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Monday, February 26, 2018

corporate laws = National Highway Authority of India -vs -M/s. T.K. Toll Road Pvt. Ltd. = since there was no arbitration agreement between the parties, the petition under Section 9 of the Act was not maintainable.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2439 OF 2018
(ARISING OUT OF SLP (CIVIL) NO. 29519 OF 2015)
M/S. ELITE ENGINEERING AND
CONSTRUCTION (HYD.) PRIVATE LIMITED
REP. BY ITS MANAGING DIRECTOR .....APPELLANT(S)
VERSUS
M/S. TECHTRANS CONSTRUCTION INDIA
PRIVATE LIMITED REP. BY ITS MANAGING
DIRECTOR .....RESPONDENT(S)
J U D G M E N T
A.K. SIKRI, J.
Leave granted.
2) National Highway Authority of India (NHAI) had entered into
agreement dated July 19, 2007 (hereinafter referred to as the
‘Concession Agreement’) whereby it had awarded a contract to
M/s. T.K. Toll Road Pvt. Ltd. (hereinafter referred to as the
‘Concessionaire’) for undertaking, inter alia, the design,
engineering, financing, procurement, construction, operation and
Civil Appeal No. 2439 of 2018 Page 1 of 18
(arising out of SLP(C) No. 29519 of 2015)
maintenance of the Project Highway on Build Operate and
Transfer (BOT) basis on the National Highway 67 connecting
Coimbatore and Nagapattinam. The Concessionaire vide EPC
agreement (Engineering, Procurement and Construction
Agreement) dated January 31, 2008 awarded the said work on a
fixed lump sum turnkey basis to M/s. Utility Energytech and
Engineers Private Limited (hereinafter referred to as the ‘EPC
Contractor’). EPC Contractor, in turn, executed a Construction
Agreement dated March 14, 2008 with the respondent herein
(M/s. Techtrans Construction India Pvt. Ltd.) to execute the works
as per terms and conditions entailed in that agreement. Clause 8
of that agreement permitted the respondent to sub-contract the
structural work. Pursuant thereto, the respondent floated a
tender for sub-contracting their work in which the appellant also
submitted its bid and was ultimately awarded the said work by the
respondent vide agreement dated July 29, 2009.
3) Some disputes arose between the appellant and the respondent
in connection with the execution of the said work and the
appellant vide its letter dated March 25, 2013 raised certain
claims against the respondent. The appellant also filed Original
Petition under Section 9 of the Arbitration and Conciliation Act,
1996 (hereinafter referred to as the ‘Act’) on the file of Principal
Civil Appeal No. 2439 of 2018 Page 2 of 18
(arising out of SLP(C) No. 29519 of 2015)
Judge, Karur. This petition was contested by the respondent who
in its reply denied all the allegations raised by the appellant and
also submitted that since there was no arbitration agreement
between the parties, the petition under Section 9 of the Act was
not maintainable. While this was pending, the appellant moved
application under Section 11(3) and (5) of the Act for appointment
of an arbitrator in the High Court of Judicature at Madras on
January 28, 2014. Notice in this petition was issued by the High
Court. In the meantime, on June 30, 2014, the Principal Judge,
Karur allowed the petition of the appellant under Section 9 of the
Act, but left open the issue of existence of arbitration agreement.
4) Insofar as the appellant’s petition under Section 11 of the Act is
concerned, it was contested by the respondent taking the
objection to the maintainability of the petition on the ground of
absence of any agreement. The High Court has vide impugned
orders dated September 18, 2015 dismissed the said petition of
the appellant upholding the contention of the respondent that
there is no arbitration agreement between the parties and,
therefore, remedy under the Act for appointment of arbitrator or
constitution of Arbitral Tribunal is not available.
5) It may be clarified at this juncture that Agreement dated July 29,
Civil Appeal No. 2439 of 2018 Page 3 of 18
(arising out of SLP(C) No. 29519 of 2015)
2009 entered into between the appellant and the respondent
does not contain any arbitration clause. There is no independent
arbitration agreement between the parties either. However, case
set up by the appellant was that this Agreement dated July 29,
2009 entered into between the parties, by implication,
incorporates the arbitration agreement that is contained in the
Agreement dated March 14, 2008 that was entered into between
the EPC Contractor and the respondent.
6) Indubitably, clause 45 of the Agreement dated March 14, 2008
between EPC Contractor and the respondent contains procedure
for resolution of disputes and sub-clause (3) thereof refers to
arbitration procedure. In case of any dispute, as per clause 45.1,
first attempt is for ‘amicable resolution’. Thereafter, under clause
45.2, process of ‘mediation’ is to be resorted to and if that also
fails then the ‘arbitration procedure’ is provided. Clause 45.3 and
clause 45.4 read as under:
“45.3.Arbitration Procedure:
Subject to the provisions of Article 45.1 and 45.2, any
dispute, which is not resolved by amicable resolution
between the parties or by a reference to mediation,
shall be finally settled by binding arbitration under the
Arbitration and Conciliation Act, 1996. The arbitration
shall be by a panel of three arbitrators, one to be
appointed by each Party and the third to be appointed
by the two arbitrators appointed by the Parties. The
Party requiring arbitration shall appoint an arbitrator in
Civil Appeal No. 2439 of 2018 Page 4 of 18
(arising out of SLP(C) No. 29519 of 2015)
writing, inform the other party about such appointment
and call upon the other party to appoint its arbitrator. If
within 15 days of receipt of such intimation the other
party fails to appoint its arbitrator, the Party seeking
appointment of arbitrator may take further steps in
accordance with Arbitration Act.
45.4. Place of Arbitration:
The place of arbitration shall be Mumbai for all
Disputes.”
7) According to the appellant, this clause gets incorporated in the
Agreement dated July 29, 2009 that was entered into between
the respondent and the appellant, by virtue of following clauses in
the said agreement:
“'2.Subcontractor hereby agrees, undertakes to execute
the said value of work, and is responsible for the
efficient and successful execution of the work and is to
be completed as per the contract period specified in the
contract document.
a........
b........
All the conditions and special conditions of contract,
specifications (general and additional clauses relating
to the works and quality specified in the relevant
agreement between the Construction Contractor and
the Employer are binding on the Subcontractor.”

Annexure-I specifying the 'Terms and Conditions' Annexed
thereto inter alia provides Clause - 9.10 as under:
“9.10. For items which are not mentioned in this
Agreement Clauses, terms and conditions of
Agreement between Contractor and EPC
Concessionaire will be applicable.''
Civil Appeal No. 2439 of 2018 Page 5 of 18
(arising out of SLP(C) No. 29519 of 2015)
8) It is, thus, argued by the learned counsel for the appellant that as
per the aforesaid clause, when the appellant had agreed and
undertaken to execute the work as per contract specified in the
contract document and the said clause also specifically provided
that all the special conditions of the contract, specifications etc.
relating to the works and qualities specified in the relevant
agreement between the construction contractor and the employer
are binding on the respondent, the clause relating to arbitration
agreement i.e. 45 entered into between EPC Contractor and the
respondent also became applicable by incorporation. It was
submitted that the aforesaid clause read with clause 9.10 of
Annexure 1 which categorically mentions that in respect of items
which are not mentioned in the Agreement clauses, terms and
conditions of the Agreement between the Contractor and EPC
Concessionaire will be applicable, would also lead to same result.
9) These very arguments were raised before the High Court. The
appellant had also referred to certain communications addressed
by it to the respondent before invoking legal remedy wherein it
has stated that the parties had agreed for settlement of disputes
in accordance with clause 45.3. The respondent, on the other
hand, had drawn attention of the High Court to paragraph 23 of
Civil Appeal No. 2439 of 2018 Page 6 of 18
(arising out of SLP(C) No. 29519 of 2015)
the petition filed by the appellant under Section 9 of the Act
wherein it had categorically stated that the appellant would be
constrained to initiate legal proceedings against the respondent
for recovery of amount by approaching the competent civil court.
The High Court, thus, opined that from the communications only,
it could not be said that parties had agreed for arbitration and, in
fact, the appellant in his petition filed under Section 9 of the Act
had professed ignorance of the agreement between the
respondent and the employer. As it had gone to the extent of
making an averment to the effect that ‘the petitioner is totally kept
in dark about the terms and conditions of the agreement till now’.
The High Court thereafter construed clauses 2 and 9.10 of the
Agreement that was entered into between the appellant and the
respondent and came to the conclusion that those clauses never
meant to incorporate arbitration agreement into the Agreement
dated July 29, 2009 executed between the parties. On this
aspect, discussion goes as follows:
“18. On a careful perusal of the pleadings and
documents as also submissions of the learned counsel
for the parties, more specifically the reading of the
clauses, this court is of the view that part of clause-2 of
the agreement dated 29.07.2009 extracted aforesaid
refers to only ''works and quality specified in the
relevant agreement between the construction
contractor and the employer''. All the conditions and
the sub-conditions of contract are binding on the sub
Civil Appeal No. 2439 of 2018 Page 7 of 18
(arising out of SLP(C) No. 29519 of 2015)
contractor/petitioner, but the unambiguous reference is
only to ''work and quality specified'' without any refence
to the arbitration clause. It is not a case of only
absence of a reference to arbitration clause, but the
reference being specific to the ''work and quality
specified.'' An expanded meaning cannot be given to
this Clause. It is in this context that Clause-9.10 of
Annexure-I specifying the terms and conditions has to
be read. Once again, it refers to ''Items'' which are not
mentioned in the agreement clauses where conditions
of the earlier agreement would be applicable. Thus,
this would refers to the items to be used.
10) The High Court also drew distinction between the reference to the
another document and incorporation of another document in a
contract by reference, which has been explained by this Court in
M.R. Engineers and Contractors Private Limited v. Som Datt
Builders Ltd.1
 and held that, in the instant case, there was only a
reference to another document with no intention to incorporate
the arbitration clause thereof in a contract between the parties.
11) Questioning the aforesaid approach of the High Court, learned
counsel for the appellant submitted that when the appellant was
required to execute the work on the terms and conditions
contained in the principal agreement, it was clear intention to
incorporate all the terms including clause 45.3. Additionally, he
referred to clause 8.7 of the agreement between the parties which
stipulates as under:
1 (2009) 7 SCC 696
Civil Appeal No. 2439 of 2018 Page 8 of 18
(arising out of SLP(C) No. 29519 of 2015)
“8.7 Other terms related to Termination of work will be
same as Agreement between EPC, Concessionaire and
Construction contractor.”
12) His submission was that when the terms related to termination of
work contained in the Agreement between EPC, Concessionaire
and the respondent were to govern their agreement as well, these
would include settlement of disputes on termination of work
through arbitration which was the term provided in the contract
between the employer and the respondent. Relying upon the
judgment in the case of Groupe Chimique Tunisien SA v.
Southern Petrochemicals Industries Corpn. Ltd.2
, he
submitted that mere fact that appellant had mentioned about filing
suit against the respondent in his petition under Section 9 of the
Act would not enure to the benefit of the respondent who said so
on account of mistaken understanding of law. Para 9 reads as
under:
“9. It is true that the petitioner had contended before the
Jordanian court that there was no arbitration agreement
between the parties. But the said contention was not
accepted and the suit filed by the petitioner has been
dismissed on the ground of want of jurisdiction.
Thereafter, on reconsidering the matter and taking legal
advice, with reference to the contentions of the
respondent, the petitioner has now proceeded on the
basis that an arbitration agreement exists between the
parties. If, on account of mistake or wrong
understanding of law, a party takes a particular stand
(that is, there is no arbitration agreement), he is not
2 (2006) 5 SCC 275
Civil Appeal No. 2439 of 2018 Page 9 of 18
(arising out of SLP(C) No. 29519 of 2015)
barred from changing his stand subsequently or
estopped from seeking arbitration. [See U.P. Rajkiya
Nirman Nigam Ltd. v. Indure (P) Ltd. [(1996) 2 SCC
667] where the contention based on estoppel was
negatived while considering a reserve (sic reverse)
situation [Ed.: Para 12] .]”
13) Mr. Ganguli, the learned senior counsel appearing for the
respondent, on the other hand, submitted that clause 2 of the
Agreement entered into between the appellant and the
respondent clearly evinced that there was only a qualified
incorporation of those terms and conditions of the contract
between the employer and the respondent which related to the
works and the quality. Insofar as clause 45 is concerned, there
was no conscious acceptance thereof between the parties and
that was the reason that even the respondent had no knowledge
about the said clause and, therefore, he did not mention so even
in his petition filed under Section 9 of the Act. He, therefore,
submitted that the High Court has rightly relied upon M.R.
Engineers and Contractors Private Limited case in dismissing
the petition of the petitioner. He also placed reliance upon the
judgments of this Court in Larsen & Toubro Limited v. Mohan
Lal Harbans Lal Bhayana3
 and Sharma and Associates
Contractors Private Limited v. Progressive Constructions
3 (2015) 2 SCC 461
Civil Appeal No. 2439 of 2018 Page 10 of 18
(arising out of SLP(C) No. 29519 of 2015)
Limited4
.
14) After considering the respective submissions, we are inclined to
agree with the respondent and, therefore, do not find any fault
with the impugned judgment of the High Court.
15) In M.R. Engineers and Contractors Private Limited case, this
Court considered the true intent and scope of Section 7 of the Act
which deals with ‘arbitration agreement’. Relevant portion of
Section 7 reads as under:
“7. Arbitration agreement.—(1) In this Part, ‘arbitration
agreement’ means an agreement by the parties to
submit to arbitration all or certain disputes which have
arisen or which may arise between them in respect of a
defined legal relationship, whether contractual or not.
xxx xxx xxx
(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.”

16) As per sub-section (5), an arbitration clause contained in an
independent document can also be imported and engrafted in the
contract between the parties, by reference to such independent
document in the contract, even if there is no specific provision for
arbitration. However, the Court noted that such a recourse can
4 (2017) 5 SCC 743
Civil Appeal No. 2439 of 2018 Page 11 of 18
(arising out of SLP(C) No. 29519 of 2015)
be adopted only ‘if the reference is such as to make the
arbitration clause in such document, a part of the contract.’ This
interpretation to sub-section (5) of Section 7 was elaborated in
the following manner:
“14. The wording of Section 7(5) of the Act makes it
clear that a mere reference to a document would not
have the effect of making an arbitration clause from that
document, a part of the contract. The 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. If the legislative
intent was to import an arbitration clause from another
document, merely on reference to such document in
the contract, sub-section (5) would not contain the
significant later part which reads: “and the reference is
such as to make that arbitration clause part of the
contract”, but would have stopped with the first part
which reads:
“7. (5) The reference in a contract to a
document containing an arbitration clause
constitutes an arbitration agreement if the
contract is in writing….”
15. Section 7(5) therefore requires
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. But the
Act does not contain any indication or guidelines as to
the conditions to be fulfilled before a reference to a
document in a contract can be construed as a
reference incorporating an arbitration clause contained
in such document into the contract. In the absence of
such statutory guidelines, the normal rules of
construction of contracts will have to be followed.
16. There is a difference between reference to another
document in a contract and incorporation of another
document in a contract, by reference. In the first case,
the parties intend to adopt only specific portions or part
of the referred document for the purposes of the
Civil Appeal No. 2439 of 2018 Page 12 of 18
(arising out of SLP(C) No. 29519 of 2015)
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.”
17) After some further discussion on this aspect with reference to the
existing case law as well as extracts from Russell on arbitration,
the Court summed up the position as under:
“24. The scope and intent of Section 7(5) of the Act may
therefore be summarised thus:
(i) An arbitration clause in another document, would get
incorporated into a contract by reference, if the
following conditions are fulfilled:
(1)the contract should contain a clear reference to the
documents containing arbitration clause,
(2)the reference to the other document should clearly
indicate an intention to incorporate the arbitration
clause into the contract,
(3)the arbitration clause should be appropriate, that is
capable of application in respect of disputes under
the contract and should not be repugnant to any term
of the contract.
(ii) 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 arbitration clause.
Civil Appeal No. 2439 of 2018 Page 13 of 18
(arising out of SLP(C) No. 29519 of 2015)
(iii) 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.
(iv) Where the contract provides that the standard form
of terms and conditions of an independent trade or
professional institution (as for example the standard
terms and conditions of a trade association or
architects association) will bind them or apply to the
contract, such standard form of terms and conditions
including any provision for arbitration in such standard
terms and conditions, shall be deemed to be
incorporated by reference. Sometimes the contract may
also say that the parties are familiar with those terms
and conditions or that the parties have read and
understood the said terms and conditions.
(v) Where the contract between the parties
stipulates that the conditions of contract of one of
the parties to the contract shall form a part of their
contract (as for example the general conditions of
contract of the Government 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.”
18) When we apply the aforesaid ratio, we find that the High Court
has correctly held that, in the instant case, it was not intended to
make the arbitration clause as a part of the contract between the
appellant and the respondent. Clause 2 and clause 9.10 are
given correct interpretation by the High Court and discussion in
this behalf has already been extracted above. By these clauses,
Civil Appeal No. 2439 of 2018 Page 14 of 18
(arising out of SLP(C) No. 29519 of 2015)
only those conditions and sub-conditions of the contract,
specification etc. which relate to the works and quality are
incorporated. Clause 9.10 only talks of ‘items’ which are not
mentioned in the contract and terms and conditions relating to the
execution of those items are to be taken from the main contracts.
Reference to clause 8.7 is also inconsequential. By this clause
only, those terms contained in the main agreement which relate to
‘terms of work’ are incorporated. Procedure relating to
‘termination’ is altogether different from resolution of disputes.
Dispute may arise even de hors the termination of the contract
and is an altogether different aspect, not necessarily connected
with the termination of work.
19) In Alimenta S.A. v. National Agricultural Coop. Mktg.
Federation of India Ltd.5
, the question was as to whether the
arbitration clause in Fosfa-20 was incorporated in the first
contract by way of clause 11 and in the second contract by virtue
of clause 9. The Court held that while the arbitration clause was
incorporated in the first contract, the same was not incorporated
in the second contract. How the matter has to be looked into, for
determining the same, was discussed in the following manner:
5 (1987) 1 SCC 615
Civil Appeal No. 2439 of 2018 Page 15 of 18
(arising out of SLP(C) No. 29519 of 2015)
“13. … There is a good deal of difference between
Clause 9 of this contract and Clause 11 of the first
contract. Clause 11 has been couched in general
words, but Clause 9 refers to all other terms and
conditions for supply. The High Court has taken the
view that by Clause 9 the terms and conditions of the
first contract which had bearing on the supply of HPS
were incorporated into the second contract, and
the term about arbitration not being incidental to supply
of goods, could not be held to have been lifted as well
from the first contract into the second one.
14. It is, however, contended on behalf of the appellant
that the High Court was wrong in its view that a term
about arbitration is not a term of supply of goods. We
do not think that the contention is sound. It has been
rightly pointed out by the High Court that the normal
incidents of terms and conditions of supply are those
which are connected with supply, such as, its mode and
process, time factor, inspection and approval, if any,
reliability for transit, incidental expenses, etc. We are
unable to accept the contention of the appellant that an
arbitration clause is a term of supply. There is no
proposition of law that when a contract is entered into
for supply of goods, the arbitration clause must form
part of such a contract. The parties may choose some
other method for the purpose of resolving any dispute
that may arise between them. But in such a contract the
incidents of supply generally form part of the terms and
conditions of the contract. The first contract includes the
terms and conditions of supply and as Clause 9 refers
to these terms and conditions of supply, it is difficult to
hold that the arbitration clause is also referred to and,
as such, incorporated into the second contract. When
the incorporation clause refers to certain particular
terms and conditions, only those terms and conditions
are incorporated and not the arbitration clause. In the
present case, Clause 9 specifically refers to the terms
and conditions of supply of the first contract and,
accordingly, only those terms and conditions are
incorporated into the second contract and not the
arbitration clause. The High Court has taken the correct
view in respect of the second contract also.”
(emphasis supplied)
Civil Appeal No. 2439 of 2018 Page 16 of 18
(arising out of SLP(C) No. 29519 of 2015)
20) This judgment is noted in M.R. Engineers and Contractors
Private Limited case as well and in the facts of M.R. Engineers
and Contractors Private Limited, the Court held that there was
no incorporation of arbitration clause. Following discussion
throws light to decide the issue in this case as well:
“37. In the present case the wording of the arbitration
clause in the main contract between the PW
Department and the contractor makes it clear that it
cannot be applied to the sub-contract between the
contractor and the sub-contractor. The arbitration
clause in the main contract states that the disputes
which are to be referred to the committee of three
arbitrators under Clause 67.3 are disputes in regard to
which the decision of the Engineer (“Engineer” refers to
person appointed by the State of Kerala to act as
Engineer for the purpose of the contract between the
PW Department and the respondent) has not become
final and binding pursuant to Clause 67.1 or disputes in
regard to which amicable settlement has not been
reached between the State of Kerala and the
respondent within the period stated in Clause 67.2.
Obviously neither Clause 67.1 nor 67.2 will apply as the
question of “Engineer” issuing any decision in a dispute
between the contractor and the sub-contractor, or any
negotiations being held with the Engineer in regard to
the disputes between the contractor and the subcontractor
does not arise. The position would have
been quite different if the arbitration clause had
used the words “all disputes arising between the
parties” or “all disputes arising under this
contract”. Secondly, the arbitration clause
contemplates a committee of three arbitrators, one
each to be appointed by the State of Kerala and the
respondent and the third (Chairman) to be
nominated by the Director General, Road
Development, Ministry of Surface Transport, Roads
Wing, Government of India. There is no question of
such nomination in the case of a dispute between
the contractor and the sub-contractor.”
Civil Appeal No. 2439 of 2018 Page 17 of 18
(arising out of SLP(C) No. 29519 of 2015)
21) In view of the aforesaid, the appeal stands dismissed.

.............................................J.
(A.K. SIKRI)
.............................................J.
(ASHOK BHUSHAN)
NEW DELHI;
FEBRUARY 23, 2018.
Civil Appeal No. 2439 of 2018 Page 18 of 18
(arising out of SLP(C) No. 29519 of 2015)

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