Supreme Court on incorporation of arbitration agreements into subcontracts

The importance of “words” isn’t simply reflected in the crooning voice of Barry Gibb. In NBCC (India) Limited v Zillion Infraprojects Private Limited[1], the Supreme Court has emphasised the importance of choosing the correct language in wooing an arbitration agreement from another contract. The Court underscored the difference between ‘incorporation of’ and mere ‘reference to’ clauses of one contract in the context of another contract.

Damodar Valley Corporation (“DVC”) awarded a contract to NBCC (India) Limited (“NBCC”) for certain works. The same contained an arbitration agreement.

NBCC awarded the subcontract to Zillion Infraprojects Pvt. Ltd. (“ZIPL”) vide a Letter of Intent (“LOI”). The LOI contained a clause that referred disputes between ZIPL and NBCC to civil courts in Delhi. However, the LOI also provided that all terms and conditions contained in the tender issued by Damodar Valley Corporation (“DVC”) to NBCC shall apply except where these have been expressly modified by NBCC.

When disputes arose between ZIPL and NBCC, ZIPL sought to invoke the arbitration agreement contained in the contract between DVC and NBCC. Since NBCC failed to appoint or consent to the appointment of an arbitrator, ZIPL filed an application before the Delhi High Court for appointment of a sole arbitrator which was allowed. NBCC challenged the same before the Supreme Court.

Interpreting Section 7(5) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) the Court held that there is a need for a conscious acceptance by the parties to incorporate the arbitration clause from another document as a part of their contract.

Relying on its own decision in M. R. Engineers and Contractors Private Limited v Som Datt Builders Limited[2], the Court held:

• that there should be a clear intention of the parties to incorporate the valid arbitration clause contained in the other contract;
• that general reference to another contract containing an arbitration clause would not automatically incorporate the arbitration clause;
• that when a reference is made to another contract for terms of execution/ performance, then only the terms pertaining to execution/performance shall be incorporated and not the arbitration clause;
• that where the contract provides that the standard form of terms and conditions of an independent trade or professional institution shall apply, then the arbitration clause contained therein shall be incorporated by reference; and
• that where the contract between the parties provides that the conditions of contract of one of the parties shall form a part of their contract (such as general conditions of contract of the Government where the Government is a party), the arbitration clause therein shall be binding upon the parties.

The Court also considered its decision in Inox Wind Limited v. Thermocables Limited[3], where the Court while agreeing with the principles laid down in M. R. Engineers held that a general reference to a consensual standard form contract (not specifically relating to a trade association or professional institute) would be enough for incorporation of the arbitration clause. However, the Court distinguished the present case from Inox Wind on the basis that Inox Wind was a case of a single-contract and not a two-contract case.

Considering the present case, the Court held that the reference to the terms and conditions agreed between DVC and NBCC could not mean that the arbitration agreement contained therein was incorporated into the subcontract as between NBCC and ZIPL; more so when there was a specific deviation from the dispute redressal mechanism in the LOI awarded to ZIPL. The Court, thus, allowed the appeal and dismissed the application for appointment of an arbitrator.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Alok Jain, Partner, Email – alokjain@elp-in.com

Vinuta Rayadurg, Principal Associate – Email – vinutarayadirg@elp-in.com

Atharva Diwe, Associate – Email – atharvadiwe@elp-in.com

[1] 2024 SCC OnLine SC 323
[2] (2009) 7 SCC 696
[3] (2018) 2 SCC 519
[4] Words by Bee Gees, Sinking Ships, Polydor, 1968