Reference to arbitration must be specific

In the current commercial ecosystem, multiple stakeholders are often linked by a web of interdependent business contracts. In some cases, to save time, in a bid to shorten the contract and avoid the renegotiation of terms, parties may incorporate the terms of an existing contract, including the arbitration clause, into another contract by reference. However, the Supreme Court has consistently held that an existing arbitration agreement may only be incorporated into another contract by a specific reference to that other contract and the arbitration agreement it contains. A general reference will not suffice. Recently, the Supreme Court reaffirmed this position in the case of NBCC (India) Limited v Zillion Infraprojects Private Limited.

NBCC had issued a tender for the construction of a weir across the Damodar River, which Zillion Infraprojects bid for successfully and was awarded the contract. NBCC then issued a letter of intent (LOI) to Zillion, stating that all terms in the tender documents issued to NBCC by Damodar Valley Corporation (documents) would apply between NBCC and Zillion unless expressly modified by NBCC. The LOI provided that all conditions in the documents would be binding on Zillion. While the documents contained an arbitration clause, the LOI did not expressly incorporate it and further provided that disputes were to be adjudicated by the civil courts in Delhi.

When disputes arose, Zillion invoked arbitration on the basis of the agreement in the documents and sought the appointment of an arbitrator. Delhi High Court allowed the application. NBCC challenged the arbitrator’s appointment before the Supreme Court on grounds including that the LOI did not specifically incorporate the documents’ arbitration clause. Their contention was supported by the fact that the LOI contained a specific dispute resolution clause. Zillion, however, argued that the arbitration clause had been incorporated by the general reference to the terms of the documents.

The court analysed section 7 of the Arbitration and Conciliation Act, 1996, which defines and governs the form of an arbitration agreement. Specifically, section 7(5) allows parties to incorporate arbitration agreements in a contract by reference. The court, relying on section 7(5) of the act and its decision in MR Engineers and Contractors Private Limited v Som Datt Builders Limited reiterated the principles for incorporation of an arbitration clause by reference.

The court held that an arbitration clause in another contract may be incorporated by reference if the subsequent contract contains a clear and specific reference to the arbitration clause. A general reference is inadequate. The subsequent contract must demonstrate an intention to incorporate the arbitration clause. Finally, the incorporation should not be repugnant to any terms of the subsequent contract.

References to execution or performance clauses from another contract, which include arbitration clauses, will not by themselves apply to the arbitration clause unless there is a specific reference to that clause.

A reference to the standard form terms and conditions of an independent trade or professional institution, which contain an arbitration clause, will be deemed to be incorporated by reference. Lastly, where one of the parties to the contract has a set of standard general conditions that includes an arbitration clause, and the contract between the parties stipulates that such standard general conditions shall be adopted, the arbitration clause will apply.

Relying on these principles, the Supreme Court held that because the LOI did not specifically refer to the arbitration clause in the documents and because it contained a specific dispute resolution clause, that is adjudication by the civil courts at Delhi, the parties had not intended to incorporate the arbitration clause contained in the documents by reference.

This judgment reinforces the principle that parties need to demonstrate a conscious and intentional acceptance of the arbitration clause from another agreement. While it is advisable to have a clear and separate dispute resolution clause in any agreement to avoid any challenge, where the terms of an existing contract are to be incorporated the parties should make a specific reference to the arbitration clause to ensure that it is applicable.

Sudeshna Guha Roy is a partner and Alabh Lal is an associate at Bharucha & Partners.