General Reference Won't Have Effect Of Incorporating Arbitration Clause In Another Contract, Specific Reference Needed : Supreme Court

The Supreme Court reiterated that a dispute cannot be referred to arbitration based on the arbitration clause contained in another contract unless a specific reference was made in the main contract to incorporate the arbitration clause into the main contract.

Reversing the findings of the High Court, the Bench Comprising Justices B.R. Gavai and Sandeep Mehta held that unless a specific reference is made in the main contract to incorporate the arbitration clause of another contract then the parties are bound to settle their dispute through the mode of settlement agreed to in the main contract.

“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 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/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.”, the Judgment authored by Justice BR Gavai said while relying on M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited.

The aforesaid observation of the Supreme Court came while deciding a plea preferred by NBCC (India) Ltd. against the decision of the Delhi High Court which had referred the dispute between the parties to the arbitration despite there being no specific reference to adopting arbitration as a suitable mode of settlement of dispute.

The disputed fact that led to the culmination of the litigation was that a main contract i.e., a Letter of Intent (“LOI”) was executed between the parties which stated that the terms and conditions mentioned in another contract (DVC) would apply mutatis mutandis to the LOI. The LOI doesn't contain the arbitration clause but provides the resolution of the dispute through the Civil Court. However, the DVC provides the resolution of the dispute through arbitration.

After the dispute arose, the respondent sought appointment of the arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996. The High Court while allowing the application took note of the fact that the LOI made a specific reference to the arbitration clause contained in the DVC.

Rejecting such an approach of the High Court, the Supreme Court held that the High Court erred in concluding that the arbitration clause mentioned in another contract (DVC) would apply to the LOI despite there being no specific reference made in the LOI to incorporate the arbitration clause of DVC to LOI.

“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. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.”, the Supreme Court said in M.R. Engineers and Contractors Private Limited.

In 'Two-Contract Case' A Specific Reference to Arbitration Clause of Another Contract Is Mandatory

The court stated that there are two forms of contract between the parties i.e., (i) two-contract case, where there is a main contract and another contract containing an arbitration clause, and (ii) one-contract case, where there is only one main contract specifying the standard terms and conditions attached with the main contract.

The court here distinguished between Inox Wind Limited V. Thermocables Limited, (2018) 2 SCC 519 and M.R. Engineers and Contractors Private Limited by stating that the present case isn't a single-contract case where a general reference to a standard form would be enough for incorporation of the arbitration clause but a two-contract case which requires a specific reference to the arbitration clause of another contract.

“In the said case (i.e. Inox Wind Limited), this Court has held that though general reference to an earlier contract is not sufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form would be enough for incorporation of the arbitration clause. Though this Court in the case of Inox Wind Limited (supra) agrees with the judgment in the case of M.R. Engineers and Contractors Private Limited (supra), it holds that general reference to a standard form of contract of one party along with those of trade associations and professional bodies will be sufficient to incorporate the arbitration clause. In the said case (i.e. Inox Wind Limited), this Court found that the purchase order was issued by the appellant therein in which it was categorically mentioned that the supply would be as per the terms mentioned therein and in the attached standard terms and conditions. The respondent therein by his letter had confirmed its acceptance. This Court found that the case before it was a case of a single-contract and not two-contract case and, therefore, held that the arbitration clause as mentioned in the terms and conditions would be applicable.”

There Was A Clear Intention of Parties To Not Settle Their Dispute Through Arbitration

“As already discussed herein above, when there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/reference thereto.”, the court said.

“We are of the considered view that the present case is not a case of 'incorporation' but a case of 'reference'. As such, a general reference would not have the effect of incorporating the arbitration clause. In any case, Clause 7.0 of the L.O.I., which is also a part of the agreement, makes it amply clear that the redressal of the dispute between the NBCC and the respondent has to be only through civil courts having jurisdiction of Delhi alone.”, the court added.

Conclusion

“In that view of the matter, we find that the learned single judge of the Delhi High Court has erred in allowing the application of the respondent. The appeals are accordingly allowed. The impugned orders are quashed and set aside. There shall be no order as to costs.”, the court concluded.

The appeal was allowed accordingly.

Counsel For Petitioner(s) Mr. Gopal Shankarnarayan, Sr. Adv. Mr. Debarshi Bhadra, Adv. Ms. Jhanvi Dubey, Adv. Mr. Sunil Mund, Adv. Mr. Kiran Kumar Patra, AOR

Counsel For Respondent(s) Mr. Sumit Kumar, AOR Ms. Kumari Supriya, Adv. Mr. Bharath Kumar, Adv. Ms. Sakshi Sharma, Adv.

Case Title: NBCC (INDIA) LIMITED VERSUS ZILLION INFRA PROJECTS PVT.LTD.

Citation : 2024 LiveLaw (SC) 246

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