Delhi High Court: Reference To Agreement Having Arbitration Clause Is Not Inherently Added Into Subsequent Pact

Delhi High Court: Reference To Agreement Having Arbitration Clause Is Not Inherently Added Into Subsequent Pact

The matter pertained to Delhi Metro, Mac Associates and an individual Parvinder Singh

The division bench of the Delhi High Court comprising Justice Rajiv Shakdher and Justice Amit Bansal has held that arbitration cannot be binding on parties unless the terms and conditions of the referenced agreement, which includes an arbitration clause, are explicitly incorporated into the new contract.

The matter pertained to a contractual agreement between the Delhi Metro Rail Corporation (DMRC) and Mac Associates (appellant) regarding various electrical works at the hostel for nurses and interns in Vasant Kunj, New Delhi.

The DMRC had issued a tender for the job, which the appellant secured. Subsequently, Parvinder Singh (respondent) expressed interest in undertaking the electrical works and submitted a quotation to the appellant. After negotiations, the appellant allocated the work to the respondent, formalizing the agreement through a signed 06 July 2010 work order.

As per the terms, the total cost was agreed upon, with a specified completion timeline of one year. However, disputes arose regarding delays and alleged breaches of the contract.

The appellant accused the respondent of not meeting the deadline. On the other hand, the respondent attributed the delay to the appellant's failure to fulfill its obligations, resulting in losses to him.

Despite the respondent completing the work on 30 November 2014, the appellant allegedly failed to clear the respondent's bills. It led to the latter filing a suit for recovery of dues totaling Rs.53,01,812.

In response, the appellant applied to invoke arbitration under Section 8 of the Arbitration and Conciliation (A&C) Act, 1996 in the Commercial Court, Saket. However, the district judge dismissed the application. He held that there was no valid and binding arbitration agreement between the parties, hence, Section 8 was inapplicable.

Aggrieved by the order, the appellant appealed before the high court under Section 37 of the A&C Act. It cited Clause 9 of the work order along with other clauses in the agreement. The appellant added that the General Conditions of Contract (GCC) issued by the DMRC had an arbitration Clause 85, which also applied to the work order between the appellant and the respondent.

However, the respondent contended that since he was not a party to the contract between the DMRC and the appellant, the arbitration clause was not binding on him.

Clause 9 of the work order stated, “The contract is completely on a back-to-back basis. The specific points/clauses have been mentioned in the order for your convenience. Any omission on our part shall not absolve you from your responsibility of going through the various clauses in the contract agreement with DMRC, including specifications, general and special conditions.”

The court examined the contentions raised by both parties, particularly the interpretation of Section 7(5) of the A&C Act. It referred to the previous judicial interpretations, including the decision of the Supreme Court in the 2009 M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd case.

The top court had distinguished between a 'mere reference to another document' and 'incorporation of the terms and conditions of the document in the contract’. It emphasized that explicit incorporation of T&C from another document into the contract was essential for the arbitration clause to be applicable.

Thus, based on this premise, Justice Rajiv Shakdher and Justice Bansal noted instances where such absorptions occurred. They highlighted the necessity for a specific reference to the arbitration clause for its inclusion in the contract.

The bench analyzed the legal position in 'single-contract' and 'two-contract' cases. It observed that in a single contract, a general reference to a standard form contract sufficed for the incorporation of an arbitration clause. However, in a two-contract case, specific reference to the arbitration clause in the earlier contract was necessary for its inclusion in the subsequent contract.

Thus, the court ruled that it was a two-contract case, as the parties to the main contract and the work order were different. Therefore, the arbitration clause (the main contract between the appellant and the DMRC) could not be incorporated into the work-order through a general reference.

The bench analyzed Clause 9 of the work order and noted that it lacked a clear intention to incorporate the arbitration clause from the main contract.

It also examined Clause 85 of the GCC, which outlined the arbitration process between the DMRC and the appellant. The court noted that it was inherently inapplicable to the contract between the appellant and the respondent. That’s because it referred to disputes between the DMRC and the appellant, not the appellant and the respondent.

Thus, the court upheld the decision of the Commercial Court and dismissed the appellant’s appeal.