In this blog post, Vanshaj Mehta, a student of Institute Of Law, Nirma University, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the incorporation of an Arbitration Clause in a Contract by Reference.
Most notable amongst the disputable and fascinating query in arbitration law is incorporation by reference. It is a common practice in a few industries, especially dispatching and development, for the legally binding relationship between the parties to be made out of a few documents. It may sometime happen that a conflict emerges with reference to one of these documents, while the arbitration clause is contained in another. Common-law rules have evolved to find out whether the parties expected to fuse the mediation proviso in one record into another, and the typical decide is that “general” fuse to the next archive does not suffice.
The Supreme Court has as of late considered this issue in an contemplated and exhaustive judgment, in M.R. Engineers v. Som Datt Builders[1],. For this situation, Som Datt Builders Ltd. [“SDBL”] had gone into an agreement with the Kerala PWD. Provision 67.3 of this agreement contained a discretion proviso which gave that issue would be given to a Committee of three authorities to be designated by different Government divisions. SDB sub-contracted a piece of its commitments to MR Engineers Pvt. Ltd. [“MREPL”]. The work order laid down that “This sub- contract shall be carried out on the terms and conditions as applicable to main contract unless otherwise mentioned in this order letter.”
Issue emerged amongst MREPL and SDBL over dues which were owed to MREPL, and MREPL ultimately filed an application under s. 11 of the Arbitration and Conciliation Act, 1999, looking for the arrangement of a mediator. MRE contended that Clause 67.3 of the agreement between the Kerala PWD and SDBL stood joined into the agreement amongst SDBL and MREPL by goodness of the dialect extricated previously. The Kerala High Court rejected the application, holding that incorporation was not enough and that there was thus no arbitration agreement amongst MREPL and SDBL.
In the Supreme Court, Justice Raveendran alluded to the arrangements of s. 7(5) of the Arbitration Act, which gives that “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 Court saw that the words, “ such as to make that arbitration part of the contract ” implied that just a reference is not enough. Plainly, s. 7(5) required “conscious acceptance” of the arbitration clause, and the Court held that this question would need to be answered as per the ordinary principles of document construction, without statutory guidelines.
The most prominent of this intention is the construction of the incorporating clause. The Court noticed that agreements in some cases join different contracts, utilizing the language along the lines of “the considerable number of terms and condition” or “this agreement should be administered by the arrangements of…” and so forth. In such cases, the arbitration clause is likewise incorporated. Where, in any case, the consolidating proviso refers to a particular part of another agreement, the assumption is that it was not expected to join the arbitration clause. This turned out to be critical for the situation, on the grounds that the incorporating clause used the expression “this subcontract shall be carried out” The Court held that the utilization of words “carried out” demonstrated the motive of the parties to keep incorporation to matters of execution and administration, and that it could therefore not stretch out to conditions outside this ambit, for example, security stores and arbitration clauses.
The second critical premise for this situation is a divergence that the Court made between “standard frame contracts” and other contracts. Depending on perceptions in Russell on Arbitration, the Court held that general reference may suffice if the reference was to a standard type of terms and states of “exchange affiliations or administrative organizations”. The thinking is that parties that understand the terms and conditions of such reputable corporations and foundation are probably aware of the presence of the arbitration clause, especially since these terms and conditions are quite often reported. On this premise, the Court recognized two of its earlier judgments where incorporation was acknowledged with regards to the General Conditions of Contract of the Grain and Food Trade Association and the General Conditions of the Fertilizer Association of India. In this instance, the Court observed that the reference was general and not to a standard type of an exchange affiliation. It was in this way viewed as lacking on the truths of the case.
A final reason to dismiss the incorporation argument is the origin for another imperative lawful argument – the arbitration condition, after incorporation, must stay in consonance with the contract into which it is incorporated. For this situation, the authorities were to be named by different Government Departments, which could obviously not make a difference to an agreement to which the Government was not a party.
In whole, the following important reasons rise up out of the judgment:
- Mere reference is not enough for the intention behind s. 7(5), which is important for an inspection into the aim of the parties on the premise of the typical standards of development of agreements.
- General reference to another agreement is generally insufficient, with the exception of where the reference is to the standard terms and states of a “trade association or regulatory institution”
- The language of the incorporation of a proviso is a vital element – in the event that it refers to a particular part of another agreement, for example, supply or execution, the arbitration statement is not refereed, though consolidation completely is adequate to join the intervention condition also.
- Incorporation falls flat if the arbitration condition on joining will be conflicting with the terms or plan of the agreement into which it is consolidated.
[1] 2009 (9) SCALE 298
