Supreme Court of India: Incorporation By Reference of An Arbitration Clause From Another Document Or Contract, The Single Contract & Two Contract Cases

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In case of Giriraj Garg v Coal India Ltd. & Ors., (decided on 15 February 2019), the Supreme Court of India dealt with the issue of incorporation of an arbitration clause by reference contained in a Scheme issued by the Respondent into individual sale orders issued by the Respondent. To decide the case, the Supreme Court relied on several English and Indian authorities on single and two contract cases and their incorporation by reference. The Court held that Clause 7 in the sale orders falls under the ‘single contract case’ where the arbitration clause is contained in a standard form document i.e. the Scheme, to which there is a reference in the individual sale orders. Detailed case analysis given below:-

Factual Matrix

The Respondent issued an e-auction scheme for distribution of coal. The Appellant was granted several orders through this e-auction scheme. As a sequitur, sale orders were issued to the Appellant by the Respondent. In furtherance to the terms and conditions of the scheme, the Appellant deposited an earnest money with the Respondent. Thereafter, a dispute arose between the parties as the Appellant was not able to lift the booked quantity of coal within the stipulated time which was considered as breach of terms of scheme by the Respondent.

The scheme contained an arbitration clause which was invoked by the Appellant who called out the Respondent to appoint an arbitration as per the arbitration clause. The Respondent failed to comply with it and therefore, the Appellant filed an application for appointment of an arbitrator before the High Court. This application was rejected on the ground that the disputes relate to different transactions entered into between the parties under the scheme whereas the sale orders did not contain an arbitration clause. It was held that even though the scheme contains an arbitration clause, none of the individual sale orders make reference to the applicability of terms and conditions of the Scheme to the sale orders. Therefore, the arbitration clause cannot be incorporated by reference.

However, the Sale Order contained Standard Terms and Conditions at the end. Clause 7 of these Terms and Conditions stated that the sale orders would be governed by the Guidelines, Circulars, Notices and Instructions issued by the Respondent. The High Court did not considered this clause as incorporation of arbitration clause contained in scheme by reference in the sale orders.

The decision of High Court is assailed before the Supreme Court in the present proceedings.

Arbitration Clause

Clause 11.12 of the 2007 Scheme contains an arbitration clause which reads as under ¬

11.12         In   the   event   of   any   dispute, Bidder/Buyer   is   necessarily   required   to represent in writing to the General Manager (Sales and Marketing) of the concerned Coal Company, who would deal with the same in a period of 1 month from such representation. Thereafter,   if   required   the   matter   be determined   by   the   Director¬In   Charge   of Marketing   of   the   concerned   Coal   Company. Any   interpretation   of   this   Clause   will   be subject to clarification by CIL, which will be deemed as firm and final. All disputes arising out of this scheme or in relation thereto in any form whatsoever shall be dealt exclusively by way of arbitration in terms of the Arbitration and   Conciliation   Act,  1996.  The   arbitration shall be conducted at Kolkata at a place to be notified   by   CIL.   The   arbitrator   shall   be appointed   by   the   Chairman   and   Managing Director,   CIL   upon   written   request   in   this behalf. The award rendered by the arbitrator shall be final and binding on the parties. (The place   of   arbitration   and   nomination   of arbitrator be varied appropriately in view of the Coal Company involved).

Applicable Legal Principles

Section 7(5) of the Arbitration and Conciliation Act, 1996 (‘Act’)

(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.

Legal Position in England and Wales

Section 6(2) of the English Arbitration Act, 1996 is pari materia to Section 7(5) of the Act, and reads as under:

6 Definition of arbitration agreement.

(1)…..

(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.

In Sea Trade Maritime v Hellenic Mutual War Rules Association (Bermuda) Ltd (“The Athena”) No.2 [2007] 1 Lloyds Rep 280, the Court drew a distinction between what it described as a ‘two-contract case’, that is where the arbitration clause is contained in a secondary document which is a contract to which at least one party is different from the parties to the contract in question, and a ‘single contract case’ where the arbitration clause is in standard terms to be found in another document. Relying on the dictum of Bingham L.J. in Federal Bulk Carriers Inc. v. C Itoh & Co. Ltd. . . ., Langley J. said that ‘In principle, English law accepts incorporation of standard terms by the use of general words and I would add, particularly so when the terms are readily available and the question arises in the context of dealings between established players in a well known market. The principle, as the dictum makes clear, does not distinguish between a term which is an arbitration clause and one which addresses other issues. In contrast, and for the very reason that it concerns other parties, a ‘stricter rule’ is applied in charterparty/bills of lading cases. The reason given is that the other party may have no knowledge nor ready means of knowledge of the relevant term. Further, as the authorities illustrate, the terms of an arbitration clause may require adjustment if they are to be made to apply to the parties to a different contract’.

The Court therefore reinforced the distinction between incorporation by reference of standard form terms and of the terms of a different contract, and concluded that in a single contract case general words of incorporation are sufficient, whereas by its nature a two-contract case may require specific reference to the other contract. Langley J further observed as under:-

general words of incorporation may serve to incorporate an arbitration clause save in the exceptional two contract cases to which I have referred in which some express reference to arbitration or perhaps provision of the relevant clause is also required.’

The issue of incorporation by reference in a single contract and two contract situation, was considered in Habas Sinai v. Sometal S.A.L. by Clarke J. in the UK High Court [2010] EWHC 29 (Comm). In paragraph 13 of his judgment he pointed out that parties are free to incorporate (or seek to incorporate) whatever terms they choose by whatever method they choose. He identified 4 separate situations:

  1. A and B make a contract in which they incorporate standard terms.
  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.
  4. A and B make a contract incorporating terms agreed between C and D.

After an exhaustive review of the authorities he expressed his conclusions in paragraphs 46 – 49 of his judgment. The essence of his reasoning is paragraphs 46 and 49.

46 Where parties are in dispute as to what they have agreed the task of the Court is to determine from the communications that passed between them in the context in which those communications were made what reasonable persons in their position would regard them as having intended to agree. Where those parties agree the essential terms of a contract and also that their contract shall include the terms of a previous contract or contracts between them the Court may have to determine which provisions of which contract(s) they meant to incorporate. If the Court is able to decide what those provisions were, it should not, in my judgment, be astute to impose any special rules which limit the ability of the parties validly to agree what, on ordinary principles of construction, they would be taken to have agreed.

49 There is a particular need to be clear that the parties intended to incorporate the arbitration clause when the incorporation relied on is the incorporation of the terms of a contract made between different parties, even if one of them is a party to the contract in suit. In such a case it may not be evident that the parties intended not only to incorporate the substantive provisions of the other contract but also provisions as to the resolution of disputes between different parties, particularly if a degree of verbal manipulation is needed for the incorporated arbitration clause to work. These considerations do not, however, apply to a single contract case

Legal Position in India

The position of law on this issue was settled by the Supreme Court in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) 7 SCC 696.

In this case, the Court was dealing with sub-section (5) of Section 7 of the Act, which is an enabling provision dealing with incorporation by reference of an arbitration clause and it sets out the legislative intent to import an arbitration clause from another document, merely on reference to such document in the contract by conscious acceptance of the arbitration clause from another document by the parties as a part of their contract.

In this case, the question for consideration of the Supreme Court was whether an arbitration clause contained in a main contract, would stand incorporated by reference, in a sub-contract, where the sub-contract provided that it “shall be carried out on the terms and conditions as applicable to the main contract.

The Court inter-alia held that even though the contract between the parties does not contain a provision for arbitration, an arbitration clause contained in an independent document will be incorporated into the contract between the parties, by reference, if the reference is such as to make the arbitration clause in such document, a part of the contract. The Court encapsulated the essentialities of incorporation by reference of an arbitration in the following words:-

“24. The scope and intent of Section 7(5) of the Act may therefore be summarised thus:

(i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled:

(1) the contract should contain a clear reference to the documents containing arbi- tration clause,

(2) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract,

(3) the arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.

(ii) 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.

(iii) 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 con- ditions 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.

(iv) Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution (as for example the standard terms and conditions of a trade association or architects association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitra- tion in such standard terms and conditions, shall be deemed to be incorporated by ref- erence. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.

(v) Where the contract between the parties stipulates that the conditions of contract of one of the parties to the contract shall form a part of their contract (as for example the general conditions of contract of the Government where the Government is a party), the arbitration clause forming part of such general conditions of contract will apply to the contract between the parties.”

In light of M.R. Engineers and Contractors Private Limited (supra), it is concluded that there must be special reference indicating a mutual intention to incorporate the arbitration clause from another document into the contract. Thus, an arbitration clause in another contract can be incorporated only by specific reference to such arbitration clause, and not general reference to the underlying contract. The only exception to this rule, as noted by the Supreme Court in the case of Inox Wind Limited v. Thermocables Limited, (2018) 2 SCC 519, is when a general reference is made to a consensual standard document.

In this case, it was held that where a general reference to a consensual standard form is made; such general reference is sufficient to incorporate the arbitration clause contained in the referred form. Even there, it is a principle of law that when the document to which a general reference is made, contains an arbitration clause whose provisions are clearly inapt or inapplicable with reference to any contract in question, it would suggest an inference that there was no intention to incorporate the arbitration clause from the referred document. In this case, the Supreme Court also made it clear that an exception to the general Rule laid down in M.R. Engineers and Contractors Private Limited (supra) as to standard forms of practice containing arbitration clauses would be extended also to standard forms between individual persons and not merely standard forms of professional assessments.

In this case, the Supreme Court considered a situation where the parties had agreed in Purchase Order that the supply was to be according to the terms mentioned in the order and the Standard Terms and Conditions that were attached thereto. An arbitration clause was recorded in the Standard Terms and Conditions. The dispute arose between the parties. One of the party invoked the arbitration agreement recorded in the Standard Terms and Conditions. High Court took a view that the arbitration clause in the main contract was not incorporated by reference in the contract between the parties. Supreme Court adverted to the judgment in case of M.R. Engineers (supra) and also adverted to a passage from Russell on Arbitration, 23rd and 24th Edition.

The Court held that there is distinction between incorporation by reference of standard form terms and of the terms of a different contract, and concluded that in a single contract case, general words of incorporation are sufficient, whereas by its nature a two contract case may require specific reference to the other contract, unless the secondary document is stated to be based on standard form terms containing an arbitration agreement.

The Court held that the courts have extended the “single contract” principle applicable to standard form contracts, where general words of incorporation will suffice, to other types of contract where the same rationale can be said to apply. It was held that if the document sought to be incorporated is a bespoke contract between the same parties, the courts have accepted this as a “single contract” case where general words of incorporation will suffice, even though the other contract is not on standard terms and constitutes an entirely separate agreement.

The rationale for this approach is that the parties have already contracted on the terms said to be incorporated and are therefore even more likely to be familiar with the term relied on than a party resisting incorporation of a standard term. It was held that if general words of incorporation are sufficient for the latter, they should be even more so for the former. The courts also appear to have accepted as a “single contract” case a situation where the contract referred to is between one of the parties to the original contract and a third party, where the contracts as a whole “were entered into in the context of a single commercial relationship”.

The Court 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. It is held that in M.R. Engineers‘ case, Supreme Court had restricted the exceptions to standard form of contract of trade associations and professional institutions. However, in view of the development of law after the judgment in M.R. Engineers‘ case, the court was of the opinion 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. Supreme Court adverted to the passage from Russell on Arbitration 24th Edition and held that the same would demonstrate the change in position of law pertaining to incorporation when read in conjunction with the earlier edition relied upon by this Court in M.R. Engineers‘ case which has rendered to 23rd Edition Russel on arbitration.

The Court was in agreement with the judgment in M.R. Engineer’s case with a modification that a 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. The respondent was duly aware of the standard terms and conditions which were attached to the purchase order. The purchase order was 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.

Judgement

The Court placed reliance on the above discussed English and Indian authorities and held that the High Court has erroneously taken the view that an arbitration clause would not stand incorporated in the individual sale orders.

The individual sale orders emanate out of the 2007 Scheme. The sale orders specifically state that they would be governed by the guidelines, circulars, office orders, notices, instructions, relevant law etc. issued from time to time by the Respondent. As a consequence, the arbitration clause in the 2007 Scheme would stand incorporated in the sale orders issued thereunder.

The Court further noted that Clause 7 in the sale orders falls under the ‘single contract case’ where the arbitration clause is contained in a standard form document i.e. the 2007 Scheme, to  which there is a reference in the individual sale orders issued by the Respondent.

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