Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No . 19 of2018
(Arising out of SLP (Civil) No.31049 of 2016)
M/S. INOX WIND LTD.
.... Appellant
Versus
M/S THERMOCABLES LTD. .... Respondent
J U D G M E N T
L. NAGESWARA RAO, J.
Leave granted.
2. This appeal is directed against the judgment of the High Court
of Judicature at Allahabad dismissing the application filed by the
Appellant under Section 11 (6) of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as ‘the Act’).
3. The Appellant is a manufacturer of wind turbine generators (WTGs).
The Respondent is engaged in the business of manufacture of wind
power cables and other types of cables. Two purchase orders dated
13.12.2012 and 02.02.2013 were issued by the Appellant to the
Respondent for supply of cables for their WTGs. According to the
Purchase Order, the supply was to be
according to the terms mentioned in the order and the Standard
Terms and Conditions that were attached thereto. Apart from the
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other conditions, the Standard Terms and Conditions contain a
clause pertaining to dispute resolution. The said clause provides for
a dispute to be resolved by a sole arbitrator in accordance with the
provisions of the Arbitration and Conciliation Act, 1996. The material
on record indicates that the Respondent accepted all the terms and
conditions mentioned in the Purchase Order except the delivery
period as is evident from a letter dated 15.12.2012.
4. The Respondent, pursuant to the Purchase Order, supplied wind
power cables to the Appellant. While laying the cables supplied by
the Respondent-company, the Appellant discovered that the outer
sheaths of the cables of 150 sq. mm. were cracked. This forced
them to stop the WTGs so as to avert damage to expensive
equipment. According to the Appellant, the Respondent-company
did not replace the cables. The Appellant, therefore, was
constrained to issue a notice dated 30.10.2014 proposing the name
of a sole arbitrator in terms of the Standard Terms and Conditions.
In the absence of any response, the Appellant moved the High Court
of Judicature at Allahabad by filing an application under Section 11
(6) of the Act.
5. The High Court dismissed the said application by holding that an
arbitrator cannot be appointed as the Appellant did not prove the
existence of an arbitration agreement. The High Court relied upon
the judgment of this Court in M.R. Engineers and Contractors
Private Limited v. Som Datt Builders Limited, (2009) 7 SCC
696 to hold that there is no special reference to the arbitration
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clause in the standard terms and conditions, so the arbitration
clause cannot be said to have been incorporated into the purchase
order.
6. We have heard the counsel for the Appellant and Respondent. The
judgment of this Court in M.R. Engineers’ case (supra) was relied
upon by both the parties. Before proceeding further, it would be
necessary to appreciate the ratio of the said judgment. A few facts
necessary to understand the dispute in the said case are that the
Appellant therein was a sub-contractor of the Respondent. The
Appellant was entrusted a part of the work by the
Respondent-contractor which pertained to ‘construction of project
directorate building’. It was mentioned in the sub-contract that it
shall be carried out as per the terms and conditions applicable to
the main contract. A dispute arose between the parties which made
the Appellant therein to approach the High Court for appointment of
an arbitrator under Section 11 (6) of the Arbitration and Conciliation
Act, 1996. The High Court of Kerala rejected the application on the
ground that the arbitration clause in the main contract was not
incorporated by reference in the contract between the Appellant
and Respondent therein. In the appeal before this Court, the
Appellant submitted that his case was squarely covered by Section
7 (5) of the Act and that the arbitration clause from the main
contract was incorporated by reference in the sub contract between
him and the Respondent.
7. This Court considered the scope of Section 7 (5) of the Act and held
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that a conscious acceptance of the arbitration clause found in
another document is necessary for the purpose of incorporating it
into the contract. It was further held that general rules of
construction of contracts would have to be followed as there were
no guidelines in Section 7(5) regarding the conditions that need to
be fulfilled before construing a reference to a portion of a contract
as a reference incorporating the whole of it along with the
arbitration clause contained in it. While distinguishing ‘reference’ to
another document from ‘incorporation’, this Court observed that the
relevant factor was the intention of the parties either to adopt the
document in its entirety or to borrow specific portions of the said
document. In this connection, the Court held as follows: (M.R.
Engineers’ case, para 17-19)
“17. We will give a few instances of incorporation and mere reference to
explain the position (illustrative and not exhaustive). If a contract refers to
a document and provides that the said document shall form part and
parcel of the contract, or that all terms and conditions of the said
document shall be read or treated as a part of the contract, or that the
contract will be governed by the provisions of the said document, or that
the terms and conditions of the said document shall be incorporated into
the contract, the terms and conditions of the document in entirety will get
bodily lifted and incorporated into the contract. When there is such
incorporation of the terms and conditions of a document, every term of
such document (except to the extent it is inconsistent with any specific
provision in the contract) will apply to the contract. If the document so
incorporated contains a provision for settlement of disputes by arbitration,
the said arbitration clause also will apply to the contract.
18. On the other hand, where there is only a reference to a document in a
contract in a particular context, the document will not get incorporated in
entirety into the contract. For example, if a contract provides that the
specifications of the supplies will be as provided in an earlier contract or
another purchase order, then it will be necessary to look to that document
only for the limited purpose of ascertainment of specifications of the goods
to be supplied. The referred document cannot be looked into for any other
purpose, say price or payment of price. Similarly, if a contract between X
and Y provides that the terms of payment to Y will be as in the contract
between X and Z, then only the terms of payment from the contract
between X and Z, will be read as part of the contract between X and Y. The
other terms, say relating to quantity or delivery cannot be looked into.
19. Sub-section (5) of Section 7 merely reiterates these well-settled
principles of construction of contracts. It makes it clear that where there is
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a reference to a document in a contract, and the reference shows that the
document was not intended to be incorporated in entirety, then the
reference will not make the arbitration clause in the document, a part of
the contract, unless there is a special reference to the arbitration clause so
as to make it applicable.”
8. Relevant passages from Russell on Arbitration 23rd
Edition (2007)
which were relied upon by this Court for interpretation of Section 7
(5) of the Arbitration and Conciliation Act, 1996 are as under: (M.R.
Engineers’ case, para 20-21)
“20. The following passages from Russell on Arbitration throw
considerable light on the position while dealing with Section 6(2) of the
(English) Arbitration Act, 1996 corresponding to Section 7(5) of the Indian
Act. (See pp. 52-55, 23rd Edn.):
“Reference to another document.—The terms of a contract may
have to be ascertained by reference to more than one document.
Ascertaining which documents constitute the contractual
documents and in what, if any, order of priority they should be read
is a problem encountered in many commercial transactions,
particularly those involving shipping and construction. This issue
has to be determined by applying the usual principles of
construction and attempting to infer the parties' intentions by
means of an objective assessment of the evidence. This may make
questions of incorporation irrelevant, if for example it is clear that
the contractual documents in question are entirely separate and no
intention to incorporate the terms of one in the other can be
established. However, the contractual document defining and
imposing the performance obligations may be found to incorporate
another document which contains an arbitration agreement. If
there is a dispute about the performance obligations, that dispute
may need to be decided according to the arbitration provisions of
that other document. This very commonly occurs when the
principal contractual document refers to standard form terms
containing an arbitration agreement. However the standard form
wording may not be apt for the contract in which the parties seek
to incorporate it, or the reference may be to another contract
between parties at least one of whom is different. In these
circumstances it may be possible to argue that the purported
incorporation of the arbitration agreement is ineffective. The
draftsmen of the Arbitration Act, 1996 were asked to provide
specific guidance on the issue, but they preferred to leave it to the
court to decide whether there had been a valid incorporation by
reference. (Para 2.044)
***
Subject to drawing a distinction between incorporation of an arbitration
agreement contained in a document setting out standard form terms and
one contained in some other contract between different parties, judicial
thinking seems to have favoured the approach of Sir John Megaw in
Aughton, namely, that general words of incorporation are not sufficient.
Rather, particular reference to the arbitration clause needs to be made to
comply with Section 6 of the Arbitration Act, 1996, unless special
circumstances exist. (Para 2.047)
Reference to standard form terms.— If the document sought to be
incorporated is a standard form set of terms and conditions the
courts are more likely to accept that general words of incorporation
will suffice. This is because the parties can be expected to be more
5 | P a g e
familiar with those standard terms including the arbitration clause.”
(Para 2.048)
21. After referring to the view of Sir John Megaw in Aughton Ltd. v. M.F.
Kent Services Ltd. [(1991) 57 BLR 1] that specific words were necessary to
incorporate an arbitration clause and that the reference in a sub-contract
to another contract's terms and conditions would not suffice to incorporate
the arbitration clause into the sub-contract, followed in Barrett & Son
(Brickwork) Ltd. v. Henry Boot Management Ltd.[1995 CILL 1026] , Trygg
Hansa Insurance Co. Ltd. v. Equitas Ltd. [(1998) 2 Lloyds' Rep 439]
and AIG Europe (UK) Ltd. v. Ethniki [(2000) 2 All ER 566 (CA)] and Sea
Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd.
No. 2 [2006 EWHC 2530] , Russell concludes:
“The current position therefore seems to be that if the arbitration
agreement is incorporated from a standard form a general
reference to those terms is sufficient, but at least in the case of
reference to a non-standard form contract in the context of
construction and reinsurance contracts and bills of lading a specific
reference to the arbitration agreement is necessary.”
9. This Court also discussed the scope of Section 7 (5) of the Act and
summarised as follows: (M.R. Engineers’ case, para 24)
“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.
(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
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forming part of such general conditions of contract will apply to the
contract between the parties.”
10. It was ultimately found that the intention of the parties was not to
incorporate the main contract in its entirety into the sub-contract.
Further, this Court held that the arbitration clause in the main
contract was inapplicable to the contract between the parties as the
main contract was between the Public Works Department,
Government of Kerala and the contractor in which the arbitration
clause contemplated appointment of a committee of three
arbitrators, with one each to be appointed by the State of Kerala
and the Respondent therein and the third to be nominated by the
Director General Road Development, Ministry of Surface Transport
Roads in Government of India. Appointment of a committee of
arbitrators with representatives of State of Kerala and the
Government of India was totally irrelevant for the contract between
the contractor and the sub-contractor.
11. Section 6 (2) of the Arbitration Act, 1996 which extends to England,
Wales and Northern Ireland is in pari materia with Section 7 (5) of
the Arbitration and Conciliation Act, 1996 and it reads as under:-
“6. Definition of arbitration agreement.
...
(2) The reference in an agreement to a written form of arbitration clause
or to a document containing an arbitration clause constitutes an
arbitration agreement if the reference is such as to make that clause part
of the agreement.”
12. It will be useful to understand the interpretation of the incorporation
issue in England. The question whether the general words of
incorporation are sufficient to incorporate an arbitration agreement
arose for consideration of the High Court of Justice, Queen’s Bench
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Division, Commercial Court in Sea Trade Maritime Corporation v.
Hellenic Mutual War Risks Association (Bermuda) Limited,
The Athena [2006] EWHC 2530 (Comm). In the said case the
difference between incorporation in a single contract case and a two
contract case was recognized. If there is a reference to a secondary
document in a contract between two parties and that secondary
document is a contract to which at least one party is different from
the parties to the contract in question, it would be a two contract
case. In other words, if the secondary document is between other
parties or if only one of the parties to the contract in dispute is party
to an earlier contract to which a reference is made, then it would be
a two contract case. In such a contract general reference to the
earlier contract would not be sufficient to incorporate the arbitration
clause. However, if the reference is to standard terms in a contract
that would be a case of ‘single contract’ and the use of general
words to incorporate the arbitration agreement by a reference is
permissible. As the reference in that case was to a standard form
of contract which was a single contract case, Justice Langley held
that the general words of incorporation were enough to incorporate
an arbitration clause.
13. The question of incorporation of the arbitration clause from an
earlier contract by general reference into a later contract came up
for consideration before the Queen’s Bench Division again in
Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal
SAL [2010] EWHC 29 (Comm). The contract in the said case
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pertained to sale of 10,000 metric tons of steel scrap. There were
several terms in the contract under the headings material, quantity,
price, shipment, discharge, rate, payment and final weight. Apart
from the said terms, the contract contained a clause which was in
the following terms: “All the rest will be same as our previous
contracts.”
14. The dispute that arose in that case was whether general words
mentioned above were capable of incorporating an arbitration
clause. The difference in approach between cases in which the
parties incorporate the terms of a contract between the other
parties or between one of them with a third party on the one hand
and those in which they incorporate the standard terms on the other
hand, was noticed. The following broad categories in which the
parties attempt to incorporate an arbitration clause were recognized
by the Court, which are as follows:
“(1) A and B make a contract in which they incorporate standard terms.
These may be the standard terms of one party set out on the back of an
offer letter or an order, or contained in another document to which reference
is made; or terms embodied in the rules of an organisation of which A or B or
both are members; or they may be terms standard in a particular trade or
industry.
(2) A and B make a contract incorporating terms previously agreed between
A and B in another contract or contracts to which they were both parties
(3) A and B make a contract incorporating terms agreed between A (or B)
and C. Common examples are a bill of lading incorporating the terms of a
charter to which A is a party; reinsurance contracts incorporating the terms
of an underlying insurance; excess insurance contracts incorporating the
terms of the primary layer of insurance; and building or engineering sub
contracts incorporating the terms of a main contract or sub-sub contracts
incorporating the terms of a sub contract.
(4) A and B make a contract incorporating terms agreed between C and D.
Bills of lading, reinsurance and insurance contracts and building contracts
may fall into this category.”
15. In Habas’s case (supra), Justice Christopher Clarke followed the
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ratio in the case of ‘the Athena’ (supra) and held that in single
contract cases (categories 1 and 2), a general reference would be
sufficient for incorporation of an arbitration clause from a standard
form of contract. In cases falling under categories 3 and 4
mentioned above which are two contract cases, it was held that a
stricter rule has to be followed by insisting on a specific reference to
the arbitration clause from an earlier contract. Reliance placed on
the judgment of Sir John Megaw in Aughton v MF Kent Services
[1991] 31 Con L.R. 60 was repelled in the following terms:
“53 I do not regard myself as bound by the decisions of the Court of
Appeal in Aughton v Kent and The Ethniki to reach a different conclusion.
Both were two-contract cases. Further the judgments of Sir John Megaw
and Lord Justice Ralph Gibson are, in part in conflict so as to preclude
either of them being binding authority even in a two contract case. The
agreement of Evans LJ with Sir John Megaw's “ analysis of the authorities
with regard to arbitration clauses and specifically with regard to the
incorporation of charterparty arbitration clauses into bills of lading ” was
obiter.”
16. The point pertaining to the independent nature of an arbitration
clause being determinative of the dispute pertaining to
incorporation was also dealt with in the said judgment as follows:
“51 Like Langley J, however, I do not accept that, in a single contract case,
the independent nature of the arbitration clause should determine whether
it is to be incorporated. A commercial lawyer would probably understand
that an arbitration clause is a separate contract collateral to another
substantive contract and that the expression “arbitration clause” is, on
that account, something of a misnomer for “the arbitration contract which
is ancillary to the primary contract”. But a businessman would have no
difficulty in regarding the arbitration clause (as he would call it) as part of
a contract and as capable of incorporation, by appropriate wording, as any
other term of such a contract; and it is, as it seems to me to a
businessman's understanding that the court should be disposed to. give
effect. A businessman who had agreed with his counterparty a contract
with 10 specific terms under various headings and then agreed with the
same counterparty terms 1-5 under the same headings as before and, as
to the rest, that all the terms of the previous contract should apply, would,
I think, be surprised to find that “all” should be interpreted so as to mean
“all but the arbitration clause”.
17. For a better understanding of the single and two contract cases and
reference to standard form terms it is relevant to examine Russell
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on Arbitration 24th
Edition (2015) which is as under: (See pp. 52-54, 24rd
Edn.)
“Reference to standard form terms, single and two contract cases. If the
document sought to be incorporated is a standard form set of terms and
conditions the courts are more likely to accept that general words of
incorporation will suffice. This is because the parties can be expected to
be more familiar with those standard terms, including the arbitration
clause. In Sea Trade Maritime Corp v. Hellenic Mutual War Risks
Association (Bermuda) Ltd, (The “Athena”) No.2 the Court drew a
distinction between what is described as a “two contract case”, that is
where the arbitration clause is contained in a secondary document which
is a contract to which at least one party is different from the parties to the
contract in question, and “a single contract case” where the arbitration
clause is in standard terms to be found in another document. Relying on
dictum of Bingham LJ in Federal Bulk Carries Inc v. C. Itoh & Co Ltd (The
“Federal Bulker”), Langley J stated that:
“In principle, English law accepts incorporation of standard terms
by the use of general words and, I would add, particularly so when
the terms are readily available and the question arises in the
context of dealings between established players in a well-known
market. The principle, as the dictum makes clear, does not
distinguish between a term which is an arbitration clause and one
which addresses other issues. In contrast, and for the very reason
that it concerns other parties, a “stricter rule” is applied in
charterparty/bills of lading cases. The reason given is that the
other party may have no knowledge nor ready means of
knowledge of the relevant terms. Further, as the authorities
illustrate, the terms of an arbitration clause may require
adjustment if they are to be made to apply to the parties to a
different contract.”
The Court therefore reinforced the distinction between incorporation by
reference of standard form terms and of the terms of a different contract,
and concluded that in a single contract case general words of
incorporation are sufficient, whereas by its nature a two contract case
may require specific reference to the other contract, unless the secondary
document is stated to be based on standard form terms containing an
arbitration agreement. In that case, presumably specific reference to the
arbitration clause would not be needed. As discussed below, this approach
has been endorsed in subsequent cases, albeit drawing a slightly different
but “material” distinction between incorporation of the terms of a separate
contract – standard or otherwise – made between the same parties which
are treated as “single contract” cases, even where there is in fact more
than one contract; and those where the terms to be incorporated are
contained in a contract between one or more different parties which are
treated as the “two contract” cases. (Para 2-049)
Extension of the single contract cases.
Recently, the courts appear to have extended the “single contract”
principle applicable to standard form contracts, where general words of
incorporation will suffice, to other types of contract where the same
rationale can be said to apply. Thus, if the document sought to be
incorporated is a bespoke contract between the same parties, the courts
have accepted this as a “single contract” case where general words of
incorporation will suffice, even though the other contract is not on
standard terms and constitutes an entirely separate agreement. The
rationale for this approach is that the parties have already contracted on
the terms said to be incorporated and are therefore even more likely to be
familiar with the term relied on than a party resisting incorporation of a
standard term. Put another way, if general words of incorporation are
sufficient for the latter, they should be even more so for the former. The
courts also appear to have accepted as a “single contract” case a situation
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where the contract referred to is between one of the parties to the original
contract and a third party, where the contracts as a whole “were entered
into in the context of a single commercial relationship”.(Para 2-050)
[Emphasis Supplied]
18. This Court in M.R. Engineers’ case, which is discussed in detail
supra, held the rule to be that an arbitration clause in an earlier
contract cannot be incorporated by a general reference. The
exception to the rule is a reference to a standard form of contract by
a trade association or a professional institution in which case a
general reference would be sufficient for incorporation of an
arbitration clause. Reliance was placed by this Court on Russell on
Arbitration 23rd
Edition (2007). The development of law regarding
incorporation after the judgment in M.R. Engineers requires
careful consideration. It has been held in Habas Sinai Ve Tibbi
Gazlar Isthisal Endustri AS v Sometal SAL [2010] EWHC 29
(Comm) that a standard form of one party is also recognized as a
‘single contract’ case. In the said case, it was also held that in
single contract cases general reference is enough for incorporation
of an arbitration clause from a standard form of contract. There is
no distinction that is drawn between standard forms by recognized
trade associations or professional institutions on one hand and
standard terms of one party on the other. Russell on Arbitration
24th
Edition (2015) also takes note of the Habas’s case.
19. We are of the opinion that 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
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enough for incorporation of the arbitration clause. In M.R.
Engineers this Court restricted the exceptions to standard form of
contract of trade associations and professional institutions. In view
of the development of law after the judgment in M.R. Engineers’
case, we are of the opinion that a general reference to a consensual
standard form is sufficient for incorporation of an arbitration clause.
In other words, general reference to a standard form of contract of
one party will be enough for incorporation of arbitration clause. A
perusal of the passage from Russell on Arbitration 24th
Edition
(2015) would demonstrate the change in position of law pertaining
to incorporation when read in conjunction with the earlier edition
relied upon by this Court in M.R. Engineers’ case. We are in
agreement with the judgment in M.R. Engineer’s case with a
modification that a general reference to a standard form of contract
of one party along with those of trade associations and professional
bodies will be sufficient to incorporate the arbitration clause.
20. In the present case, the purchase order was issued by the Appellant
in which it was categorically mentioned that the supply would be as
per the terms mentioned therein and in the attached standard
terms and conditions. The Respondent by his letter dated
15.12.2012 confirmed its acceptance of the terms and conditions
mentioned in the purchase order except delivery period. The
dispute arose after the delivery of the goods. No doubt, there is
nothing forthcoming from the pleadings or the submissions made by
the parties that the standard form attached to the purchase order is
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of a trade association or a professional body. However, the
Respondent was aware of the standard terms and conditions which
were attached to the purchase order. The purchase order is a single
contract and general reference to the standard form even if it is not
by a trade association or a professional body is sufficient for
incorporation of the arbitration clause.
21. For the aforementioned reasons, the appeal is allowed and the
judgment of the High Court is set aside. Justice Sushil Harkauli is
appointed as the Arbitrator to adjudicate the dispute between the
parties.
........................................J.
[S.A. BOBDE]
..……................................J.
[L. NAGESWARA RAO]
New Delhi;
January 05, 2018
14 | P a g e
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No . 19 of2018
(Arising out of SLP (Civil) No.31049 of 2016)
M/S. INOX WIND LTD.
.... Appellant
Versus
M/S THERMOCABLES LTD. .... Respondent
J U D G M E N T
L. NAGESWARA RAO, J.
Leave granted.
2. This appeal is directed against the judgment of the High Court
of Judicature at Allahabad dismissing the application filed by the
Appellant under Section 11 (6) of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as ‘the Act’).
3. The Appellant is a manufacturer of wind turbine generators (WTGs).
The Respondent is engaged in the business of manufacture of wind
power cables and other types of cables. Two purchase orders dated
13.12.2012 and 02.02.2013 were issued by the Appellant to the
Respondent for supply of cables for their WTGs. According to the
Purchase Order, the supply was to be
according to the terms mentioned in the order and the Standard
Terms and Conditions that were attached thereto. Apart from the
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other conditions, the Standard Terms and Conditions contain a
clause pertaining to dispute resolution. The said clause provides for
a dispute to be resolved by a sole arbitrator in accordance with the
provisions of the Arbitration and Conciliation Act, 1996. The material
on record indicates that the Respondent accepted all the terms and
conditions mentioned in the Purchase Order except the delivery
period as is evident from a letter dated 15.12.2012.
4. The Respondent, pursuant to the Purchase Order, supplied wind
power cables to the Appellant. While laying the cables supplied by
the Respondent-company, the Appellant discovered that the outer
sheaths of the cables of 150 sq. mm. were cracked. This forced
them to stop the WTGs so as to avert damage to expensive
equipment. According to the Appellant, the Respondent-company
did not replace the cables. The Appellant, therefore, was
constrained to issue a notice dated 30.10.2014 proposing the name
of a sole arbitrator in terms of the Standard Terms and Conditions.
In the absence of any response, the Appellant moved the High Court
of Judicature at Allahabad by filing an application under Section 11
(6) of the Act.
5. The High Court dismissed the said application by holding that an
arbitrator cannot be appointed as the Appellant did not prove the
existence of an arbitration agreement. The High Court relied upon
the judgment of this Court in M.R. Engineers and Contractors
Private Limited v. Som Datt Builders Limited, (2009) 7 SCC
696 to hold that there is no special reference to the arbitration
2 | P a g e
clause in the standard terms and conditions, so the arbitration
clause cannot be said to have been incorporated into the purchase
order.
6. We have heard the counsel for the Appellant and Respondent. The
judgment of this Court in M.R. Engineers’ case (supra) was relied
upon by both the parties. Before proceeding further, it would be
necessary to appreciate the ratio of the said judgment. A few facts
necessary to understand the dispute in the said case are that the
Appellant therein was a sub-contractor of the Respondent. The
Appellant was entrusted a part of the work by the
Respondent-contractor which pertained to ‘construction of project
directorate building’. It was mentioned in the sub-contract that it
shall be carried out as per the terms and conditions applicable to
the main contract. A dispute arose between the parties which made
the Appellant therein to approach the High Court for appointment of
an arbitrator under Section 11 (6) of the Arbitration and Conciliation
Act, 1996. The High Court of Kerala rejected the application on the
ground that the arbitration clause in the main contract was not
incorporated by reference in the contract between the Appellant
and Respondent therein. In the appeal before this Court, the
Appellant submitted that his case was squarely covered by Section
7 (5) of the Act and that the arbitration clause from the main
contract was incorporated by reference in the sub contract between
him and the Respondent.
7. This Court considered the scope of Section 7 (5) of the Act and held
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that a conscious acceptance of the arbitration clause found in
another document is necessary for the purpose of incorporating it
into the contract. It was further held that general rules of
construction of contracts would have to be followed as there were
no guidelines in Section 7(5) regarding the conditions that need to
be fulfilled before construing a reference to a portion of a contract
as a reference incorporating the whole of it along with the
arbitration clause contained in it. While distinguishing ‘reference’ to
another document from ‘incorporation’, this Court observed that the
relevant factor was the intention of the parties either to adopt the
document in its entirety or to borrow specific portions of the said
document. In this connection, the Court held as follows: (M.R.
Engineers’ case, para 17-19)
“17. We will give a few instances of incorporation and mere reference to
explain the position (illustrative and not exhaustive). If a contract refers to
a document and provides that the said document shall form part and
parcel of the contract, or that all terms and conditions of the said
document shall be read or treated as a part of the contract, or that the
contract will be governed by the provisions of the said document, or that
the terms and conditions of the said document shall be incorporated into
the contract, the terms and conditions of the document in entirety will get
bodily lifted and incorporated into the contract. When there is such
incorporation of the terms and conditions of a document, every term of
such document (except to the extent it is inconsistent with any specific
provision in the contract) will apply to the contract. If the document so
incorporated contains a provision for settlement of disputes by arbitration,
the said arbitration clause also will apply to the contract.
18. On the other hand, where there is only a reference to a document in a
contract in a particular context, the document will not get incorporated in
entirety into the contract. For example, if a contract provides that the
specifications of the supplies will be as provided in an earlier contract or
another purchase order, then it will be necessary to look to that document
only for the limited purpose of ascertainment of specifications of the goods
to be supplied. The referred document cannot be looked into for any other
purpose, say price or payment of price. Similarly, if a contract between X
and Y provides that the terms of payment to Y will be as in the contract
between X and Z, then only the terms of payment from the contract
between X and Z, will be read as part of the contract between X and Y. The
other terms, say relating to quantity or delivery cannot be looked into.
19. Sub-section (5) of Section 7 merely reiterates these well-settled
principles of construction of contracts. It makes it clear that where there is
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a reference to a document in a contract, and the reference shows that the
document was not intended to be incorporated in entirety, then the
reference will not make the arbitration clause in the document, a part of
the contract, unless there is a special reference to the arbitration clause so
as to make it applicable.”
8. Relevant passages from Russell on Arbitration 23rd
Edition (2007)
which were relied upon by this Court for interpretation of Section 7
(5) of the Arbitration and Conciliation Act, 1996 are as under: (M.R.
Engineers’ case, para 20-21)
“20. The following passages from Russell on Arbitration throw
considerable light on the position while dealing with Section 6(2) of the
(English) Arbitration Act, 1996 corresponding to Section 7(5) of the Indian
Act. (See pp. 52-55, 23rd Edn.):
“Reference to another document.—The terms of a contract may
have to be ascertained by reference to more than one document.
Ascertaining which documents constitute the contractual
documents and in what, if any, order of priority they should be read
is a problem encountered in many commercial transactions,
particularly those involving shipping and construction. This issue
has to be determined by applying the usual principles of
construction and attempting to infer the parties' intentions by
means of an objective assessment of the evidence. This may make
questions of incorporation irrelevant, if for example it is clear that
the contractual documents in question are entirely separate and no
intention to incorporate the terms of one in the other can be
established. However, the contractual document defining and
imposing the performance obligations may be found to incorporate
another document which contains an arbitration agreement. If
there is a dispute about the performance obligations, that dispute
may need to be decided according to the arbitration provisions of
that other document. This very commonly occurs when the
principal contractual document refers to standard form terms
containing an arbitration agreement. However the standard form
wording may not be apt for the contract in which the parties seek
to incorporate it, or the reference may be to another contract
between parties at least one of whom is different. In these
circumstances it may be possible to argue that the purported
incorporation of the arbitration agreement is ineffective. The
draftsmen of the Arbitration Act, 1996 were asked to provide
specific guidance on the issue, but they preferred to leave it to the
court to decide whether there had been a valid incorporation by
reference. (Para 2.044)
***
Subject to drawing a distinction between incorporation of an arbitration
agreement contained in a document setting out standard form terms and
one contained in some other contract between different parties, judicial
thinking seems to have favoured the approach of Sir John Megaw in
Aughton, namely, that general words of incorporation are not sufficient.
Rather, particular reference to the arbitration clause needs to be made to
comply with Section 6 of the Arbitration Act, 1996, unless special
circumstances exist. (Para 2.047)
Reference to standard form terms.— If the document sought to be
incorporated is a standard form set of terms and conditions the
courts are more likely to accept that general words of incorporation
will suffice. This is because the parties can be expected to be more
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familiar with those standard terms including the arbitration clause.”
(Para 2.048)
21. After referring to the view of Sir John Megaw in Aughton Ltd. v. M.F.
Kent Services Ltd. [(1991) 57 BLR 1] that specific words were necessary to
incorporate an arbitration clause and that the reference in a sub-contract
to another contract's terms and conditions would not suffice to incorporate
the arbitration clause into the sub-contract, followed in Barrett & Son
(Brickwork) Ltd. v. Henry Boot Management Ltd.[1995 CILL 1026] , Trygg
Hansa Insurance Co. Ltd. v. Equitas Ltd. [(1998) 2 Lloyds' Rep 439]
and AIG Europe (UK) Ltd. v. Ethniki [(2000) 2 All ER 566 (CA)] and Sea
Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd.
No. 2 [2006 EWHC 2530] , Russell concludes:
“The current position therefore seems to be that if the arbitration
agreement is incorporated from a standard form a general
reference to those terms is sufficient, but at least in the case of
reference to a non-standard form contract in the context of
construction and reinsurance contracts and bills of lading a specific
reference to the arbitration agreement is necessary.”
9. This Court also discussed the scope of Section 7 (5) of the Act and
summarised as follows: (M.R. Engineers’ case, para 24)
“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.
(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
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forming part of such general conditions of contract will apply to the
contract between the parties.”
10. It was ultimately found that the intention of the parties was not to
incorporate the main contract in its entirety into the sub-contract.
Further, this Court held that the arbitration clause in the main
contract was inapplicable to the contract between the parties as the
main contract was between the Public Works Department,
Government of Kerala and the contractor in which the arbitration
clause contemplated appointment of a committee of three
arbitrators, with one each to be appointed by the State of Kerala
and the Respondent therein and the third to be nominated by the
Director General Road Development, Ministry of Surface Transport
Roads in Government of India. Appointment of a committee of
arbitrators with representatives of State of Kerala and the
Government of India was totally irrelevant for the contract between
the contractor and the sub-contractor.
11. Section 6 (2) of the Arbitration Act, 1996 which extends to England,
Wales and Northern Ireland is in pari materia with Section 7 (5) of
the Arbitration and Conciliation Act, 1996 and it reads as under:-
“6. Definition of arbitration agreement.
...
(2) The reference in an agreement to a written form of arbitration clause
or to a document containing an arbitration clause constitutes an
arbitration agreement if the reference is such as to make that clause part
of the agreement.”
12. It will be useful to understand the interpretation of the incorporation
issue in England. The question whether the general words of
incorporation are sufficient to incorporate an arbitration agreement
arose for consideration of the High Court of Justice, Queen’s Bench
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Division, Commercial Court in Sea Trade Maritime Corporation v.
Hellenic Mutual War Risks Association (Bermuda) Limited,
The Athena [2006] EWHC 2530 (Comm). In the said case the
difference between incorporation in a single contract case and a two
contract case was recognized. If there is a reference to a secondary
document in a contract between two parties and that secondary
document is a contract to which at least one party is different from
the parties to the contract in question, it would be a two contract
case. In other words, if the secondary document is between other
parties or if only one of the parties to the contract in dispute is party
to an earlier contract to which a reference is made, then it would be
a two contract case. In such a contract general reference to the
earlier contract would not be sufficient to incorporate the arbitration
clause. However, if the reference is to standard terms in a contract
that would be a case of ‘single contract’ and the use of general
words to incorporate the arbitration agreement by a reference is
permissible. As the reference in that case was to a standard form
of contract which was a single contract case, Justice Langley held
that the general words of incorporation were enough to incorporate
an arbitration clause.
13. The question of incorporation of the arbitration clause from an
earlier contract by general reference into a later contract came up
for consideration before the Queen’s Bench Division again in
Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal
SAL [2010] EWHC 29 (Comm). The contract in the said case
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pertained to sale of 10,000 metric tons of steel scrap. There were
several terms in the contract under the headings material, quantity,
price, shipment, discharge, rate, payment and final weight. Apart
from the said terms, the contract contained a clause which was in
the following terms: “All the rest will be same as our previous
contracts.”
14. The dispute that arose in that case was whether general words
mentioned above were capable of incorporating an arbitration
clause. The difference in approach between cases in which the
parties incorporate the terms of a contract between the other
parties or between one of them with a third party on the one hand
and those in which they incorporate the standard terms on the other
hand, was noticed. The following broad categories in which the
parties attempt to incorporate an arbitration clause were recognized
by the Court, which are as follows:
“(1) A and B make a contract in which they incorporate standard terms.
These may be the standard terms of one party set out on the back of an
offer letter or an order, or contained in another document to which reference
is made; or terms embodied in the rules of an organisation of which A or B or
both are members; or they may be terms standard in a particular trade or
industry.
(2) A and B make a contract incorporating terms previously agreed between
A and B in another contract or contracts to which they were both parties
(3) A and B make a contract incorporating terms agreed between A (or B)
and C. Common examples are a bill of lading incorporating the terms of a
charter to which A is a party; reinsurance contracts incorporating the terms
of an underlying insurance; excess insurance contracts incorporating the
terms of the primary layer of insurance; and building or engineering sub
contracts incorporating the terms of a main contract or sub-sub contracts
incorporating the terms of a sub contract.
(4) A and B make a contract incorporating terms agreed between C and D.
Bills of lading, reinsurance and insurance contracts and building contracts
may fall into this category.”
15. In Habas’s case (supra), Justice Christopher Clarke followed the
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ratio in the case of ‘the Athena’ (supra) and held that in single
contract cases (categories 1 and 2), a general reference would be
sufficient for incorporation of an arbitration clause from a standard
form of contract. In cases falling under categories 3 and 4
mentioned above which are two contract cases, it was held that a
stricter rule has to be followed by insisting on a specific reference to
the arbitration clause from an earlier contract. Reliance placed on
the judgment of Sir John Megaw in Aughton v MF Kent Services
[1991] 31 Con L.R. 60 was repelled in the following terms:
“53 I do not regard myself as bound by the decisions of the Court of
Appeal in Aughton v Kent and The Ethniki to reach a different conclusion.
Both were two-contract cases. Further the judgments of Sir John Megaw
and Lord Justice Ralph Gibson are, in part in conflict so as to preclude
either of them being binding authority even in a two contract case. The
agreement of Evans LJ with Sir John Megaw's “ analysis of the authorities
with regard to arbitration clauses and specifically with regard to the
incorporation of charterparty arbitration clauses into bills of lading ” was
obiter.”
16. The point pertaining to the independent nature of an arbitration
clause being determinative of the dispute pertaining to
incorporation was also dealt with in the said judgment as follows:
“51 Like Langley J, however, I do not accept that, in a single contract case,
the independent nature of the arbitration clause should determine whether
it is to be incorporated. A commercial lawyer would probably understand
that an arbitration clause is a separate contract collateral to another
substantive contract and that the expression “arbitration clause” is, on
that account, something of a misnomer for “the arbitration contract which
is ancillary to the primary contract”. But a businessman would have no
difficulty in regarding the arbitration clause (as he would call it) as part of
a contract and as capable of incorporation, by appropriate wording, as any
other term of such a contract; and it is, as it seems to me to a
businessman's understanding that the court should be disposed to. give
effect. A businessman who had agreed with his counterparty a contract
with 10 specific terms under various headings and then agreed with the
same counterparty terms 1-5 under the same headings as before and, as
to the rest, that all the terms of the previous contract should apply, would,
I think, be surprised to find that “all” should be interpreted so as to mean
“all but the arbitration clause”.
17. For a better understanding of the single and two contract cases and
reference to standard form terms it is relevant to examine Russell
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on Arbitration 24th
Edition (2015) which is as under: (See pp. 52-54, 24rd
Edn.)
“Reference to standard form terms, single and two contract cases. If the
document sought to be incorporated is a standard form set of terms and
conditions the courts are more likely to accept that general words of
incorporation will suffice. This is because the parties can be expected to
be more familiar with those standard terms, including the arbitration
clause. In Sea Trade Maritime Corp v. Hellenic Mutual War Risks
Association (Bermuda) Ltd, (The “Athena”) No.2 the Court drew a
distinction between what is described as a “two contract case”, that is
where the arbitration clause is contained in a secondary document which
is a contract to which at least one party is different from the parties to the
contract in question, and “a single contract case” where the arbitration
clause is in standard terms to be found in another document. Relying on
dictum of Bingham LJ in Federal Bulk Carries Inc v. C. Itoh & Co Ltd (The
“Federal Bulker”), Langley J stated that:
“In principle, English law accepts incorporation of standard terms
by the use of general words and, I would add, particularly so when
the terms are readily available and the question arises in the
context of dealings between established players in a well-known
market. The principle, as the dictum makes clear, does not
distinguish between a term which is an arbitration clause and one
which addresses other issues. In contrast, and for the very reason
that it concerns other parties, a “stricter rule” is applied in
charterparty/bills of lading cases. The reason given is that the
other party may have no knowledge nor ready means of
knowledge of the relevant terms. Further, as the authorities
illustrate, the terms of an arbitration clause may require
adjustment if they are to be made to apply to the parties to a
different contract.”
The Court therefore reinforced the distinction between incorporation by
reference of standard form terms and of the terms of a different contract,
and concluded that in a single contract case general words of
incorporation are sufficient, whereas by its nature a two contract case
may require specific reference to the other contract, unless the secondary
document is stated to be based on standard form terms containing an
arbitration agreement. In that case, presumably specific reference to the
arbitration clause would not be needed. As discussed below, this approach
has been endorsed in subsequent cases, albeit drawing a slightly different
but “material” distinction between incorporation of the terms of a separate
contract – standard or otherwise – made between the same parties which
are treated as “single contract” cases, even where there is in fact more
than one contract; and those where the terms to be incorporated are
contained in a contract between one or more different parties which are
treated as the “two contract” cases. (Para 2-049)
Extension of the single contract cases.
Recently, the courts appear to have extended the “single contract”
principle applicable to standard form contracts, where general words of
incorporation will suffice, to other types of contract where the same
rationale can be said to apply. Thus, if the document sought to be
incorporated is a bespoke contract between the same parties, the courts
have accepted this as a “single contract” case where general words of
incorporation will suffice, even though the other contract is not on
standard terms and constitutes an entirely separate agreement. The
rationale for this approach is that the parties have already contracted on
the terms said to be incorporated and are therefore even more likely to be
familiar with the term relied on than a party resisting incorporation of a
standard term. Put another way, if general words of incorporation are
sufficient for the latter, they should be even more so for the former. The
courts also appear to have accepted as a “single contract” case a situation
11 | P a g e
where the contract referred to is between one of the parties to the original
contract and a third party, where the contracts as a whole “were entered
into in the context of a single commercial relationship”.(Para 2-050)
[Emphasis Supplied]
18. This Court in M.R. Engineers’ case, which is discussed in detail
supra, held the rule to be that an arbitration clause in an earlier
contract cannot be incorporated by a general reference. The
exception to the rule is a reference to a standard form of contract by
a trade association or a professional institution in which case a
general reference would be sufficient for incorporation of an
arbitration clause. Reliance was placed by this Court on Russell on
Arbitration 23rd
Edition (2007). The development of law regarding
incorporation after the judgment in M.R. Engineers requires
careful consideration. It has been held in Habas Sinai Ve Tibbi
Gazlar Isthisal Endustri AS v Sometal SAL [2010] EWHC 29
(Comm) that a standard form of one party is also recognized as a
‘single contract’ case. In the said case, it was also held that in
single contract cases general reference is enough for incorporation
of an arbitration clause from a standard form of contract. There is
no distinction that is drawn between standard forms by recognized
trade associations or professional institutions on one hand and
standard terms of one party on the other. Russell on Arbitration
24th
Edition (2015) also takes note of the Habas’s case.
19. We are of the opinion that 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
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enough for incorporation of the arbitration clause. In M.R.
Engineers this Court restricted the exceptions to standard form of
contract of trade associations and professional institutions. In view
of the development of law after the judgment in M.R. Engineers’
case, we are of the opinion that a general reference to a consensual
standard form is sufficient for incorporation of an arbitration clause.
In other words, general reference to a standard form of contract of
one party will be enough for incorporation of arbitration clause. A
perusal of the passage from Russell on Arbitration 24th
Edition
(2015) would demonstrate the change in position of law pertaining
to incorporation when read in conjunction with the earlier edition
relied upon by this Court in M.R. Engineers’ case. We are in
agreement with the judgment in M.R. Engineer’s case with a
modification that a general reference to a standard form of contract
of one party along with those of trade associations and professional
bodies will be sufficient to incorporate the arbitration clause.
20. In the present case, the purchase order was issued by the Appellant
in which it was categorically mentioned that the supply would be as
per the terms mentioned therein and in the attached standard
terms and conditions. The Respondent by his letter dated
15.12.2012 confirmed its acceptance of the terms and conditions
mentioned in the purchase order except delivery period. The
dispute arose after the delivery of the goods. No doubt, there is
nothing forthcoming from the pleadings or the submissions made by
the parties that the standard form attached to the purchase order is
13 | P a g e
of a trade association or a professional body. However, the
Respondent was aware of the standard terms and conditions which
were attached to the purchase order. The purchase order is a single
contract and general reference to the standard form even if it is not
by a trade association or a professional body is sufficient for
incorporation of the arbitration clause.
21. For the aforementioned reasons, the appeal is allowed and the
judgment of the High Court is set aside. Justice Sushil Harkauli is
appointed as the Arbitrator to adjudicate the dispute between the
parties.
........................................J.
[S.A. BOBDE]
..……................................J.
[L. NAGESWARA RAO]
New Delhi;
January 05, 2018
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