[Ria Bansal is a 3rd year B.A., LL.B. (Hons.) student at Rajiv Gandhi National University of Law, Punjab]
Recently, the Supreme Court of India in NBCC (India) Ltd. vs. Zillion Infraprojects (P) Ltd. set aside the appointment of a sole arbitrator under section 11(6) of the Arbitration and Conciliation Act, 1996 (“the Act”) on the basis that the arbitration clause had not been incorporated within the second contract. The Court held forth that in this case there was a ‘general reference’ to the arbitral clause rather than a ‘specific’ reference.
In the case at hand, the primary contract was the tender document, which was referred to in the letter of Intent (“LOI”). The LOI (within clause 2.0) stated that the conditions contained within the tender document shall apply mutatis mutandis i.e., generally applicable and subject to minor adjustments. This was the primary contention in favour of arbitration by Zillion Infraprojects Pvt. Ltd. On the other hand, NBCC (India) Ltd. contended that the High Court had erred in appointing the arbitrator under section 11(6) of the Act since clause 7.0 of the LOI clearly stated that the redressal of disputes shall only be through the civil courts. Hence, there was confusion between two clauses of the LOI, which conveyed contrasting ideas. The Supreme Court went on to hold that the contention of NBCC (India) Ltd. was correct and that a general reference to the terms of the primary contract shall not be construed as incorporation of the arbitral clause.
While this is an instrumental ruling, it adopted an oversimplified perspective of incorporation of arbitral clauses. This is because, at the base level, it is argued that an agreement to arbitrate is a product of contractual intent, and the same cannot be decoded by mere words connoting a general or a specific reference. In this post, the author argues that a straitjacket “reference vs incorporation” analysis in the case of primary and secondary contracts is not sufficient. The author analyses the need to probe deeper into contractual intent, examining various factors such as how experienced the parties are in their profession, and whether they had past contracts between them, among other factors.
General vs. Specific Reference to an Arbitration Clause
Section 7(5) of the Act provides that if a contract contains a reference to a document consisting of the arbitration clause, this would result in an arbitration agreement. The section is not thoroughly indicative of what exactly the dimensions of such a reference should be. As a result, the same has been the subject of judicial interpretation for years. The courts have been torn mainly between two forms of reference, “general reference”, connoting a reference to the terms and conditions (“T&C”) of the primary contract; and “specific reference”, meaning an explicit mention of the arbitral clause contained within the primary contract.
In M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., the Supreme Court thoroughly interpreted section 7(5). It provided that a broad reference to the primary contract would not be sufficient to apply the arbitral clause to the referring contract. It also laid down that if a contract refers to the standard T&C of a specific institution, then if such standard terms include the arbitral clause, the same shall stand incorporated. Therefore, this ruling interpreted the concept of a “standard form of contract” allied to a specific professional institution, connoting that professionals have a prior understanding of the contents of a contract. As a result, a general reference to the same incorporates the entire T&C of the contract. This essentially means that a general reference is enough to demonstrate contractual intent to arbitrate in the event of a dispute where parties have a prior understanding.
The concept of incorporation of arbitration clauses gained a new dimension through the ruling in Inox Wind Limited v. Thermocables Limited., which cogently differentiated between a single contract case (as was dealt with in M.R. Engineers) and a two-contract case. To clarify, a single contract case involves the same parties across both contracts, the primary and the referring; whereas a two-contract case involves at least one different party. For instance, if the contract is between A and B and a subsequent LOI is also between the two, then a general reference to the contract is enough to incorporate the arbitral clause. However, if the LOI involves a third party, C, then to incorporate the arbitral clause, there will have to be a specific mention of the same.
The Inox case held that a general reference to a standard form of contract shall be adequate to incorporate the arbitration clause in a single-contract case, but for a two-contract case there must be a specific reference to the arbitral clause of the primary contract. In the context of the NBCC case, the reference in the LOI was made to a document involving a third party i.e. the Damodar Valley Corporation, as a result of which the court classified it as a two-contract case and held that a general reference shall not suffice to incorporate the arbitral clause. The author shall now demonstrate how such a classification cannot be a singular factor in determining contractual intent in a two-contract case specifically.
The Inadequacy of Such an Approach
While all these judgements point towards a singular position of law, that in a two-contract case, only a specific reference to the arbitral clause can lead to the incorporation of the same, it is argued that contractual intent cannot be seen from such a unidimensional view. While it is prudent within the factual matrix of the NBCC case to mandate a specific reference to the arbitral clause, since the more strongly worded clause 7.0 takes precedence over an unassuming clause 2.0, specific reference to the arbitral clause should not be mandated every time. If the NBCC ruling is applied squarely for every subsequent contract containing a general reference, the same shall promote forum shopping and vitiate party autonomy. This is because parties who have entered into contracts prior to such rulings may use such a general reference to avoid arbitration, with the intent to stall claims and delay proceedings. That being said, it must be acknowledged that such a ruling has a retrospective effect and the distinction between a general and specific reference should not be the only factor to determine whether the dispute is arbitrable.
Recommendations: Drawing from Global Viewpoints
It is argued that the Court ought to have delved into other important factors such as correspondence between parties before and during the dispute along with their course of dealing, i.e. past contractual relationships between the parties which are indicative of professional understanding. While the standard form of contract as given in M.R. Engineers may not apply to a two-contract case, delving into whether the party referring the matter to arbitration had a professional understanding with all the other parties to the contracts helps ascertain whether a general reference to the contract was made with consent to arbitrate. In other words, a general reference to the contract should not be struck off as insufficient without considering such factors.
This approach has been taken in various courts across the world. For instance, Standard Bent Glass Corp. v. Glassbots involved an agreement that referred to certain industry guidelines called Orgalime S92 containing an arbitration clause. Standard Bent Glass Corp. contended that since the guidelines were not fully appended to the contract and only referred to on the cover page, the same does not imply that the parties had the intent of incorporating the arbitral clause. The United States Court of Appeals held that the amalgamation of Orgalime S92 along with its arbitration clause was a common industry practice and it was notable that Standard Bent had prior experience in international trade. These factors led to the court holding that the parties had an intention to arbitrate, despite there being a general reference only.
Such a view was also subscribed to by the Italian Supreme Court in Del Medico v. Iberprotein , which stated that a reference to the general T&C to a document containing an arbitration clause was sufficient to constitute an arbitration agreement. It concretely observed that the New York Convention (“the Convention”) defines the term “arbitration agreement” in a broad manner to encompass even incorporation by reference in it. Along with this, it held that the factor of knowledge of common practices-in-trade must be examined according to the facts and circumstances of each case to decide whether there was a valid incorporation or not. This ruling conveyed that the Convention has portrayed flexibility in the realm of incorporation of arbitral clauses. It can be construed that the same has been done to uphold customization and adaptability, which are among the key features of arbitration. Interestingly, the Act also demonstrated the same intention, not defining exactly what kind of a reference shall lead to the incorporation of an arbitral clause. Therefore, each case must be analysed thoroughly in light of various factors as enumerated above to ensure that the substance of the will of the parties is properly deciphered.
It is acknowledged that these cases do not categorically lay down that even in a two-contract case, a general reference should be enough to incorporate the arbitral clause; however, they provide two important arguments in favour of such a contention. Standard Bent stated that the factor guiding the determination regarding valid incorporation of arbitral clause is whether both parties consented to arbitrate, which has to be constructed by examining the prior experience of parties in the industry. Bolstering the argument in favour of party autonomy, Del Medico demonstrated that the Convention’s intent behind defining “arbitration agreement” in an all-encompassing manner is to ensure that the will of parties is thoroughly examined at the time of the dispute, rather than employing a straight-jacket formula to derive whether incorporation is valid or not.
Conclusion
The NBCC case is symbolic of the courts’ endeavour to provide objective analysis of contractual intent and will definitely make contractual interpretation easier. However, it is important to note that every single contractual relationship has varied contexts and the intent to arbitrate should be seen after a clear examination of the same. The same has been upheld by various courts across the world and was envisioned both within the Convention as well as the Act. A thorough determination of contractual intent, through correspondences, trade usages and prior contracts, among other factors, is necessary to ensure that party autonomy is respected and the ability to resort to arbitration is not undermined.
– Ria Bansal