General Reference Won’t Have Effect Of Incorporating Arbitration Clause In Another Contract

Summary:

[1]A Two-Judge Bench of the Hon’ble Supreme Court (“Hon’ble SC”) comprising of Justice B.R. Gavai and JusticeSandeep Mehta (“Hon’ble Bench”), reversed the findings of the Hon’ble High Court of Delhi (“Hon’ble HC”) and reiterated that a dispute cannot be referred to arbitration based on the arbitration clause contained in another contract unless a specific reference was made in the main contract to incorporate the arbitration clause into the main contract.

Facts:

The Appellant, NBCC (India) Limited is a Public Limited Company and Government of India undertaking, engaged in construction of power plants and other infrastructure projects on EPC and/or PMC basis. The Respondent, M/s Zillion Infraprojects Pvt. Ltd. is a Private Limited Company, engaged in the construction and infrastructure sector.

The Appellant issued an invitation for Tender dated 03.11.2006 (“Tender”) for construction of “Weir with Allied Structures across river Damodar at DVC, CTPS, Chandrapura, Dist – Bokaro, Jharkhand, containing inter-alia, the General and Additional Terms and Conditions of Contract, Special Conditions of Contract, Bill of Quantity, etc. The Respondent, pursuant to its Bid dated 16.11.2006, was awarded the contract for Construction of the Weir by the Appellant for a total value of Rs. 19,08,46,612/- vide Letter of Intent dated 04.12.2006 (“LOI”).

It is pertinent to note that the main contract i.e., the LOI stated that the terms mentioned in the Tender Documents would apply mutatis mutandis to the LOI, unless expressly modified by NBCC. The Tender Documents, more specifically the Additional Terms & Conditions of Contract (“ATC”), provide for the resolution of the disputes through arbitration whereas the LOI provides for the resolution of the dispute through the Civil Court of Delhi. Further, as per the ATC, the jurisdiction with regards to any dispute between the parties is vested with the Court in the City of Kolkata only.

Certain disputes arose between the parties and as a result, the Respondent issued a notice invoking Arbitration dated 06.03.2020 (hereinafter referred to as “Notice”), in terms of Clause 3.34 of the ATC. The Appellant not having responded to the aforementioned Notice, the Respondent preferred an application before the Hon’ble HC u/ s. 11(6) of the Arbitration & Conciliation Act, 1996 (“the Act”).

The Hon’ble HC vide its Interim Order dated 12.03.2021 (“Interim Order”) allowed the Arbitration Petition and proposed the appointment of a former Judge of the Hon’ble HC, as the Sole Arbitrator, to adjudicate the dispute between the parties. The Hon’ble HC vide its Final Judgment & Order dated 09.04.2021 (“Final Judgment & Order”) confirmed the proposed appointment of the former Judge as the Sole Arbitrator.

The Appellant preferred Appeals before the Hon’ble SC challenging both the Interim Order and the Final Judgement & Order. The Hon’ble SC issued notice and stay of further proceedings of the arbitration vide its Order dated 23.07.2021 (“Stay Order”).

Issue:

Whether a dispute can be referred to arbitration based on the arbitration clause contained in another contract without a specific reference to that effect in the main contract?

Judgment:

The Hon’ble SC, placing strong reliance upon the decision of M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) 7 SCC 696 held that 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. The Hon’ble Bench was of the considered view that the present case was not a case of ‘incorporation’ but rather a case of ‘reference’ and as such, a general reference would not have the effect of incorporating the arbitration clause.

The Hon’ble SC also distinguished its judgment in Inox Wind Limited vs Thermocables Limited (2018) 2 SCC 519 by opining that the present case is a ‘two-contract’ case and not a ‘single contract’ case, as was the case in Inox (supra).

Analysis:

This judgment has significant implications for the construction and interpretation of arbitration clauses within contracts. It underscores the necessity for unambiguous language that explicitly states the parties’ intention to arbitrate disputes. The ruling also reinforces the judiciary’s role in upholding the sanctity of contractual agreements and ensuring that arbitration remains an efficient and effective means of dispute resolution.

[1] BEFORE THE HON’BLE SUPREME COURT

Nbcc (India) Limited v. Zillion Infraprojects Pvt.Ltd. : https://www.sci.gov.in/wp-admin/admin-ajax.php?action=get_judgements_pdf&diary_no=127472021&type=j&order_date=2024-03-19

Civil Appeal No. 004417-004418 of 2024

Judgment dated 19th March 2024