Supreme Court of India: Incorporation by Reference of An Arbitration Clause in A ‘Two Contract’ Case

Supreme Court of India: Incorporation by Reference of An Arbitration Clause in A ‘Two Contract’ Case

In NBCC (India) Limited v Zillion Infraprojects Pvt. Ltd., the Hon’ble Supreme Court of India has discussed the concept of incorporation of arbitration clause by reference in a ‘Two Contract’ case and held that in ‘Two Contract’ cases an arbitration clause from first contract cannot be incorporated in a second contract without a specific reference.

Factual Matrix

In the facts of the case, Damodar Valley Corporation (“DVC”) issued a tender to NBCC (India) Limited (“NBCC”) for certain construction works. Tender contained certain set of standard contracts such as General Conditions of Contracts Special Conditions  of Contract, Bill of Quantity, etc including an arbitration clause.

NBCC in turn issued these works to Zillion Infraprojects Pvt. Ltd. (“Zillion”) under a Letter of Intent (“LOI”). LOI inter alia provided that all terms and conditions as contained in the tender issued by DVC to NBCC shall apply mutatis mutandis to the parties to the LOI. However, LOI also provided that where the terms and conditions have been expressly modified by NBCC in the LOI viz-a-viz the tender, the same would not be applicable to the parties to the LOI. It also provided that the redressal of dispute between NBCC and Zillion shall only be through civil courts of Delhi alone.

Disputes arose between NBCC and Zillion and the latter invoked the arbitration clause provided under the GCC of the tender issued by DVC to NBCC. NBCC didn’t act on this notice which led Zillion to file an application to the Court seeking appointment of an arbitrator under Section 11(6) of the Indian Arbitration and Conciliation Act,1996 (“A&C Act”). This was allowed by the Hon’ble Delhi High Court which led NBCC to file an appeal before the Hon’ble Supreme Court which is decided in the present proceedings.

Parties Contentions 

Before the Supreme Court, NBCC contended as under:- 

• Albeit the LOI provides that the terms of tender between DVC and NBCC shall apply mutandis mutandis on parties to LOI, it also carves out an exception where such terms will not apply if they’re modified in LOI by NBCC;

• According to Zillion, LOI has specifically modified the dispute resolution under LOI by conferring exclusive jurisdiction to courts in Delhi to decide any dispute between the parties;

• Therefore, the arbitration clause from tender between DVC and NBCC cannot be said to be incorporated by reference in the LOI;

• The present matter is a ‘Two contract’ case wherein an arbitration clause from one contract cannot be incorporated by reference into the second contract without a specific reference. 

Per contra, Zillion argued that the LOI specifically incorporates the terms and conditions in the tender issued by the DVC to the NBCC including the arbitration clause and thus High Court was right in acting upon such arbitration clause. 

Position of Law

• Section 7(5) of A&C Act provides that 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.

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

• 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. (M.R. Engineers and Contractors Private Limited (supra))

• Where 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. (M.R. Engineers and Contractors Private Limited (supra))

• Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution will bind them or apply to the   contract, such standard form of terms and conditions including   any provision for arbitration in such standard terms and   conditions, shall be deemed to be incorporated by reference. (M.R. Engineers and Contractors Private Limited (supra))

• 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. (M.R. Engineers and Contractors Private Limited (supra))

• 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, the arbitration   clause forming part of such general conditions of contract will   apply to the contract between the parties. (M.R. Engineers and   Contractors Private Limited (supra))

Conclusion 

Applying the above position of law on the facts of the present case, the Court held as under:-

• A reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document into the contract.  

• The present case is a ‘two-contract’ case and not a ‘single- contract’ case.  

• In view of the clauses of LOI, all terms and conditions as contained in the tender issued by DVC to NBCC shall apply mutatis mutandis except where these have been expressly modified by the NBCC. 

• Intention between the parties is very clear. LOI specifically provides that the redressal of dispute between the NBCC and Zillion shall only be through civil courts having jurisdiction of Delhi alone. It specifically uses the word “only”   before the words “be through civil courts having jurisdiction of Delhi alone”. 

• 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. 

Accordingly, the Court held that the present case is not a case of ‘incorporation’ but a case of ‘reference’ and as such, a general reference in LOI would not have the effect of incorporating the arbitration clause from the tender between DVC and NBCC.