Supreme Court clarifies arbitration clause incorporation in contract law: NBCC vs Zillion Infraprojects (2024)

Date of the Judgment: 19 March 2024

Citation: 2024 INSC 218

Judges: B.R. Gavai, J., Sandeep Mehta, J.

Can a general reference to another contract automatically incorporate an arbitration clause contained within that other contract? The Supreme Court of India recently addressed this question in a dispute between NBCC (India) Limited and Zillion Infraprojects Pvt. Ltd. The court clarified the requirements for incorporating an arbitration clause by reference, emphasizing the need for a specific intention to adopt such a clause. This judgment clarifies the law on incorporation of arbitration clauses by reference, particularly in cases involving multiple contracts. The judgment was authored by Justice B.R. Gavai, with Justice Sandeep Mehta concurring.

Case Background

NBCC (India) Limited, a government undertaking, issued a tender on 3rd November 2006 for the construction of a weir. Zillion Infraprojects Pvt. Ltd. submitted a bid on 16th November 2006, and was awarded the contract on 4th December 2006, via a Letter of Intent (LOI) for Rs. 19,08,46,612/-. Over time, disputes arose, leading Zillion Infraprojects to invoke arbitration on 6th March 2020, citing Clause 3.34 of the tender documents. NBCC did not respond to the arbitration notice. Zillion Infraprojects then filed an application under Section 11(6) of the Arbitration & Conciliation Act, 1996, in the High Court of Delhi.

Timeline:

Course of Proceedings

The High Court of Delhi, through an interim order on 12th March 2021, allowed Zillion Infraprojects’ application under Section 11(6) of the Arbitration Act and proposed the appointment of a former High Court judge as the Sole Arbitrator. This appointment was confirmed by the High Court on 9th April 2021. NBCC appealed against these orders to the Supreme Court, which issued a stay on the arbitration proceedings on 23rd July 2021.

Legal Framework

The core legal provision at the heart of this case is Section 7(5) of the Arbitration & Conciliation Act, 1996. This section addresses how an arbitration clause in one document can be incorporated into another contract. Section 7(5) 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.”

This provision requires a clear intention to incorporate an arbitration clause from another document into the main contract. The Supreme Court has interpreted this to mean that a mere general reference to another contract is insufficient; there must be a specific reference to the arbitration clause itself.

Arguments

Appellant (NBCC) Arguments:

• NBCC argued that the High Court erred in invoking Section 11(6) of the Arbitration Act.
• The Letter of Intent (LOI) stated that while the terms and conditions of the tender issued by Damodar Valley Corporation (DVC) to NBCC would apply, any modifications by NBCC would take precedence.
• Clause 7.0 of the LOI specified that disputes would be resolved through civil courts in Delhi only.
• Clause 1.0 of the LOI stated that the contractual, financial, and technical conditions in the tender documents would be binding and form part of the agreement.
• Clause 10.0 of the LOI also stated that the LOI would form part of the agreement.
• NBCC contended that a mere reference to the terms and conditions in the DVC tender, without specific incorporation of the arbitration clause, does not make the dispute amenable to arbitration.
• Relying on M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited [(2009) 7 SCC 696], NBCC argued that a general reference is insufficient and that the arbitration clause must be specifically incorporated.

Respondent (Zillion Infraprojects) Arguments:

• Zillion Infraprojects argued that Clause 2.0 of the LOI specifically referenced the terms and conditions of the DVC tender, which included the arbitration clause.
• The only modification was regarding jurisdiction: Clause 3.34 of the DVC tender specified Kolkata, while the LOI specified Delhi.
• The High Court correctly considered this aspect and no interference was warranted.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether the arbitration clause contained in the tender issued by DVC to NBCC, was incorporated by reference into the Letter of Intent (LOI) between NBCC and Zillion Infraprojects.

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 authorities:

Cases:

• M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited [(2009) 7 SCC 696] – The Supreme Court of India held that a general reference to another contract does not incorporate the arbitration clause unless there is a specific reference to the arbitration clause.
• Duro Felguera, S.A. vs Gangavaram Port Limited [(2017) 9 SCC 729] – The Supreme Court of India followed the law laid down in M.R. Engineers case.
• Elite Engineering and Construction (Hyderabad) Private Limited vs Techtrans Construction India Private Limited [(2018) 4 SCC 281] – The Supreme Court of India followed the law laid down in M.R. Engineers case.
• Inox Wind Limited vs Thermocables Limited [(2018) 2 SCC 519] – The Supreme Court of India distinguished the law laid down in M.R. Engineers case and held that a general reference to a standard form would be enough for incorporation of the arbitration clause.

Legal Provisions:

• Section 7(5) of the Arbitration & Conciliation Act, 1996 – Specifies the conditions under which an arbitration clause in another document can be incorporated into a contract by reference.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The court followed the principles laid down in M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited [(2009) 7 SCC 696], emphasizing that a general reference to another contract is insufficient to incorporate an arbitration clause.
• The court noted that Duro Felguera, S.A. vs Gangavaram Port Limited [(2017) 9 SCC 729] and Elite Engineering and Construction (Hyderabad) Private Limited vs Techtrans Construction India Private Limited [(2018) 4 SCC 281] followed the principles laid down in M.R. Engineers.
• The court distinguished Inox Wind Limited vs Thermocables Limited [(2018) 2 SCC 519], noting that it involved a single contract with a general reference to a standard form, unlike the present case, which is a two-contract case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that an arbitration clause must be consciously accepted by the parties to be incorporated into a contract by reference. The court emphasized the importance of specific language and intent when incorporating clauses from another document. The presence of Clause 7.0 in the LOI, which explicitly stated that disputes would be resolved in Delhi civil courts, weighed heavily against the argument that the parties intended to arbitrate.

Fact:Law Ratio

The court’s reasoning was primarily based on legal interpretation (70%) of Section 7(5) of the Arbitration Act and the principles laid down in previous cases. The factual aspects (30%) of the case, such as the clauses in the LOI and the tender documents, were considered in light of these legal principles.

Logical Reasoning

The Supreme Court’s reasoning was based on the following points:

• The court emphasized that a general reference to another contract is not sufficient to incorporate an arbitration clause. There must be a specific reference to the arbitration clause itself.
• The court noted that Clause 7.0 of the LOI specifically stated that disputes would be resolved through civil courts in Delhi, which indicated the parties’ intention to not have arbitration.
• The court distinguished the case from Inox Wind Limited vs Thermocables Limited [(2018) 2 SCC 519], as the present case involved two separate contracts, unlike the single contract in Inox Wind.
• The court relied on M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited [(2009) 7 SCC 696], which held that a specific reference to the arbitration clause is required for incorporation.

The court quoted the following from the judgment:

• “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.”
• “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 redressal of dispute between NBCC and you shall only be through civil courts having jurisdiction of Delhi alone.”

There was no minority opinion in this case. The judgment was unanimous.

Key Takeaways

• A general reference to another contract is not sufficient to incorporate an arbitration clause into a contract.
• For an arbitration clause to be incorporated by reference, there must be a specific intention to do so, clearly indicated in the contract.
• If a contract specifies that disputes will be resolved through civil courts, it indicates an intention to not arbitrate.
• Parties must carefully draft contracts to ensure that their intentions regarding dispute resolution are clearly expressed.

Directions

The Supreme Court allowed the appeals and quashed the orders of the Delhi High Court. The arbitration proceedings were set aside.

Development of Law

The ratio decidendi of this case is that a general reference to another contract is insufficient to incorporate an arbitration clause. There must be a specific reference to the arbitration clause to incorporate it into the contract. This judgment reaffirms the principles laid down in M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited [(2009) 7 SCC 696] and clarifies the application of Section 7(5) of the Arbitration & Conciliation Act, 1996. The court distinguished its judgment in Inox Wind Limited vs Thermocables Limited [(2018) 2 SCC 519] by stating that the present case is a two-contract case.

Conclusion

In conclusion, the Supreme Court’s judgment in NBCC (India) Limited vs. Zillion Infraprojects Pvt. Ltd. clarifies the requirements for incorporating an arbitration clause by reference. The court held that a general reference to another contract is insufficient, and a specific reference is required to incorporate an arbitration clause. This decision reinforces the need for parties to be explicit in their intentions regarding dispute resolution in contracts.