Supreme Court of India: Whether the general words of incorporation are sufficient to incorporate an arbitration agreement; difference between ‘reference’ and ‘incorporation’

Supreme-Court-of-India-1_85138_730x419

In a recent case of M/S. INOX Wind Ltd. v. M/S Thermocables Ltd. Civil Appeal No. 19 of 2018 (Arising out of SLP (Civil) No.31049 of 2016 decided on January 05, 2018), the Supreme Court of India (the Court) addressed the issue of whether the general words of incorporation are sufficient to incorporate an arbitration agreement. The Court cited its earlier dicta of M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696 wherein the Court had set the rule to be that an arbitration clause in an earlier contract cannot be incorporated by a general reference. The exception to the rule is a reference to a standard form of contract by a trade association or a professional institution in which case a general reference would be sufficient for incorporation of an arbitration clause. In the case in hand, the Court agreed with its ruling in M.R. Engineers’ case (Supra) with a modification 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. In M.R. Engineers the Court restricted the exceptions to standard form of contract of trade associations and professional institutions. But in the case in hand, the Court observed that in view of the development of law after the judgment in M.R. Engineers’ case, it is correct to hold that a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause. In other words, general reference to a standard form of contract of one party will be enough for incorporation of arbitration clause. Detailed case analysis follows:

Factual Matrix

The dispute arose between the parties regarding non-payment of purchase orders issued for the supply of cables by the INOX to the Thermocables. The dispute resolution clause of the Purchase Order provided for a dispute to be resolved by a sole arbitrator in accordance with the provisions of the Indian Arbitration Act (the Act). As per the Purchase Order, Thermocables supplied the material to INOX which were found to be defective and INOX asked for replacement. Since Thermocables paid no heed, INOX issued notice to Thermocables for appointing a sole arbitrator pursuant to dispute resolution clause. In the absence of any response, the INOX moved the High Court of Judicature at Allahabad by filing an application under Section 11 (6) of the Act. The High Court dismissed the said application by holding that an arbitrator cannot be appointed as INOX did not prove the existence of an arbitration agreement. The High Court further held that there is no special reference to the arbitration clause in the standard terms and conditions, so the arbitration clause cannot be said to have been incorporated into the purchase order.

Application Legal Principles

Section 11 (6) of the Act

11 Appointment of arbitrators. —

(6) Where, under an appointment procedure agreed upon by the parties,–

(a)  a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c)  a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request [the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

(6B) The designation of any person or institution by the Supreme Court or, as the case may be, the High Court, for the purposes of this section shall not be regarded as a delegation of judicial power by the Supreme Court or the High Court.

Section 7 (5) of the Act

7. Arbitration agreement.—

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 6 (2) of the English Arbitration Act, 1996

6 Definition of arbitration agreement.

(2)The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.

Authorities relied upon by Court and Parties

M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696

In this case, the Appellant was a sub-contractor of the Respondent. The Appellant was entrusted a part of the work by the Respondent-contractor which pertained to ‘construction of project directorate building’. It was mentioned in the sub-contract that it shall be carried out as per the terms and conditions applicable to the main contract. A dispute arose between the parties which made the Appellant therein to approach the High Court for appointment of an arbitrator under Section 11 (6) of the Arbitration and Conciliation Act, 1996. The High Court of Kerala rejected the application on the ground that the arbitration clause in the main contract was not incorporated by reference in the contract between the Appellant and Respondent therein. In the appeal before this Court, the Appellant submitted that his case was squarely covered by Section7 (5) of the Act and that the arbitration clause from the main contract was incorporated by reference in the sub contract between him and the Respondent.

The Supreme Court considered the scope of Section 7 (5) of the Act and held that a conscious acceptance of the arbitration clause found in another document is necessary for the purpose of incorporating it into the contract. It was further held that general rules of construction of contracts would have to be followed as there were no guidelines in Section 7(5) regarding the conditions that need to be fulfilled before construing a reference to a portion of a contract as a reference incorporating the whole of it along with the arbitration clause contained in it.

While distinguishing ‘reference’ to another document from ‘incorporation’, the Supreme Court observed that the relevant factor was the intention of the parties either to adopt the document in its entirety or to borrow specific portions of the said document.

Analysis

The Court observed that Section 6 (2) of the English Arbitration Act, 1996 which extends to England, Wales and Northern Ireland is in pari materia with Section 7 (5) of the Act. The Court found it useful to understand the interpretation of the incorporation issue in England. The question whether the general words of incorporation are sufficient to incorporate an arbitration agreement arose for consideration of the High Court of Justice, Queen’s Bench Division, Commercial Court in Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited The Athena [2006] EWHC 2530 (Comm). In the said case the difference between incorporation in a single contract case and a two contract case was recognized. If there is a reference to a secondary document in a contract between two parties and that secondary document is a contract to which at least one party is different from the parties to the contract in question, it would be a two contract case. In other words, if the secondary document is between other parties or if only one of the parties to the contract in dispute is party to an earlier contract to which a reference is made, then it would be a two contract case. In such a contract general reference to the earlier contract would not be sufficient to incorporate the arbitration clause. However, if the reference is to standard terms in a contract that would be a case of ‘single contract’ and the use of general words to incorporate the arbitration agreement by a reference is permissible. As the reference in that case was to a standard form of contract which was a single contract case, Justice Langley held that the general words of incorporation were enough to incorporate an arbitration clause.

The Court cited another case from English Jurisdiction the Queen’s Bench Division again in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm). The dispute that arose in that case was whether general words were capable of incorporating an arbitration clause. The difference in approach between cases in which the parties incorporate the terms of a contract between the other parties or between one of them with a third party on the one hand and those in which they incorporate the standard terms on the other hand, was noticed.

The following broad categories in which the parties attempt to incorporate an arbitration clause were recognized by the Court, which are as follows:

“(1) A and B make a contract in which they incorporate standard terms. These may be the standard terms of one party set out on the back of an offer letter or an order, or contained in another document to which reference is made; or terms embodied in the rules of an organisation of which A or B or both are members; or they may be terms standard in a particular trade or industry.

(2) A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties

(3) A and B make a contract incorporating terms agreed between A (or B) and C. Common examples are a bill of lading incorporating the terms of a charter to which A is a party; reinsurance contracts incorporating the terms of an underlying insurance; excess insurance contracts incorporating the terms of the primary layer of insurance; and building or engineering sub contracts incorporating the terms of a main contract or sub-sub contracts incorporating the terms of a sub contract.

(4) A and B make a contract incorporating terms agreed between C and D. Bills of lading, reinsurance and insurance contracts and building contracts may fall into this category.”

In Habas’s case (supra), Justice Christopher Clarke followed the ratio in the case of ‘the Athena’ (supra) and held that in single contract cases (categories 1 and 2), a general reference would be sufficient for incorporation of an arbitration clause from a standard form of contract. In cases falling under categories 3 and 4 mentioned above which are two contract cases, it was held that a stricter rule has to be followed by insisting on a specific reference to the arbitration clause from an earlier contract.

Conclusion

The Court held that the purchase order is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clause.

 

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