Cannot Be Incorporated By Reference, Without Clear Intention Of Parties: Calcutta High Court

The Calcutta High Court has recently dismissed applications for interim relief filed by Kobelco Construction Equipment India Private Limited under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”).

In dismissing the prayer for an interim injunction on the respondents, and holding that the petitioners could not be allowed to incorporate an arbitration clause by-reference from the ‘Master’ agreement to the ‘Settlement’ agreement in the absence of unambiguous intention of both parties, a single-bench of Justice Moushumi Bhattacharya opined:

The present case involves two arbitration clauses and the Court is being asked to hold that the arbitration clause of the first Agreement should be treated as being incorporated into the second Agreement by reference…there is no special reference indicating a mutual intention on the part of the petitioner, SREI and the respondent no. 1 to incorporate the arbitration clause from the Master Facility Agreement to the Settlement Agreement. A general reference to the Master Facility Agreement is not sufficient to incorporate the arbitration clause.

The petitioner’s case for interim relief must therefore fail in the absence of a definitive contractual relationship between the petitioner and the respondent no. 1 containing an arbitration clause and further the absence of an unambiguous intention expressed by the petitioner and the respondent no. 1 to incorporate the arbitration clause from one of the agreements to the other. In the absence of either of the aforesaid, this Court is unable to find a basis for grant of interim relief.

Brief facts of the case

These observations were made in an arbitration petition made by the petitioners under Section 9 of the Act, seeking an interim order of injunction upon the respondents, to prevent them from disposing off assets under a ‘Master Facility Agreement’ from 2020 and a ‘Settlement Agreement from 2021.

It was submitted by the petitioners that the respondents were bound by the master facility agreement executed between them and SREI Equipment Finance Limited for financial assistance given by SREI to them to the tune of Rs 6,72,60,000.

It was submitted that the respondents had paid 14 out of 34 instalments under the agreement, and that thereafter, the remaining debt was assigned by SREI to the present petitioners under a ‘settlement agreement’ in furtherance of their dues of Rs 70,97,70,999 owed to Kobelco.

Petitioners relied on certain definitions in the Settlement Agreement to prove that the assignment was done under the Master Facility Agreement, “whereby SREI could transfer its rights, benefits and obligations under the Agreement to any person without notice to the borrower (the respondent no. 1) and that SREI had in any event sent an intimation to the respondent no. 1 about the assignment by a letter dated 17th July, 2021.”

Petitioners submitted that the respondents had made payments to them in furtherance of the settlement agreement, after its execution, and that those payments showed an implied consent on part of the respondents to the assignment of agreement.

Per contra, it was submitted by the respondents that they were not a party to the settlement agreement between the petitioners and SREI and that the petitioner could not incorporate both arbitration clauses contained within the master facility agreement and the settlement agreement.

It was argued that in the absence of any privity of contract between the present petitioners and the respondent, the arbitration clauses could not be incorporated by a composite reference and that the clause would have to be specifically incorporated, which was not done in the present case, since a general reference to the same would not be sufficient under Section 7(5) of the Act.

Findings of the Court

In adjudicating on the matter, the Court chalked out two major issues. Firstly, whether there existed any arbitration agreement between the petitioner and respondent, and second, whether a composite reference could be made for two separate arbitration agreements. On the first question, it was observed:

There is admittedly not 1, but 2 arbitration agreements, [one] between SREI and the respondent no. 1 and a Settlement Agreement between SREI and the petitioner. The common entity between these two agreements is SREI who is not a party to the present application. Both agreements have independent arbitration clauses. Admittedly, the bridge between these two island-agreements is SREI who is “missing in action” in the present application. Hence, there is no arbitration agreement between the petitioner and the respondent no. 1 which can form the basis of a section 9 application.

On the question of whether a composite reference could be made to an arbitration clause to incorporate it from one agreement to another, the Court was of the opinion that the statutory provision under the Act did not support such fact-scenario, where “the entity bound by the reference is not a party to the arbitration agreement.”

In examining various case laws on the subject, as well as the provisions within the Arbitration and Conciliation Act, the Court dismissed applications while emphasising on the assumption of an underlying arbitration agreement between the parties u/s 9 of the Act, and held that wherever a composite reference is sought to be made, the intention of both parties to incorporate the arbitration clause must be “clear” as required u/s 7 of the Act. It concluded:

On a meaningful reading of sections 7(5), 2(1)(h) and 9(1) of the Act, only a party to the arbitration agreement, which clause was originally contained in the arbitration agreement or incorporated into a second document, can exercise the right to interim measures. A section 9 Court presumes that there is an underlying arbitration agreement between the party who approaches the Court for interim relief and the party against whom the interim relief is sought. Therefore, the entire issue of incorporation of the arbitration clause from the Settlement Agreement to Master Facility Agreement assumes relevance since SREI which is the only common “party” to both the agreements is not before the Court for seeking any relief. In the present case, the presumptive link between the petitioner, the respondent no. 1 and the Arbitration Agreement between them has snapped by the mix-up of parties. There is no special reference indicating a mutual intention on the part of the petitioner, SREI and the respondent no. 1 to incorporate the arbitration clause from the Master Facility Agreement to the Settlement Agreemen. The non-commonality of parties makes such a composite reference impossible in the eye of law.

Case: Kobelco Construction Equipment India Private Limited vs. Lara Mining & Anr.

Coram: Justice Moushumi Bhattacharya

Citation: 2023 LiveLaw (Cal) 222

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