Incorporation of Arbitration Clause by Reference

[Anshuman Chowdhury is a 5th year BBA, LL.B.(Hons.) Student of National Law University Odisha]

In a recent judgment in Inox Wind Ltd v Thermocables Ltd (“Inox Wind”) judgement, the Supreme Court held that “a general reference to a standard form of contract of one party will be enough for incorporation of arbitration clause”. This was apparently an expansion of the scope of reference for incorporation of an arbitration clause contained in a standard form of terms and conditions of a party.

Brief facts

The dispute in question arose out of a contract for supply of cables by Thermocables to Inox Wind. The purchase order issued by Inox Wind mentioned that supply would be as per the terms mentioned therein and in the attached standard terms and conditions (which contained the arbitration clause) and it was not disputed by Thermocables. When a dispute arose, Inox Wind filed an application under section 11(6) of the Arbitration and Conciliation Act, 1996 before the Allahabad High Court. The High Court, following the decision of the Supreme Court in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696 (“MR Engineers”), rejected the application on the grounds that since there no special reference to the arbitration clause in the standard terms and conditions, it cannot be said to have been incorporated into the purchase order. The Supreme Court, in the present appeal, overruled the High Court and appointed an arbitrator.

The rationale in the present matter

The Supreme Court extensively discussed the earlier MR Engineers judgement and as well as the development of law that took place subsequently. The exception provided in MR Engineers (in paragraph 13(iv)) that only a general reference to standard form of terms and conditions of trade associations or regulatory institutions would be sufficient to incorporate the arbitration clause would now, in light of the evolution in English law, also include a general reference to standard terms of one party.

Analysis

Actual change in the English position

Until recently, the position of law in England was as laid down in Aughton Ltd. v. M.F. Kent Services Ltd. [1991 (57) BLR 1] (“Aughton”), the English Court had held that a general reference to a contract would be insufficient to incorporate any arbitration clause, unless sufficient cause existed to suggest to the contrary, and a special reference was, therefore, necessary. This changed subsequently with the decision of the Queen’s Bench in Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena [2006] EWHC 2530 (Comm) (“Athena”) which discussed the single contract/two contract reference regime and in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm) (“Habas”). In Habas, the Court held that a general reference would be sufficient for incorporation of an arbitration clause from a standard form of contract if such standard terms were previously agreed between the two parties in another contract(s) or if they were standard terms of one party set out in the back of an offer letter, order or another document.

The rationale in the earlier decision

Following the Aughton judgement, the Court in M.R. Engineers held that, generally, a specific reference to an arbitration clause would be needed to incorporate it into the current contract, barring a few exceptions. In this vein, it gave illustrations of various possible situations wherein reference would lead to incorporation. However, it specifically went ahead and laid down in paragraph 13 that:

“(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.” (emphasis supplied)

By including this along with other exceptions such as standard form of terms and conditions of a trade associations or regulatory institutions, the Supreme Court had, in effect, expanded the scope of incorporation by reference from the conservative English position by recognising the realities of commercial relations whereby a mere general reference should be deemed to have been sufficient for incorporations.

Impact of the present judgement

The reasoning in the earlier case survives the broader shift in the jurisprudence from a general/special reference regime to a single contract/two contract reference regime, especially as applicable to the facts of the present case. Here, the facts fall squarely within the situation as described in para 13(v) (incorporation by reference to general conditions of contract of one party containing the arbitration clause forming part of the contract) of the MR Engineers judgement. Rather, in para 13(iv) of the said judgement, standard form of terms and conditions of trade associations or regulatory institutions was specifically mentioned as they are drafted from experience of trade practices and well known in trade circles so that parties using such formats are usually well versed with the contents thereof including the arbitration clause therein. With regards to the present matter, there is no discernible difference between the phrases “Standard forms of terms and Conditions” and “General Conditions of Contract” as used the Court. In effect, the Supreme Court in Inox Wind extended the scope of para 13(iv) to make it analogous to para 13(v), which is a redundant exercise in itself.

Moreover, while English law, in light of the Athena and the Habas judgements, faced a radical shift from its earlier more-stringent Aughton position, the (earlier) Indian position, as laid down in MR Engineers, was broad and well-reasoned enough to capture, in advance, the essence of the new legal position vis-a-vis nature of commercial transactions and the need for incorporation by general reference. Specifically, paragraph 13 of the MR Engineers decision contains illustrations which would be applicable under the new regime equally. Therefore, in terms of the present circumstances, there is no substantial change in the applicable law as the Standard (or General) Terms and Conditions (including arbitration clauses) of a party forming part of the contract have always continued to be incorporated by a general reference in a contract between the two parties.

Conclusion

The facts of the present matter did not validate the approach taken by the Court. A more careful reading of the earlier decision of the Court would have revealed that it squarely and sufficiently addressed the issue in hand. There was no need to forcefully expand the contours of a highly specific exception for the bar against incorporation by general reference when an appropriate exception already existed simultaneously. In this highly competitive race to burnish one’s pro-arbitration credentials, while not entirely unwelcome, judges might do well to take a pause to appreciate the nuance of the decisions of their colleagues of the past.

– Anshuman Chowdhury

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