Scope Of ‘Reference’ In Section 7(5) Of A&C Act

Section 7 of the Arbitration & Conciliation Act (Act) defines the arbitration agreement and provides for the requirements for a valid arbitration agreement. In this article we will be discussing Section 7(5) of the Act and its interpretation by the courts in India.

Section 7(5) of the Act reads as follows:

(5) 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.

Section 7(5) provides that arbitration agreement between the parties even if not provided in the contract and is provided in some other document, would be binding on the parties if the parties have made the reference to the said document with the intention to make it part of the contract between the parties. The provision focuses on the intention of parties and reference to the document which contains the arbitration agreement.

What would constitute “reference” in terms of the Section 7(5) of the Act has now been settled by the Hon’ble Supreme Court of India. It is important to discuss the certain judgements on the issue to have better clarity on what constitute “reference” in terms of the Section 7(5) of the Act so as to make arbitration agreement part of the subsequent contract.

1. M.R. Engineers & Contracts Pvt. Ltd. Vs. Som Datt Builders Ltd., (2009) 7 SCC 696:

Issue: Whether an arbitration clause contained in a main contract, would stand incorporated by reference in a sub-contract, where the sub-contract provided that it “shall be carried out on the terms and conditions as applicable to the main contract”.

Facts: PWD, Government of Kerela entrusted work of “Four Laning and strengthening of Alwaye-Vyttila and Aroor-Cherthala and strengthening of Vyttila to Aroor Section NH 47- N2 & N3 packages”. The said contract between PW Department and the Contractor contained a provision for arbitration. The Contractor sub-contracted the work under a work order which provided that “the sub-contract shall be carried out on the terms and conditions as applicable to main contract unless otherwise mentioned in this order letter”. Dispute arose between Contractor and Sub-Contractor whereby sub-contractor sought reference of dispute to arbitration on the basis of the arbitration agreement contained in main contract. Failure of agreement between the parties for arbitration, subcontractor preferred a Section 11 application whereby Hon’ble Chief Justice rejected the said application on the ground that arbitration clause was not incorporated from main contract to sub- contract by reference. Sub-contractor preferred an appeal before the Hon’ble Supreme Court.

Judgement: Hon’ble Supreme Court while dismissing the petition of the subcontractor summarised the scope of Section 7(5) of Act as follows:

(i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled : (i) The contract should contain a clear reference to the documents containing arbitration clause, (ii) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract, (iii) The arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.

(ii) When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.

(iii) Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.

(iv) Where the contract provides that the standard form of terms and conditions of an independent Trade or Professional Institution (as for example the Standard Terms & Conditions of a Trade Association or Architects Association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.

(v) Where the contract between the parties stipulates that the Conditions of Contract of one of the parties to the contract shall form a part of their contract (as for example the General Conditions of Contract of the Government where Government is a party), the arbitration clause forming part of such General Conditions of contract will apply to the contract between the parties.

2. Inox Wind Ltd. Vs. Thermocables Ltd., AIR 2018 SC 349

Issue: Whether the arbitration clause contained in the Standard Terms and Conditions will be incorporated by reference in the Purchase Order?

Facts: Certain dispute arose between the parties in relation to supply of Wind Power Cables pursuant to the Purchase Order. An application under Section 11(6) of the Act was preferred before the Hon’ble High Court of Allahabad which was dismissed by placing reliance of the M.R. Engineers Case as there was no special reference to the arbitration clause contained in the Standard Terms and Conditions and merely because of general reference arbitration does not stand incorporated in the Purchase Order.

Judgement: The order of Hon’ble High Court was appealed before the Hon’ble Supreme Court. Hon’ble Supreme Court held observed that the though general reference to an earlier contract is not sufficient for incorporation of an arbitration Clause in the later contract, a general reference to a standard form would be enough for incorporation of the arbitration clause. In M.R. Engineers this Court restricted the exceptions to standard form of contract of trade associations and professional institutions. In view of the development of law after the judgment in M.R. Engineers' case, a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause. In the present case, Respondent was aware of the standard terms and conditions which were attached to the purchase order. The purchase order is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clause. Therefore, Hon’ble Supreme Court appointed the Arbitrator and allowed the appeal.

3. Giriraj Garg Vs. Coal India Ltd. and Ors., AIR 2019 SC 1015

Issue: Whether the Arbitration Clause contained in 2007 Scheme which contains an arbitration clause would get incorporated by reference in the Sale Order?

Facts: Certain dispute arose between the parties pursuant to the Sale Order. Section 11 was preferred for before the Hon’ble High Court of Jharkhand at Ranchi which was dismissed by the Hon’ble High Court by holding that dispute relate to different transactions and since no arbitration clause is provided in Sale Order and none of the Sale Order makes reference to the applicability of terms and conditions of the 2007 Scheme to the sale orders. Hence, the arbitration Clause could not be incorporated by reference.

Judgement: The order of Hon’ble High Court was appealed before the Hon’ble Supreme Court. Hon’ble Supreme Court observed that the High Court has erroneously taken the view that an arbitration Clause would not stand incorporated in the individual sale orders entered into by the Respondent No. 2 - Coal Company and the Appellant. 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. Therefore, Hon’ble Supreme Court appointed the Arbitrator and allowed the appeal.

4. NBCC (India) Limited vs. Zillion Infraprojects Pvt. Ltd., Civil Appeal Nos. 4417-4418 of 2024 (Arising out of Special Leave Petition (Civil) Nos. 7573-7574 of 2021)

Issue: Whether the arbitration clause contained in the Tender Document would be incorporated into the Letter of Intimation (LoI) by reference in the LoI to the Tender Documents and LoI being part of the Tender Documents.

Judgement: Hon’ble Supreme Court observed that as per Clause 2.0, all terms and conditions as contained in the tender issued by the DVC to the NBCC shall apply mutatis mutandis except where these have been expressly modified by the NBCC. Clause 7.0 specifically provides that the redressal of dispute between the NBCC and the Respondent shall only be through civil courts having jurisdiction of Delhi alone. Clause 10.0 further provides that the L.O.I. shall also form a part of the agreement. The Hon’ble Supreme Court referred to its judgment in M.R. Engineers to hold that the case is not a case of 'incorporation' but a case of 'reference'. As such, a general reference would not have the effect of incorporating the arbitration clause. Hence, the Hon’ble Court dismissed the petition.

Conclusion:

The interpretation and scope of ‘reference’ in Section 7(5) of the Act is now well settled by the Hon’ble Supreme Court. Reference can be categorised in two types a.) General Reference and b.) Specific Reference.

In case of General Reference, reference to a document containing arbitration agreement will be held to be valid if the document is i.) Standard Terms and Conditions ii.) standard form of terms and conditions of an independent Trade or Professional Institution

In case of Specific Reference, specific reference to arbitration agreement in the document/contract is important for incorporating of the arbitration agreement. In two contract cases, specific reference to arbitration agreement is required and not general reference to the other contract.

Interpretation of Section 7(5) being in line with the International jurisprudence assists the courts to gather the intentions of the parties insofar as Arbitration Agreement is concerned and also the parties to frame the contracts accordingly so to further their interests in case of dispute.

Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in May 2024.