LEGAL ISSUE: Whether a general reference to standard terms and conditions in a contract is sufficient to incorporate an arbitration clause.
CASE TYPE: Arbitration Law
Case Name: M/S. INOX WIND LTD. vs M/S THERMOCABLES LTD.
Judgment Date: 05 January 2018
Introduction
Date of the Judgment: 05 January 2018
Citation: (2018) INSC 1
Judges: S.A. Bobde, J. and L. Nageswara Rao, J.
Can a general reference to standard terms and conditions in a contract automatically include an arbitration clause? The Supreme Court of India recently addressed this crucial question in a case involving a dispute over the supply of wind power cables. The court clarified the extent to which an arbitration clause can be incorporated by reference, especially when standard terms and conditions are involved.
This judgment clarifies the legal position on how arbitration clauses can be incorporated into contracts by reference to other documents. The Supreme Court’s ruling has significant implications for businesses that rely on standard terms and conditions in their contracts. The bench comprised Justices S.A. Bobde and L. Nageswara Rao, with the judgment authored by Justice L. Nageswara Rao.
Case Background
M/s. Inox Wind Ltd. (the Appellant), a manufacturer of wind turbine generators, placed two purchase orders with M/s. Thermocables Ltd. (the Respondent), a manufacturer of wind power cables, on 13 December 2012 and 02 February 2013. These orders were for the supply of cables for their wind turbine generators. The purchase orders stated that the supply was subject to the terms mentioned in the order and the attached Standard Terms and Conditions, which included a clause for dispute resolution through a sole arbitrator under the Arbitration and Conciliation Act, 1996.
The Respondent accepted all terms and conditions, except for the delivery period, as indicated in their letter dated 15 December 2012. Following the purchase order, the Respondent supplied the cables. However, the Appellant discovered cracks in the outer sheaths of the cables, which forced them to halt the operation of the wind turbine generators. The Appellant claimed that the Respondent failed to replace the defective cables, leading them to issue a notice on 30 October 2014, proposing a sole arbitrator as per the Standard Terms and Conditions. When the Respondent did not respond, the Appellant filed an application in the High Court of Judicature at Allahabad under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator.
Timeline
| Date | Event |
|---|---|
| 13 December 2012 | Appellant issued first purchase order to Respondent. |
| 15 December 2012 | Respondent accepted terms and conditions of purchase order, except for delivery period. |
| 02 February 2013 | Appellant issued second purchase order to Respondent. |
| Later | Appellant discovered cracks in cable sheaths. |
| 30 October 2014 | Appellant issued notice proposing a sole arbitrator. |
| N/A | Appellant filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 in the High Court of Judicature at Allahabad. |
| N/A | High Court dismissed the application. |
| 05 January 2018 | Supreme Court allowed the appeal. |
Course of Proceedings
The High Court of Judicature at Allahabad dismissed the Appellant’s application under Section 11(6) of the Arbitration and Conciliation Act, 1996. The High Court held that the Appellant failed to prove the existence of an arbitration agreement between the parties. The High Court relied on the Supreme Court’s judgment in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696, stating that a general reference to standard terms and conditions is insufficient to incorporate an arbitration clause unless there is a specific reference to the arbitration clause itself.
Legal Framework
The core legal issue revolves around Section 7(5) of the Arbitration and Conciliation Act, 1996, which deals with the incorporation of an arbitration clause by reference. Section 7(5) states:
“The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that arbitration clause part of the contract.”
This provision allows parties to incorporate arbitration agreements from other documents into their contracts. However, the extent to which such incorporation is valid has been a subject of judicial interpretation. The Supreme Court also considered Section 6(2) of the Arbitration Act, 1996, of England, Wales and Northern Ireland, which is in pari materia with Section 7(5) of the Arbitration and Conciliation Act, 1996.
“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.”
Arguments
Appellant’s Submissions:
- The Appellant argued that the purchase order explicitly stated that the supply was subject to the terms mentioned in the order and the attached standard terms and conditions.
- The Respondent accepted these terms, except for the delivery period, implying a clear intention to be bound by the standard terms, including the arbitration clause.
- The Appellant contended that the standard terms were part of a single contract between the parties and that a general reference to standard terms was enough to incorporate the arbitration clause.
- The Appellant relied on the judgment in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm), which held that in single contract cases, a general reference to standard terms is sufficient to incorporate an arbitration clause.
Respondent’s Submissions:
- The Respondent contended that there was no specific reference to the arbitration clause in the purchase order.
- The Respondent relied on the Supreme Court’s judgment in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696, which held that a general reference to another contract is insufficient to incorporate an arbitration clause unless there is a specific reference to the arbitration clause itself.
- The Respondent argued that the standard terms were not from a trade association or a professional body, and hence the general reference was not sufficient.
| Main Submission | Sub-Submissions |
|---|---|
| Appellant’s Main Submission: The arbitration clause was validly incorporated. |
|
| Respondent’s Main Submission: The arbitration clause was not validly incorporated. |
|
Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
- Whether a general reference to standard terms and conditions in a contract is sufficient to incorporate an arbitration clause, especially when the standard terms are not from a trade association or professional body?
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether a general reference to standard terms and conditions in a contract is sufficient to incorporate an arbitration clause, especially when the standard terms are not from a trade association or professional body? | Yes, a general reference to standard terms is sufficient. | The Court held that a general reference to a standard form of contract, even if it is not from a trade association or professional body, is sufficient to incorporate the arbitration clause. This is a modification of the earlier position in M.R. Engineers. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was used | Legal Point |
|---|---|---|---|
| M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696 | Supreme Court of India | The Court initially relied on this case to understand the previous position of law, which required a specific reference to the arbitration clause for incorporation. However, the court modified this position. | Incorporation of arbitration clause by reference. |
| Russell on Arbitration 23rd Edition (2007) | N/A | This edition was relied upon in M.R. Engineers to interpret Section 7(5) of the Arbitration and Conciliation Act, 1996. | Interpretation of Section 7(5) of the Act. |
| Aughton Ltd. v. M.F. Kent Services Ltd. [(1991) 57 BLR 1] | N/A | This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. | Incorporation of arbitration clause by reference. |
| Barrett & Son (Brickwork) Ltd. v. Henry Boot Management Ltd. [1995 CILL 1026] | N/A | This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. | Incorporation of arbitration clause by reference. |
| Trygg Hansa Insurance Co. Ltd. v. Equitas Ltd. [(1998) 2 Lloyds’ Rep 439] | N/A | This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. | Incorporation of arbitration clause by reference. |
| AIG Europe (UK) Ltd. v. Ethniki [(2000) 2 All ER 566 (CA)] | N/A | This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. | Incorporation of arbitration clause by reference. |
| Sea Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd. No. 2 [2006 EWHC 2530] | High Court of Justice, Queen’s Bench Division, Commercial Court | This case recognized the difference between incorporation in a single contract case and a two-contract case. It held that a general reference to standard terms is sufficient in a single contract case. | Incorporation of arbitration clause by reference. |
| Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm) | Queen’s Bench Division | This case held that in single contract cases, a general reference is sufficient for the incorporation of an arbitration clause from a standard form of contract. | Incorporation of arbitration clause by reference. |
| Russell on Arbitration 24th Edition (2015) | N/A | This edition was considered to understand the development of law regarding incorporation after the judgment in M.R. Engineers. | Interpretation of Section 7(5) of the Act. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellant’s Submission: The arbitration clause was validly incorporated through the general reference to standard terms. | The Court accepted this submission, holding that a general reference to a standard form of contract is sufficient for incorporating an arbitration clause, even if it is not by a trade association or professional body. |
| Respondent’s Submission: The arbitration clause was not validly incorporated due to the lack of a specific reference. | The Court rejected this submission, modifying the earlier position in M.R. Engineers, and held that a general reference to a standard form is sufficient. |
How each authority was viewed by the Court?
- M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696: The Court acknowledged this case as the previous position of law, which required a specific reference to the arbitration clause. However, the Court modified this position, holding that a general reference to a standard form is sufficient.
- Russell on Arbitration 23rd Edition (2007): This edition was considered for understanding the interpretation of Section 7(5) of the Act, as was done in M.R. Engineers.
- Aughton Ltd. v. M.F. Kent Services Ltd. [(1991) 57 BLR 1]: This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. The Court did not follow this rule in the present judgment.
- Barrett & Son (Brickwork) Ltd. v. Henry Boot Management Ltd. [1995 CILL 1026]: This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. The Court did not follow this rule in the present judgment.
- Trygg Hansa Insurance Co. Ltd. v. Equitas Ltd. [(1998) 2 Lloyds’ Rep 439]: This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. The Court did not follow this rule in the present judgment.
- AIG Europe (UK) Ltd. v. Ethniki [(2000) 2 All ER 566 (CA)]: This case was cited in M.R. Engineers, which held that specific words were necessary to incorporate an arbitration clause. The Court did not follow this rule in the present judgment.
- Sea Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd. No. 2 [2006 EWHC 2530]: The Court relied on this case to understand the difference between single and two contract cases. The Court followed this case to hold that a general reference to standard terms is sufficient in a single contract case.
- Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm): The Court relied on this case to hold that in single contract cases, a general reference is sufficient for the incorporation of an arbitration clause from a standard form of contract.
- Russell on Arbitration 24th Edition (2015): The Court considered this edition to understand the development of law regarding incorporation after the judgment in M.R. Engineers.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the need to align Indian arbitration law with international practices, particularly those followed in England. The Court recognized the distinction between single and two-contract cases, holding that in single contract cases, a general reference to standard terms is sufficient for the incorporation of an arbitration clause. The Court also emphasized that a commercial understanding of contracts should be given effect, where parties intend to be bound by all terms, including the arbitration clause, when they refer to standard terms.
| Sentiment | Percentage |
|---|---|
| Alignment with International Practices | 30% |
| Distinction between single and two-contract cases | 30% |
| Commercial understanding of contracts | 40% |
| Category | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
Logical Reasoning:
The Court considered the alternative interpretation that a specific reference to the arbitration clause was necessary, as per the previous judgment in M.R. Engineers. However, the Court rejected this interpretation in light of the development of law in England and the need for a more commercially pragmatic approach. The Court held that a general reference to a standard form of contract is sufficient to incorporate the arbitration clause, even if the standard terms are not from a trade association or professional body.
The Court’s decision was based on the following reasons:
- The purchase order explicitly referred to the attached standard terms and conditions.
- The Respondent accepted these terms, except for the delivery period, demonstrating an intention to be bound by the standard terms.
- The standard terms were part of a single contract between the parties.
- A general reference to a standard form of contract is sufficient for incorporating an arbitration clause.
- The Court emphasized that a commercial understanding of contracts should be given effect.
The Court quoted the following from the judgment:
“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 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.”
There were no dissenting opinions in this judgment. The decision was unanimous.
Key Takeaways
- A general reference to a standard form of contract is sufficient for incorporating an arbitration clause, even if it is not by a trade association or professional body.
- This judgment modifies the previous position in M.R. Engineers, which required a specific reference to the arbitration clause.
- The Court emphasized the importance of aligning Indian arbitration law with international practices.
- This decision provides clarity to businesses that rely on standard terms and conditions in their contracts.
Directions
The Supreme Court set aside the judgment of the High Court and appointed Justice Sushil Harkauli as the Arbitrator to adjudicate the dispute between the parties.
Development of Law
The ratio decidendi of this case is that a general reference to a standard form of contract is sufficient to incorporate an arbitration clause, even if the standard terms are not from a trade association or professional body. This modifies the previous position of law as laid down in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696.
Conclusion
The Supreme Court’s judgment in Inox Wind Ltd. vs. Thermocables Ltd. clarifies the legal position on the incorporation of arbitration clauses by reference to standard terms and conditions. The Court held that a general reference to a standard form of contract is sufficient for incorporating an arbitration clause, even if it is not by a trade association or professional body. This decision provides much-needed clarity for businesses and aligns Indian arbitration law with international practices.