Mere Reference To Another Agreement Having Arbitration Clause Does Not Automatically Incorporate It Into Subsequent Contract: Delhi High Court

The Delhi High Court division bench of Justice Rajiv Shakdher and Justice Amit Bansal held that arbitration cannot be binding on parties unless the terms and conditions of the referenced agreement, which includes an arbitration clause, are explicitly incorporated into the new contract. 

Brief Facts:

The matter pertained to a contractual agreement between the Delhi Metro Rail Corporation (DMRC) and the M/s MAC Associates (“Appellant”) regarding various electrical works at the Nurses and Intern's Hostel in Vasant Kunj, New Delhi. Initially, the DMRC issued a tender for these works, which the appellant secured. Subsequently, Mr Parvinder Singh (“Respondent”) expressed interest in undertaking the electrical works and submitted a quotation to the Appellant. Following negotiations, the Appellant allocated the work to the Respondent, formalizing the agreement through a signed work order dated July 6th, 2010.

As per the terms of the work order, the total cost of the work was agreed upon, with a specified completion timeline of 12 months. However, disputes arose regarding delays and alleged breaches of contract. The Appellant accused the Respondent of failing to complete the work within the agreed timeframe, while the Respondent countered it, attributing the delays to the Appellant's failure to fulfil its obligations promptly, resulting in losses for the Respondent.

Despite the completion of the work by the Respondent on November 30th, 2014, the Appellant allegedly failed to clear the Respondent's bills, prompting the Respondent to file a suit for recovery of dues totalling Rs. 53,01,812/-. In response, the Appellant filed an application for invoking arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in the Commercial Court, Saket. The District Judge dismissed the application and held that there was no valid and binding arbitration agreement between the parties, hence, Section 8 was inapplicable.

Dissatisfied with the order of the Commercial Court, the Appellant filed an appeal under Section 37 of the Arbitration Act in the High Court of Delhi (“High Court”). The Appellant cited Clause 9 of the work order along with several other clauses in the agreement to refer the dispute to arbitration. It further submitted that the General Conditions of Contract (GCC) issued by the DMRC had an arbitration clause (Clause 85) which also applied to the work order between the Appellant and the Respondent. The Respondent submitted that he was not a party to the contract between the DMRC and the Appellant. Therefore, the arbitration clause cannot be held to be binding on him. 

The relevant Clause 9 of the work order is reproduced below:

“9. The Contract is completely on back to back basis only. The specific and main points/clauses only has been mentioned in this order for your convenience and any omission on our part shall not absolve you from your responsibility of going through the various clauses in the contract agreement with DMRC including specifications, General and special conditions of the contract, as this is a back to back basis contract.”

Observations of the Commission:

The High Court thoroughly examined the contentions raised by both parties, particularly focusing on the interpretation of Section 7(5) of the Arbitration Act. The High Court referenced previous judicial interpretations of this section, notably the Supreme Court's decision in M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd. [(2009) 7 SCC 696].

In M.R. Engineers, the Supreme Court distinguished between a 'mere reference to another document' and 'incorporation of the terms and conditions of the said document in the contract.' It emphasized that explicit incorporation of terms and conditions from another document into the contract is essential for the arbitration clause to be applicable. Based on this, the High Court outlined instances where such incorporation occurs, highlighting the necessity for a specific reference to the arbitration clause for its inclusion in the contract.

Subsequently, the High Court analyzed the legal position in 'single-contract' and 'two-contract' cases. It noted that in single-contract cases, a general reference to a standard form contract suffices for the incorporation of an arbitration clause. However, in two contract cases, specific reference to the arbitration clause in the earlier contract is necessary for its inclusion in the subsequent contract.

Applying these principles to the present case, the High Court determined that it constituted a two-contract case, as the parties to the main contract and the work order were different. Consequently, the arbitration clause from the main contract between the Appellant and the DMRC could not be incorporated into the work order through a general reference. The High Court also scrutinized Clause 9 of the work order and found it lacking a clear intention to incorporate the arbitration clause from the main contract.

Furthermore, the High Court examined Clause 85 of the General Conditions of Contract (GCC), which outlined the arbitration process between the DMRC and the Appellant. It concluded that this clause was inherently inapplicable to the contract between the Appellant and the Respondent, as it referred to disputes between the DMRC and the Appellant, not the Appellant and the Respondent.

Based on these observations, the High Court upheld the decision of the Commercial Court, dismissing the appeal filed by the Appellant.

Case Title: M/s MAC Associates vs Parvinder Singh

Citation: 2024 LiveLaw (Del) 254

Case No.: Fao (Comm) 261/2023 & CM Appl. 66526/2023

Advocate for the Appellant: Mr Vikas Tomar and Mr Nimish Mishra 

Advocate for the Respondent: Mr Sunil Kumar, Mr Ankit Dixit, Mr Surender Kumar and Mr Hansraj

Click Here To Read/Download Order