April 15, 2019

Arbitration through incorporation by reference - Indian Law Position

In Giriraj Garg v. Coal India Ltd. and Ors.[1] the Supreme Court of India examined the principles of law laid down by Queen’s Bench Division judgment in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL[2] affirmed by the Queen’s Bench Division judgment in SEA2011 Inc. v. ICT Ltd.[3] and recognized the arbitration clause between the parties applying the principles of incorporation by reference in a ‘single contract case’.

Brief facts

  • There was a 2007 Scheme floated by Respondent No.1 whereby coal distribution would be conducted through e-auction, with a view to provide access to coal for buyers, who were not able to source coal through the available institution mechanism;
  • 2007 Scheme contained an arbitration clause for settling disputes arising out of the Scheme or in relation thereto in any form whatsoever;
  • Appellant herein, participated in the e-Auction for purchase of coal for several sale orders issued under the 2007 Scheme. Appellant was declared successful with respect to various coal orders and was issued several sale orders;
  • Subsequently, certain disputes arose between the parties with the Appellant invoking the arbitration clause under the 2007 Scheme. Respondent failed to appoint an arbitrator as per the 2007 Scheme;
  • Accordingly, Appellant filed an Application under Section 11 of the Arbitration and Conciliation Act, 1996 before the Jharkhand High Court seeking appointment of an independent arbitrator;
  • Appellant’s application was rejected on the ground that disputes relate to different transactions entered into between the parties under the 2007 Scheme. Further, the sale orders did not contain an arbitration clause and none of the individual sale orders refer to the applicability of terms and conditions of the 2007 Scheme to the sale orders. As such, there is no incorporation by reference.

In the above backdrop, the Supreme Court determined whether arbitration clause contained in the 2007 Scheme, would stand incorporated by reference in each of the sale orders.

Discussion

The Supreme Court examined the principles of incorporation by reference of an arbitration clause which has been given statutory recognition under Section 7(5) of the Arbitration and Conciliation Act, 1996. The said provision inter-alia provides that reference in a contract to a document containing an arbitration clause, constitutes a valid arbitration agreement, if the contract is in writing, and the reference is specifically made to incorporate the arbitration clause as a part of the contract.

The Court further analyzed the following:

  • Article 7(2) of the UNCITRAL Model Law as it stood prior to the 2006 amendment which provides for reference to a document containing an arbitration clause;
  • Section 6(2) of the English Arbitration Act, 1996, which is pari materia to Section 7(5) of the Indian Arbitration Act;
  • Decision passed by the Queen’s Bench Division, Commercial Court in Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena[4] which laid down the foundation of incorporation of an arbitration clause by general reference;
  • The distinction carved out between single contract case and two contract case in Habas Sinai (Supra) wherein incorporation by general reference in single contract case was held valid and in two contract case, a specific reference to the arbitration clause was required; and
  • The principles of law laid down in INOX Wind Ltd. v. Thermocables Ltd. (2018) 2 SCC 519 wherein the Court expanded the application of doctrine of general reference to a standard form contract of one party.

Reasons and conclusion

After appreciating the consistent development of law in relation to incorporation by reference of an arbitration clause, the Supreme Court held that the arbitration clause in the 2007 Scheme would stand incorporated in the sale orders issued thereunder.

Noticing the words in relation hereto appearing in the 2007 Scheme’s arbitration clause, the Court held that these words are of the widest amplitude and would apply to all transactions which took place under the 2007 Scheme including the sale orders.

Finally, the Court was pleased to appoint a Sole Arbitrator to adjudicate the disputes between Appellant and Respondent in relation to the 2007 Scheme.

Authors comments

The present judgment manifests the intention of Courts in India to encourage dispute resolution through arbitration even though such mechanism may be not be conspicuous. The law laid down by the Supreme Court in its landmark judgment passed in M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd.[5]  setting the tone of incorporation by reference of an arbitration clause under the 1996 Act has witnessed an improvement basis the rapid development of global arbitration jurisprudence.

Same parties which transact with each other on a regular basis may not be able to avoid an arbitration clause incorporated by general reference from a previous agreement between them inter-alia on technical grounds such as an unsigned contract. This is also based on the rationale that the parties are expected to be more familiar with those standard terms, including the arbitration clause.

Incorporation of standard terms by use of general words in single form contracts between the same private parties is being accepted by the Courts. The dictum makes it clear that the intention is not to distinguish between a term which is an arbitration clause and one which addresses other issues. The stricter rule in two contract cases appears to be for safeguarding the other party which may have no ready means of knowledge of the relevant terms.

Footnotes
1. AIR2019SC1015
2. [2010] EWHC 29 (Comm)
3. [2018]EWHC 520 (Comm)
4. [2006] EWHC 2530 (Comm)
5. 2009(9) SCALE 298

Authors

Sumeet Lall
Partner, CSL Chambers
Sumeet.Lall@cslchambers.com

Sidhant Kapoor
Associate, CSL Chambers
Sidhant.Kapoor@cslchambers.com

CSL Chambers is Clyde & Co's associated firm in New Delhi, India