Incorporation by Reference of Arbitral Clauses & Arbitration Agreements under the Arbitration & Conciliation Act, 1996 – By Advait Ghosh

I. Introduction

Arbitration has become the preferred mode of dispute resolution in the country, and commercial disputes are being increasingly resolved by arbitration due to their advantages over the traditional court system.

Arbitration can only fructify if there is a valid arbitration agreement or clause in existence. Arbitration clauses are usually present in the contract between the parties, and in those cases recourse can be taken to arbitration easily. The problem arises when the existence of the arbitration agreement or the arbitration clause has to be inferred from surrounding circumstances. Section 7(5) of The Arbitration & Conciliation Act, 1996 says that “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 main contract”. This signifies that an arbitration agreement or clause can be imported into a contract if that contract makes a reference to an arbitration clause or an agreement in another contract or document. This article will attempt to elucidate in what manner such incorporation is permitted, and how Courts grapple with the quandary of incorporating these arbitration clauses.

II. The meaning of incorporation by reference : As per the Oxford English Concise dictionary the word ‘reference’ is derived from the word ‘refer’ in other words to mention or allude to something. In the legal world the word ‘refer’ is used to mean something which is not available immediately for consumption.

III. Why Incorporation is done in that manner?

The important question which can arise is why the arbitral clause is not provided in a distinct manner. These types of “incorporation by reference” are usually found amongst businessmen and tradesmen in contracts between them. The contracts between them often have reference to earlier successfully concluded contracts between the parties, and the existing contracts have reference to the earlier successful contracts between the same parties, often which have Arbitral Clauses embedded in them.

We shall now embark on a detailed case-law analysis to understand how courts deal with the question of incorporation of arbitration agreements & clauses by reference.

A) M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd (THE OLD VIEW ON INCORPORATION BY REFERENCE!) (1) – The Supreme Court in the case was faced with the question whether in a contract where the Appellant was a sub-contractor of the Respondent, a general reference to the principal contract between the Respondent and the Public Works Department of Kerala, would be sufficient to be such as to have the effect of incorporating the arbitration clause contained in the principal contract. The court primarily tried to differentiate between “reference to another document in a contract” and “incorporation of another document in a contract, by reference”, and observed: “In the first case, the parties intend to adopt only specific portions or part of the referred document for the purposes of the contract. In the second case, the parties intend to incorporate the referred document in entirety, into the contract. Therefore when there is a reference to a document in a contract, the court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract.”

The Court relied on Russel on Arbitration (2) and relied on various judgements of the English Commercial Court on this aspect. After analysing the various pronouncements on this aspect, the Supreme Court opined that a general reference to a document will not lead to automatic incorporation of the arbitration clause which is contained therein; the parties will need to refer to the arbitration clause, specifically to incorporate the same. 

B) Habas Sinai VE Tibbi Gazlar Isthisal Endustrisi A.S. v. Sometlal (A CHANGE IN THE LAW OF INCORPORATION OF ARBITRAL CLAUSE BY REFERENCE) (3) – By a contract in writing dated 9th June 2008 (“the June Contract”), typed on a sheet of paper with the letter heading of a company whose abbreviated name is Metkim Sometal S.A.L. (“Sometal”), for which Metkim acted as agent, agreed to sell 10,000 m.t. of steel scrap ex Romania & Bulgaria CIF FO Memrut Bay, Turkey. The contract contained a number of terms under the headings Material, Quantity, Price, Shipment, Discharge Rate, Payment, Final weight and NOR Tenderence (sic) and then ended with the words:

“ALL THE REST WILL BE SAME AS OUR PREVOUS CONTRACTS”-

The Learned Arbitral Tribunal in this case affirmed the validity of the arbitral clause and held it incorporated in the contract by way of reference. The award was sought to be challenged by Habbas on the grounds of “non-incorporation by reference”. The Commercial Bench of the English and Wales High Court presided over by Justice. Christopher Clarke examined a catena of decisions of the English Courts related to “incorporation by reference” which did not allow incorporation by reference as in those cases it was held that it would lead to confusion in the commercial world. In this however Justice Christopher Clarke of the Commercial Court diverged from the conventional wisdom and went on to hold that in cases of businessmen and tradesmen who have been engaged in a particular industry or trade and such tradesmen or businessmen contract with tradesmen in the same business or trade and they have engaged in a number of contracts in the past then “incorporation by reference” will be allowed even if the terms of the contract do not refer to a set of common terms and conditions.

This Judicial pronouncement was a landmark judgement on incorporation of arbitration clauses by reference. In this the Court had held that even if there was a general reference to a document will, that be sufficient to incorporate the arbitration clause if the reference was to a “standard form of contracts” , excluding the terms and contracts of  professional bodies & even trade associations. This was a major departure from the earlier view, which permitted general reference only in cases of terms & conditions of professional bodies and trading associations. We shall now see how the Indian Courts have dealt with the changed circumstances of “incorporation by reference”.

C) M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd (SUPREME COURT MAKES A DEPARTURE FROM M R ENGINEERS) (4) – Appellant was a manufacturer of Wind Turbine Generators . Respondent was a manufacturer of Wind power cables. Purchase orders dated 13.12.2012 & 2.12.2013 were issued by Appellant to the Respondent for supply of cables for their wind turbine generators. As per the purchase order, supply was to be as per “terms & conditions”, which contained an arbitration clause. It provided for appointment of sole arbitrator as per the provisions of the arbitration act. All the terms & conditions were accepted by the Respondent. Respondent, pursuant to the purchase order supplied cables to the Respondent. Disputes arose between the parties, and Appellant filed application under Section 11 of The Arbitration & Conciliation Act, 1996 for appointment of sole arbitrator. The appointment was declined as the Court opined as per the ratio of M.R. Engineers that in the absence of specific reference to the arbitration clause, the arbitration clause was not incorporated. Appeal was made to the Supreme Court. The Supreme Court made a departure from its previous viewpoint in MR. Engineers & held that “general reference to a contract will be sufficient to incorporate the arbitration clause, if the contract is of standard form as previously concluded between the parties, even if the terms & conditions are not that of a professional body or a trading association”. 

D) GIRI RAJ GARG VS COAL INDIA (5) – In the year 2007 Coal India started a scheme of coal distribution through e-auction, through a single window. Appellant was sent various orders, as per which he was required to lift coal, after depositing earnest money. The initial orders contained a dispute resolution clause, mandating arbitration in case of dispute, the subsequent orders contained a clause stipulating “as per previous terms & conditions” .Appellant had failed to lift the coal. Coal India considered this to be a breach of the terms & conditions, and forfeited the earnest money. Arbitration was invoked by the Appellants. A petition under Section 11 of The Arbitration & Conciliation Act, 1996 was preferred, for appointment of sole arbitrator. Petition was rejected on the ground that there was “discernible arbitration agreement”. Appeal was made to the Supreme Court. The Supreme Court said “arbitration clause can be incorporated by reference, in this case it was incorporated by reference when the Appellant entered into the contract where it was mentioned” terms & conditions as per previous contracts”.    

E) GLENCORE INTERNATIONAL AG VS M/S SHREE GANESH METALS (6) – Appellant is a company registered under the Laws of Switzerland, engaged in mining works. Respondent is one of the highest producers of zinc alloys in the country. Respondent purchased Zinc Metal from Appellant for the first time in 2011. A contract was executed as per which Respondent agreed to purchase 400 tonnes of Zinc from Appellant to be supplied in 4 lots of 100 tonnes each. The 1^st contract was governed by the Laws of England & Wales, & also contained an arbitration clause providing for the seat of arbitration to be London. The 2^nd contract in which Respondent had to supply 400 metric tonnes of zinc had an arbitration clause, with seat being London. The parties then entered into a 3^rd contract for supply of 600 tonnes of zinc metal to Respondent No. 1. Here also seat was London. 

Subsequently parties entered into a 5^th contract for sale of 6000 tonnes of zinc metal. The business modalities were reduced in writing. Respondent vide email dated 11.3.2016 accepted all the terms other than provisional prices. Pursuant to approval by Respondent No.1, they entered into a 5^th contract based on the principles of English Law & provided a 3 member Tribunal for the same, with seat being in London. 

As per the terms of the 5^th contract, Appellant required Respondent to open a “letter of credit” at a bank nominated by Appellant to cover the value of the materials. 

Subsequently, there were disputes & differences between the parties, Respondents did not pay Appellants a sum of USD 867411. The Appellants enchased the Letter of Credit towards the outstanding amount.

Respondents filed a Suit for Recovery, Permanent Injunction & Declaration. Appellants filed application under Section 45 of The Arbitration & Conciliation Act, 1996. The Single Judge dismissed the application and opined that-“Nothing on record to show that the contract contained detailed terms & conditions had been accepted by the Plaintiffs. From the exchange of e-mails it cannot be inferred that Plaintiff had impliedly or expressly agreed to all the terms & conditions of the 2012 contract”. 

In appeal Sh. Nayyer argued that there is a valid arbitration agreement under the 2016 contract as per Section 7 of The Arbitration & Conciliation Act, 1996. He referred to the cases of Habas Sinai Ve Tibbi Gazlar Isthisal Endustri A.S. v. Sometlal & M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd to contend that the arbitration clause had got incorporated by reference from the 2012 contract. The Division Bench of the Delhi High Court opined that – “the submissions of the appellant that the 2016 contract in terms of the 2012 contract was incorporated, perusal of the relevant clauses show variation in the same. The arbitration clause of 2012 says that parties have waived away the right of appeal, 2016 does not say so. The number of arbitrators is also different. The Ld. Single Judge has correctly held that if they wanted to incorporate all the terms of the 2012 contract, they had no reason to change the terms of the arbitration, thus the Court held that there was no acceptance, whether implied or express on the part of the Respondent”.

IV: CONCLUSION:

It is noteworthy to mention that Section 7(5) by itself does not differentiate between the various types of the documents referred to by the parties, it only requires that the reference (irrespective of the nature of the document) be of such nature that it has the effect of incorporating the arbitration clause in the contract which is under consideration. The standard to test the intention of the contracting parties should be on the basis of a ‘reasonable businessman’, dealing with that industry and not a ‘well-informed commercial lawyer’ standard. In the opinion of the author, this is the correct interpretation of the statutory provision, and can substantially add to the evolution towards an arbitration-friendly regime of the Indian jurisprudence.

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Advait is an associate in the litigation team of Kesar Dass B & Associates. He deals with arbitration, civil suits and matters pertaining to the Insolvency and Bankruptcy Code, 2016.

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(1) CIVIL APPEAL NO. 4150 OF 2009

(2) Russell on Arbitration (23rd edn, Sweet & Maxwell 2007)

(3) [2010] EWHC 29 (Comm)

(4) CIVIL APPEAL No. 19  of 2018

(5) CIVIL APPEAL NO. 1695 OF 2019

(6) FAO(OS) (COMM) 195/2017

Disclaimer: The views or opinions expressed are solely of the author.