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Supreme Court Rules on Incorporation of Arbitration Clause by Reference - International Law Office

International Law Office

Litigation - India

Supreme Court Rules on Incorporation of Arbitration Clause by Reference

September 08 2009

Introduction
Facts
Decision
Comment


Introduction

The Supreme Court recently made an important pronouncement on its interpretation of Section 7(5) of the Arbitration and Conciliation Act 1996 and the issue of whether an arbitration clause contained in a main contract can be incorporated by reference into a subcontract, where the subcontract provides that it "shall be carried out on the terms and conditions as applicable to the main contract". In MR Engineers and Contractors Pvt Ltd v Somm Datt Builders Ltd the Supreme Court discussed the applicability of the arbitration clause contained in the main contract to the disputes arising in relation to the subcontract and laid down certain conditions for incorporation of the arbitration clause by reference.(1)

Facts

The Public Works Department (PWD) entered into a contract with Som Datt Builders Ltd for work improving highways. This main contract between PWD and Som Datt also included the job of constructing a project directorate building and provided for arbitration between the parties on the fulfilment of certain conditions pursuant to Clause 67.3 of the general conditions of contract. MR Engineers was a subcontractor of Som Datt and was entrusted with part of the job of constructing the project office.

The subcontract was to be carried out under the terms and conditions of the main contract unless otherwise mentioned in the order letter. MR Engineers had carried out some extra work on the instructions of PWD and asked Som Datt to make claim for payment from PWD. This claim, together with several other of Som Datt's claims against PWD, was referred to arbitration and the arbitrator made an award. MR Engineers maintained that the award passed awarding amounts in favour of Som Datt also covered the claims that MR Engineers had made through Som Datt. On these grounds, MR Engineers lodged a claim against Som Datt and as the claim was settled, MR Engineers sent a letter seeking reference of the disputes to arbitration.

On Som Datt's failure to comply, MR Engineers filed an application under Section 11 of the Arbitration and Conciliation Act contending, among other things, that Clause 67.3 of the general conditions of contract forming part of the main contract between PWD and Som Datt and providing for disputes to be referred to arbitration was incorporated into the subcontract between Som Datt and MR Engineers by reference, and further that the subcontract was an agreement within the meaning of Section 7(5) of the act.(2)

The designate of the chief justice rejected the application on the grounds that the arbitration clause in the main contract was not incorporated by reference into the subcontract between Som Datt and MR Engineers. This decision was challenged before the Supreme Court.

Decision

The Supreme Court accepted the proposition that even where a contract between two 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 to an independent document in the contract if the reference is such to make the arbitration clause in the independent document a part of the contract. However, based on the facts of the case, it was held that there was no incorporation of the arbitration clause contained in the main contract into the subcontract between Som Datt and MR Engineers by reference because: (i) the parties never intended to incorporate the same into the subcontract; and (ii) the entire arbitration agreement contained in the main contract was tailor-made to meet the requirements of the contract between PWD and Som Datt, and was wholly inappropriate and inapplicable in the context of a dispute between Som Datt and MR Engineers.

Comment

This decision lays down certain important principles with regard to the scope and intent of Section 7(5) of the Arbitration and Conciliation Act, requiring parties' conscious acceptance of an arbitration clause from another document as part of their contract before such arbitration clause can be read as part of the contract.

Since Section 7(5) of the Arbitration and Conciliation Act is silent on the conditions to be fulfilled before an arbitration clause can be incorporated by reference, the Supreme Court has laid down the following normal rules of contract construction to bring out the true scope and intent of Section 7(5):

  • An arbitration clause in another document will be incorporated into a contract by reference if the following conditions are fulfilled:
    • The contract should contain a clear reference to the document containing the arbitration clause;
    • The reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract; and
    • The arbitration clause should be appropriate (ie, capable of application in respect of disputes under the contract) and should not oppose any term of the contract.
  • Where parties enter into a contract that makes a general reference to another contract, such general reference will not have the effect of incorporating an arbitration clause from the referred document into the contract between the parties. An arbitration clause from another contract can be incorporated into the main contract only by specific reference to the arbitration clause.
  • Where a contract between parties provides that the execution or performance of that contract shall be under the terms of another contract (which contains a provision for settlement of disputes by arbitration), the terms of the referred contract in regard to execution or performance alone will apply and not the arbitration agreement in the referred contract, unless there is also specific reference to the arbitration clause.
  • Where a contract provides that the standard form of terms and conditions of an independent trade or professional institution will apply to the contract, such standard form of terms and conditions, including any provision for arbitration, will be deemed to be incorporated by reference.
  • Where a contract between parties stipulates that the conditions of one of the party's contract shall form a part of their contract (eg, the governmental general conditions of contract 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.

For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+91 11 2692 4900) or email (bishwajit.dubey@amarchand.com or tamal.mandal@amarchand.com).

Endnotes


(1) Civil Appeal 4150/2009 decided on July 7 2009.

(2) Section 7(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."


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