Incorporating Arbitration Clause – What’s The Deal?

Introduction

In the world of business contracts, arbitration is often the go-to method for resolving disputes. Rather than dragging a matter through the courts, many companies prefer to settle their differences through arbitration, a more efficient and private process.

But here’s where things can get tricky:

• What if your contract doesn’t have an arbitration clause directly, but refers to another document that does?
• Does that mean arbitration automatically applies?

According to Section 7(5) of the Arbitration and Conciliation Act, 1996, 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.

This issue has sparked quite a bit of debate, and the Indian judiciary has made some landmark rulings that clarify the rules around incorporating arbitration clauses by reference.

English Law

Aughton Ltd. v. M.F. Kent Services Ltd. [(1991) 57 BLR 1]

It was held that a general reference to a contract would be insufficient to incorporate any arbitration clause, unless sufficient cause existed to suggest to the contrary, and a special reference was, therefore, necessary.

Sea Trade Maritime Corp. v. Hellenic Mutual War Risks Association (Bermuda) Ltd. (The “Athena”) [2006] EWHC 2530

The difference between incorporation in a single contract case and a two contract case was recognized.

Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm)

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.

Justice Christopher Clarke followed the 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.

Indian Law

Landmark Judgments

R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) 7 SCC 696

It was a landmark decision when it comes to how arbitration clauses are incorporated into contracts. Essentially, the Supreme Court made it clear that an arbitration clause from a separate document could become part of a contract, but only if certain conditions were met. Here are the key points:

• Clear Reference to the Document: The contract should contain a clear reference to the documents containing arbitration clause.
• Intent to Incorporate the Clause: The reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract
• Capability: 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.

This judgment also made an important distinction: a general reference to another document containing terms and conditions is not enough to automatically include the arbitration clause. For it to apply, the reference needs to specifically mention the arbitration clause itself. However, if the contract explicitly states that it adopts another party’s general terms (including their arbitration clause), then that clause will be incorporated.

EXCEPTION: The only exception to the aforesaid position is that 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.

Inox Wind Limited v. Thermocables Limited, (2018) 2 SCC 519

The Court was 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.

Giriraj Garg v. Coal India Ltd & Ors., (2019) 2 SCC 192

The Court reiterated that in ‘two-contract case’, a specific reference to the arbitration clause contained in an earlier contract is required for its incorporation in the main contract between the parties. However, in a ‘single-contract case’, a general reference to the standard form contract will have the effect of incorporating the arbitration clause in the main contract.

It was held that the arbitration clause (Clause 11.2) was contained in a standard form document, i.e, the 2007 scheme, to which there was a reference in the individual sale orders. Since the parties to the main contract were same as in the individual sale orders, the Supreme Court held that this would be a ‘single-contract case’. Therefore, the arbitration clause contained in the 2007 scheme would stand incorporated in the individual sale orders.

NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. 2024 SCC OnLine SC 323

The Court discussed when an arbitration clause can be considered to be ‘incorporated’ in an agreement as opposed to being a mere ‘reference’ to arbitration. The court reiterated that if there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/reference thereto. The present case is not a case of ‘incorporation’ but a case of ‘reference’. As such, a general reference would not have the effect of incorporating the arbitration clause.

M/S Mac Associates v. Parvinder Singh FAO (COMM) 261/2023 & CM APPL. 66526/2023

It was held that the arbitration clause in the contract between different parties cannot be merely extended to other parties without explicit reference and intention of the parties to arbitrate the disputes arising out of the contract.

Conclusion

The decisions discussed above highlight the need for parties to a contract to be vigilant about dispute resolution clauses in cases where terms are spread out across multiple documents, which a contract may refer to. Given the Supreme Court’s observations, parties to a commercial agreement ought to explicitly provide for a dispute resolution clause in the final contract, instead of merely relying on reference to other documents. This would ensure greater certainty about the intent of the parties to arbitrate and ensure the validity and enforceability of the arbitration clause.