Whether an arbitration clause from a primary contract gets incorporated into a subsequent Letter of Intent? Supreme Court answers

Supreme Court: In a civil appeal filed by NBCC (India) Limited challenging the orders passed by the Delhi High Court, wherein the Court allowed the application under Section 11(6) of the Arbitration and Conciliation Act 1996 (‘the Arbitration Act’) and appointed the Sole Arbitrator, the division bench of BR Gavai* and Sandeep Mehta, JJ. while setting aside the impugned orders, said 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.

Further, it said that the present case is not a case of ‘incorporation’ but a case of ‘reference.’ As such, a general reference would not include the arbitration clause. Clause 7.0 of the LOI., also part of the agreement, makes it clear that the redress of the dispute between the NBCC and Zillion Infra must be only through civil courts having jurisdiction of Delhi alone.

Background:

NBCC is a Public Limited Company and Government of India undertaking, engaged in construction of power plants and other infrastructure projects. The respondent Zillion Infra projects Pvt. Ltd. (‘Zillion Infra’) is a Private Limited Company, engaged in the construction and infrastructure sector. NBCC issued an invitation for tender for “Construction of Weir with Allied Structures across river Damodar (‘Construction of the Weir’), containing inter-alia, the General Conditions of Contract, Special Conditions of Contract, Bill of Quantity, etc. (‘Tender Documents’). Thereafter, Zillion Infra submitted its Techno Commercial Bid. On fulfilment of the tender criteria, vide Letter of Intent, NBCC awarded the contract for Construction of the Weir to Zillion Infra. With the passage of time, certain disputes arose between the parties, thus, Zillion Infra issued a notice in terms of Clause 3.34 of Section III Volume II of the Tender Documents (GCC), thereby invoking arbitration and further seeking consent of NBCC for the appointment of a former Judge of a High Court, as Sole Arbitrator. NBCC did not respond to the notice invoking arbitration, so Zillion Infra filed an application at the High Court under Section 11(6) of the Arbitration Act. The High Court allowed the Arbitration Petition and proposed the appointment of a former Judge of the High Court, as the Sole Arbitrator, to adjudicate the dispute between the parties. Aggrieved by the orders of the High Court, the appellant filed the present appeal.

Analysis:

After taking note of Section 7(5) of the Arbitration Act, and the decision in M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696, the Court noted that 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 the arbitration clause. Further, 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 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.

After further perusing Section 7(5) of the Arbitration Act, the Court said that it provides for a conscious acceptance of the arbitration clause from another document, by the parties, as a part of their contract, before such arbitration clause could be read as a part of the contract between the parties. Thus, 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.

Further, the Court referred to Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519, wherein it was held that hat 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. The Court said that this was a case of a single-contract and not two-contract case and, therefore, it was held that the arbitration clause as mentioned in the terms and conditions would be applicable.

The Court noted that the present case is a ‘two-contract’ case and not a ‘single contract’ case. After referring to Clause 3.34 of the Additional Terms & Conditions of Contract, the Court said that Clause 3.34 provides for a reference of the dispute to the sole arbitration of the Secretary, CEO of Damodar Valley Corporation, or to a person appointed by him for that purpose.

After referring to Clauses 1.0, 2.0, 7.0 and 10.0 of the Letter of Intent (‘LOI’), the Court said that the intention between the parties is very clear. Clause 7.0 of the LOI forms part of the agreement and provides that the redressal of the dispute between the NBCC and Zillion Infra shall only be through civil courts having the jurisdiction of Delhi alone.

The Court noted that Clause 7.0 of the LOI specifically uses the word “only” before the words “be through civil courts having jurisdiction of Delhi alone”.

The Court said 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.

Further, the Bench viewed that the present case is not a case of ‘incorporation’ but a case of ‘reference’. As such, a general reference would not include the arbitration clause. Clause 7.0 of the LOI., also part of the agreement, makes it clear that the redress of the dispute between the NBCC and Zillion Infra must be only through civil courts having jurisdiction of Delhi alone.

Thus, the Court held that the Delhi High Court has erred in allowing the application of Zillion Infra.

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