Supreme Court clarifies: Arbitration Clause in Amenities Agreement extends to Leave and License Agreement

Date of the Judgment: March 13, 2023
Citation: 2023 INSC 232
Judges: Dr Dhananjaya Y Chandrachud, CJI, Pamidighantam Sri Narasimha, J, J B Pardiwala, J
Can an arbitration clause in one agreement be considered part of another agreement if the two are linked? The Supreme Court of India recently addressed this question in a case involving a Leave and License agreement and an Amenities agreement. The core issue was whether an arbitration clause in the Amenities agreement could be extended to the Leave and License agreement because of a clause stating that the Amenities agreement is an integral part of the Leave and License agreement. The Supreme Court held that the arbitration clause in the Amenities Agreement was indeed applicable to the Leave and License Agreement. This judgment was delivered by a three-judge bench comprising of Chief Justice of India Dr. Dhananjaya Y Chandrachud, Justice Pamidighantam Sri Narasimha and Justice J B Pardiwala, with the opinion authored by Chief Justice Dr. Dhananjaya Y Chandrachud.

Case Background

Shinhan Bank (the petitioner), a banking company incorporated under the laws of South Korea, entered into a Leave and License agreement with Carol Info Services Limited (the respondent) on August 5, 2011, for the use of office premises in Mumbai. On the same day, an Amenities agreement was also executed. Upon expiry of the initial term, a fresh Leave and License agreement was executed on July 1, 2016, for a period of two years. On August 25, 2016, a new Amenities agreement was entered into.

On March 22, 2017, the petitioner issued a notice to terminate both agreements effective July 1, 2017, after the lock-in period. The respondent refused to refund the security deposits, claiming the termination was not valid. The petitioner stated that they handed over vacant possession on June 13, 2017. Subsequently, the petitioner demanded a refund of the security deposits with interest on July 3, 2017, which was denied by the respondent on July 13, 2017. The respondent counterclaimed for outstanding license fees and amenities charges for the period from July 1, 2017, to June 30, 2018, along with consequential losses.

The petitioner sought a refund of the security deposits amounting to Rs 1,68,48,000 under the Leave and License agreement and Rs 56,16,000 under the Amenities agreement, with 15% interest per annum, on September 29, 2017. The respondent rejected this claim on October 5, 2017. The petitioner then invoked arbitration on October 9, 2017, which the respondent denied on October 13, 2017, stating that there was no arbitration agreement in place.

Timeline:

Course of Proceedings

The petitioner initially filed an arbitration petition under Section 11 of the Arbitration and Conciliation Act 1996 before the High Court of Judicature at Bombay. However, this petition was withdrawn because the arbitration was considered an international commercial arbitration, given that the petitioner is a banking company incorporated in South Korea.

Legal Framework

The primary legal provision in question is Section 7(5) of the Arbitration and Conciliation Act 1996, which states:

“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.”

The Supreme Court also considered the interpretation of contractual terms, specifically how a reference to another document can incorporate its terms into the primary contract.

Arguments

Petitioner’s Arguments:

• The petitioner argued that the Amenities agreement, which contains an arbitration clause, is an integral part of the Leave and License agreement due to Clause 1 of the Amenities agreement.
• Clause 1 of the Amenities agreement states that its provisions are deemed to be an integral part of the Leave and License agreement.
• Therefore, the arbitration clause in the Amenities agreement should apply to disputes arising from the Leave and License agreement.

Respondent’s Arguments:

• The respondent contended that the Leave and License agreement does not contain an arbitration clause.
• A mere reference to a document does not automatically incorporate an arbitration clause from that document into the contract, as per Section 7(5) of the Arbitration and Conciliation Act 1996.
• The respondent relied on the Supreme Court’s decision in M R Engineers and Contractors Private Limited vs Som Datt Builders Limited, [(2009) 7 SCC 696] to support the argument that a simple reference to another document is not sufficient to incorporate an arbitration clause.
• The respondent also argued that since they have already filed a suit before the High Court of Judicature at Bombay, the petitioner should seek a reference to arbitration under Section 8 of the Arbitration and Conciliation Act 1996 in those proceedings.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the arbitration clause in the Amenities agreement can be considered an integral part of the Leave and License agreement, thus making it applicable to disputes arising from the Leave and License agreement?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authority:

• M R Engineers and Contractors Private Limited vs Som Datt Builders Limited [(2009) 7 SCC 696] – Supreme Court of India. This case was cited by the respondent to argue that a mere reference to another document is not sufficient to incorporate an arbitration clause. However, the Supreme Court distinguished this case, stating that the clause in the present case was not a mere reference but an incorporation of the terms.

The Court also considered the following legal provision:

• Section 7(5) of the Arbitration and Conciliation Act 1996 – This provision defines when a reference to a document containing an arbitration clause constitutes an arbitration agreement.

Judgment

The Supreme Court held that the arbitration clause in the Amenities agreement is applicable to the Leave and License agreement.

The Supreme Court viewed the authorities as follows:

• M R Engineers and Contractors Private Limited vs Som Datt Builders Limited [(2009) 7 SCC 696]: The Supreme Court distinguished this case, stating that the clause in the present case was not a mere reference but an incorporation of the terms. The Court held that the principle in M R Engineers was that a mere reference to a document would not incorporate the arbitration clause unless there was a special reference to the arbitration clause.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the explicit language of Clause 1 of the Amenities agreement, which stated that the provisions of the Amenities agreement were an integral part of the Leave and License agreement. The Court emphasized the intention of the parties to make the arbitration clause in the Amenities agreement applicable to the Leave and License agreement. The Court also distinguished the case of M R Engineers and Contractors Private Limited vs Som Datt Builders Limited [(2009) 7 SCC 696], noting that the clause in the present case was not a mere reference but an incorporation of the terms. The Court also emphasized the importance of upholding the arbitration agreement to ensure the efficacy of the arbitration process.

The Court’s logical reasoning for the issue is as follows:

The Court considered the argument that a mere reference to a document would not incorporate the arbitration clause, but rejected it. The Court distinguished the case of M R Engineers and Contractors Private Limited vs Som Datt Builders Limited [(2009) 7 SCC 696], stating that the clause in the present case was not a mere reference but an incorporation of the terms. The Court also rejected the argument that the petitioner should be relegated to pursuing the remedy under Section 8, stating that the clear terms of the contract necessitated a reference to arbitration.

The decision was unanimous.

The Supreme Court’s decision clarifies that when a contract explicitly states that another agreement is an integral part of it, the terms of the other agreement, including the arbitration clause, are also incorporated. This ruling has significant implications for contract interpretation and the enforcement of arbitration agreements.

The Court quoted the following from the judgment:

• “This Agreement is executed contemporaneously with the said Leave and License Agreement and shall be read and construed accordingly. The provision of this Agreement shall be deemed to be and shall constitute an integral part of the said Leave and License Agreement in respect of the License of the Licensed Premise granted by the Licensors to the Licensee. All provisions of the said Leave and License Agreement shall, mutatis mutandis; apply to this Amenities Agreement”
• “Sub-section (5) of Section 7 merely reiterates these well-settled principles of construction of contracts. It makes it clear that where there is 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.”
• “The arbitration agreement which is embodied in clause 17 of the Amenities agreement was intended by the parties for all intents and purposes to be a part of the Leave and Licence agreement.”

Key Takeaways

• When a contract states that another agreement is an integral part of it, the terms of the other agreement, including the arbitration clause, are incorporated.
• A mere reference to another document is not sufficient to incorporate the arbitration clause, but an explicit statement that the other agreement is an integral part will incorporate the arbitration clause.
• Parties must carefully draft contracts to avoid ambiguity about the incorporation of terms from other documents.

Directions

The Supreme Court directed that the disputes between the parties be referred to the sole arbitration of Dr (Mrs) Shalini Phansalkar-Joshi, a former Judge of the High Court of Judicature at Bombay. The Arbitrator was directed to decide upon the fees in consultation with the parties and the modalities of arbitration.

Development of Law

The ratio decidendi of the case is that when a contract explicitly states that another agreement is an integral part of it, the terms of the other agreement, including the arbitration clause, are also incorporated. This ruling clarifies the interpretation of Section 7(5) of the Arbitration and Conciliation Act 1996 and provides guidance on how to interpret contracts that incorporate terms from other documents. This is a change in the previous position of law, where a mere reference to a document was not considered sufficient to incorporate the arbitration clause.

Conclusion

The Supreme Court’s judgment clarifies that an arbitration clause in an Amenities agreement can be extended to a Leave and License agreement if the Amenities agreement explicitly states that it is an integral part of the Leave and License agreement. This decision emphasizes the importance of clear contractual language and the intention of the parties to be bound by the terms of the contract.

Category:

• Arbitration Law
  • Arbitration and Conciliation Act 1996
    • Section 7(5), Arbitration and Conciliation Act 1996
  • Incorporation of Arbitration Clauses
  • International Commercial Arbitration
• Contract Law
  • Contract Interpretation
  • Leave and License Agreement
  • Amenities Agreement

FAQ

Q: What is the main issue in this case?
A: The main issue was whether an arbitration clause in an Amenities agreement could be applied to a Leave and License agreement if the Amenities agreement stated that it was an integral part of the Leave and License agreement.

Q: What did the Supreme Court decide?
A: The Supreme Court decided that the arbitration clause in the Amenities agreement was indeed applicable to the Leave and License agreement because the Amenities agreement explicitly stated that it was an integral part of the Leave and License agreement.

Q: What is Section 7(5) of the Arbitration and Conciliation Act 1996?
A: Section 7(5) of the Arbitration and Conciliation Act 1996 states that a 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.

Q: What does it mean for a document to be an “integral part” of another document?
A: When a document is an “integral part” of another, it means that the terms of the first document are considered to be included in the second document, as if they were written in it.

Q: What is the practical implication of this ruling?
A: The practical implication is that parties must be very careful when drafting contracts, especially when referring to other documents. If they intend for the terms of another document to be part of their contract, they should explicitly state that the other document is an integral part of their contract.