Supreme Court settles the validity of arbitration clause incorporation by reference in Coal India dispute (15 February 2019)

Date of the Judgment: 15 February 2019
Citation: Giriraj Garg v. Coal India Ltd. & Ors. (2019) INSC 123
Judges: Uday Umesh Lalit, J. and Indu Malhotra, J.

Can an arbitration clause in a parent scheme be automatically applied to individual sale orders made under that scheme? The Supreme Court of India recently addressed this question in a dispute between Giriraj Garg and Coal India Ltd. The core issue was whether an arbitration clause in the 2007 Coal Distribution Scheme could be incorporated by reference into subsequent sale orders issued under the scheme. The Supreme Court held that the arbitration clause in the 2007 Scheme was indeed incorporated by reference into the sale orders. The bench comprised of Justice Uday Umesh Lalit and Justice Indu Malhotra, with the majority opinion authored by Justice Indu Malhotra.

Case Background

In 2007, Coal India Ltd. (Respondent No. 1) introduced a scheme for coal distribution through e-auctions. This scheme aimed to provide a transparent and accessible way for buyers to purchase coal. The scheme included an arbitration clause (Clause 11.12) for dispute resolution. From 2012 to 2015, Giriraj Garg (the Appellant), a registered buyer, participated in these e-auctions and received several sale orders. The Appellant deposited the Earnest Money Deposit (EMD) and the coal value as required. However, the Appellant could not lift the booked coal within the allowed 45-day period. Consequently, Coal India Ltd. forfeited the EMD, citing a breach of the scheme’s terms. This led to a dispute, and the Appellant invoked the arbitration clause. When the Respondents failed to appoint an arbitrator, the Appellant filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 before the Jharkhand High Court at Ranchi.

Timeline

Course of Proceedings

The Jharkhand High Court at Ranchi rejected the Appellant’s application under Section 11 of the Arbitration and Conciliation Act, 1996. The High Court reasoned that the disputes arose from different transactions under the 2007 Scheme, and the individual sale orders did not explicitly mention the applicability of the scheme’s terms, including the arbitration clause. The High Court concluded that the arbitration clause could not be incorporated by reference. Aggrieved by this order, the Appellant appealed to the Supreme Court.

Legal Framework

The Supreme Court examined the principle of incorporation by reference, which is a well-established principle in arbitration law. Section 7(5) of the Arbitration and Conciliation Act, 1996, 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 allows an arbitration clause from one document to be incorporated into another contract, provided there is a clear reference. The Court noted that Section 7(5) of the Arbitration and Conciliation Act, 1996, closely mirrors Article 7(2) of the UNCITRAL Model Law, which also recognizes the validity of incorporating arbitration clauses by reference. The Court also referred to Section 6(2) of the English Arbitration Act, 1996, which is similar to Section 7(5) of the Indian Act.

Arguments

Appellant’s Submissions:

• The Appellant argued that the individual sale orders were issued under the 2007 Scheme, which contains a clear arbitration clause.
• The Appellant contended that Clause 7 of the sale orders explicitly states that they are governed by the guidelines, circulars, notices, and instructions issued by Coal India Ltd., which includes the 2007 Scheme.
• The Appellant submitted that the arbitration clause in the 2007 Scheme should be considered incorporated by reference into the sale orders.
• The Appellant relied on the principle of incorporation by reference as recognized under Section 7(5) of the Arbitration and Conciliation Act, 1996.

Respondents’ Submissions:

• The Respondents contended that the disputes relate to different transactions under the 2007 Scheme.
• The Respondents argued that the individual sale orders did not contain an arbitration clause, nor did they explicitly refer to the applicability of the 2007 Scheme’s terms.
• The Respondents submitted that the arbitration clause could not be incorporated by reference, as the sale orders did not specifically mention it.

Submissions Table

Issues Framed by the Supreme Court

The key issue before the Supreme Court was:

1. Whether the arbitration clause contained in the 2007 Scheme would stand incorporated by reference in each of the sale orders.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on several authorities to support its decision:

On Incorporation by Reference:

• Clements v. Devon Country Insurance Committee, [1918] 1 KB 94 (English Court): This case established the principle of incorporation by reference in arbitration jurisprudence.
• Macleod Ross and Co. Ltd. v. Compagnie d’Assurances Generales L’Helvetia of St Gall, [1952] 1 All ER 331 (English Court): This case further supported the principle of incorporating arbitration clauses by reference.
• Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena, [2006] EWHC 2530 (Comm) (Queen’s Bench Division): This case held that general words of incorporation of a standard form contract are sufficient to incorporate an arbitration clause.
• Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL, [2010] EWHC 29 (Comm) (Queen’s Bench Division): This case distinguished between ‘single contract’ and ‘two-contract’ cases, stating that general reference is sufficient in single contract cases.
• SEA2011 Inc. v. ICT Ltd., [2018] EWHC 520 (Comm) (Queen’s Bench Division): This case affirmed the judgment in Habas.
• Alimenta SA v. National Agriculture Co-op Marketing Federation of India Ltd., (1987) 1 SCC 615 (Supreme Court of India): This case recognized the doctrine of incorporation by reference under the Arbitration Act, 1940.
• M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 (Supreme Court of India): This case held that an arbitration clause in an independent document can be incorporated by reference.
• Inox Wind Ltd. v. Thermocables Ltd., (2018) 2 SCC 519 (Supreme Court of India): This case held that a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause.

On Interpretation of Arbitration Clauses:

• Renusagar Power Co. Ltd. v. General Electric Company and Anr., [1985] 1 SCR 432 (Supreme Court of India): This case observed that expressions like “arising out of”, “in respect of”, or “in connection with” a contract are of wide amplitude.
• Doypack Systems Pvt. Ltd. v. Union of India and Ors., 1988 (36) ELT 201 (SC) (Supreme Court of India): This case held that expressions such as “pertaining to”, “in relation to”, and “arising out of” are used in an expansive sense.

Legal Provisions:

• Section 7(5) of the Arbitration and Conciliation Act, 1996: This provision provides for the incorporation of an arbitration clause by reference.
• Article 7(2) of the UNCITRAL Model Law: This is the international counterpart to Section 7(5) of the Indian Act.
• Section 6(2) of the English Arbitration Act, 1996: This is the English law equivalent to Section 7(5) of the Indian Act.

Authorities Table

Judgment

The Supreme Court allowed the appeal, setting aside the order of the Jharkhand High Court.

Treatment of Submissions

Treatment of Authorities

The Court relied on the following authorities:

• Clements v. Devon Country Insurance Committee [1918] 1 KB 94: The court cited this case as a foundational authority for the principle of incorporation by reference in arbitration law.
• Macleod Ross and Co. Ltd. v. Compagnie d’Assurances Generales L’Helvetia of St Gall [1952] 1 All ER 331: The court used this case to further support the principle of incorporating arbitration clauses by reference.
• Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena [2006] EWHC 2530 (Comm): The court relied on this case to establish that general words of incorporation in a standard form contract are sufficient to incorporate an arbitration clause.
• Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm): The court used this case to distinguish between ‘single contract’ and ‘two-contract’ cases, holding that general reference is sufficient in single contract cases.
• SEA2011 Inc. v. ICT Ltd. [2018] EWHC 520 (Comm): The court mentioned this case to show that the judgment in Habas was affirmed.
• Alimenta SA v. National Agriculture Co-op Marketing Federation of India Ltd. (1987) 1 SCC 615: The court cited this case to show that the doctrine of incorporation by reference is recognized under Indian law.
• M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696: The court used this case to support the view that an arbitration clause in an independent document can be incorporated by reference.
• Inox Wind Ltd. v. Thermocables Ltd. (2018) 2 SCC 519: The court relied on this case to hold that a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause.
• Renusagar Power Co. Ltd. v. General Electric Company and Anr. [1985] 1 SCR 432: The court cited this case to interpret the wide amplitude of expressions like “arising out of” or “in relation to” a contract.
• Doypack Systems Pvt. Ltd. v. Union of India and Ors. 1988 (36) ELT 201 (SC): The court used this case to support the expansive interpretation of expressions such as “pertaining to” or “arising out of”.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of incorporation by reference, as recognized under Section 7(5) of the Arbitration and Conciliation Act, 1996, and the wide interpretation given to the phrase “in relation thereto” in the arbitration clause of the 2007 Scheme. The court emphasized that the sale orders explicitly stated they would be governed by the guidelines and instructions issued by Coal India Ltd., which included the 2007 Scheme. The court’s reasoning was also influenced by the need to uphold the sanctity of arbitration agreements and the principle of party autonomy.

Sentiment Analysis of Reasons

Ratio Analysis

Logical Reasoning

The Court found that the sale orders’ reference to guidelines and instructions issued by Coal India Ltd. was sufficient to incorporate the arbitration clause from the 2007 Scheme.

The Court observed that the arbitration clause in the 2007 Scheme states:

“All disputes arising out of this scheme or in relation thereto in any form whatsoever shall be dealt exclusively by way of arbitration in terms of the Arbitration and Conciliation Act, 1996.”

The court interpreted the words “in relation thereto” to mean that the clause would apply to all transactions under the 2007 Scheme, including the sale transactions in this case.

The Court stated:

“The individual sale orders emanate out of the 2007 Scheme. The sale orders specifically state that they would be governed by the guidelines, circulars, office orders, notices, instructions, relevant law etc. issued from time to time by Coal India Limited or Bharat Coking Coal Limited etc. As a consequence, the arbitration clause ( i.e. Clause 11.12) in the 2007 Scheme would stand incorporated in the sale orders issued thereunder.”

The Court also noted that:

“Clause 7 in the sale orders falls under the ‘single contract case’ where the arbitration clause is contained in a standard form document i.e. the 2007 Scheme, to which there is a reference in the individual sale orders issued by Respondent No. 2 – the Coal Company.”

The Court concluded that the High Court’s view was erroneous and set aside the order.

Key Takeaways

• Incorporation by Reference: An arbitration clause in a parent document can be incorporated into subsequent contracts if the subsequent contracts make a clear reference to the parent document.
• Single Contract Case: General reference to a standard form contract is sufficient to incorporate an arbitration clause.
• Broad Interpretation: The phrase “in relation thereto” in an arbitration clause is given a wide interpretation, covering all transactions under the scheme.
• Sanctity of Arbitration Agreements: The judgment reinforces the importance of upholding arbitration agreements and party autonomy.

Directions

The Supreme Court, with the consent of the parties, appointed Mr. Justice Pranab Kumar Chattopadhyay (Retired Judge of the Calcutta High Court) as the Sole Arbitrator to adjudicate the disputes between the Appellant and Respondent No. 2. The arbitration proceedings will be conducted in Kolkata.

Development of Law

The ratio decidendi of this case is that an arbitration clause in a parent scheme can be incorporated by reference into individual sale orders issued under that scheme, provided the sale orders refer to the guidelines and instructions of the parent scheme. This judgment reinforces the principle of incorporation by reference and clarifies the scope of arbitration clauses in standard form contracts. It also affirms the distinction between single and two-contract cases, holding that general reference is sufficient in single contract cases. This case does not overrule any previous positions of law but provides a clear application of the existing legal principles to the facts of the case.

Conclusion

In conclusion, the Supreme Court held that the arbitration clause in the 2007 Coal Distribution Scheme was validly incorporated by reference into the individual sale orders. The Court emphasized the importance of clear references in contracts and the broad interpretation of arbitration clauses, setting aside the Jharkhand High Court’s order.