Overview
In a recent case before the Supreme Court, NBCC (India) Limited V/s Zillion Infraprojects Pvt. Ltd [2024 SCC Online Sc 323], the Court discussed when an arbitration clause can be considered to be ‘incorporated’ in an agreement as opposed to being a mere ‘reference’ to arbitration.
The case involves a dispute over an arbitration clause between two Indian companies – Appellant NBCC (India) Ltd., a public sector undertaking in construction, and Respondent Zillion Infraprojects Pvt. Ltd., a private infrastructure company ruled an important decision.
The key issue is whether an arbitration clause from an earlier contract between different parties gets incorporated into a later contract between NBCC and Zillion by mere reference.
The Supreme Court applied the legal test under Section 7(5) of the Indian Arbitration & Conciliation Act, 1996 and held that a general reference to another contract is not enough to incorporate an arbitration clause into the later contract. There has to be a specific reference showing intention to incorporate the arbitration clause.
Background Facts
The government of India undertaking and public limited company, the Appellant, was involved in the EPC and/or PMC construction of infrastructure projects, including power plants. A private limited company working in the infrastructure and construction industries was the Respondent.
The Respondent was given the go-ahead to build the dam across the Damodar River in Jharkhand. Among other things, the Respondent filed the “Tender Documents,” which are the General Conditions of Contract, Special Conditions of Contract, Bill of Quantity, etc.
Disputes later arose between NBCC and Zillion. In March 2020, Zillion issued a notice to NBCC invoking arbitration under the clause in the NBCC-DVC contract. NBCC did not respond. Zillion approached Delhi High Court for appointment of an arbitrator.
The Court relied on reference in Letter of Intent (“LOI”) to allow the plea. Over time, disputes arose between NBCC and Zillion. In March 2020, Zillion issued a notice for arbitration to NBCC under the arbitration clause in NBCC’s contract with DVC. NBCC did not respond. Zillion moved the Delhi High Court under the Arbitration Act seeking appointment of an arbitrator.
The Hon’ble High Court of Delhi allowed Zillion’s plea relying on the arbitration clause in the NBCC-DVC contract, as referred to in the LOI. NBCC appealed to the Supreme Court, contending there was no arbitration agreement.
The Appellant filed an application under Section 11(6) of the Arbitration Act because the Appellant did not respond to the notice invoking arbitration. The petition for arbitration was granted by the High Court through an interim order. A former Delhi High Court judge was designated as the exclusive arbitrator, and this appointment was subsequently validated by the High Court’s final judgment and order.
The Appellant, who felt aggrieved by the aforementioned orders, appealed to the Hon’ble Supreme Court, raising issues with the interim order as well as the final judgment and order.
Issues and Observations
- Whether there is valid arbitration agreement between NBCC and Zillion
The Hon’ble Supreme Court applied Section 7(5) of Arbitration Act which requires conscious acceptance of arbitration clauses from another document into the contract between parties. It held that LOI does not show intention to make an arbitration clause from the NBCC-DVC contract applicable to the NBCC-Zillion contract.
- Effect of general reference to another contract
Relying on its past judgment in M.R. Engineers case, the Hon’ble Supreme Court held that general reference to another contract does not have the effect of incorporating an arbitration clause into the contract unless there is a specific reference to the arbitration clause. Based on the judgment passed in the case of MR Engineers and Contractors Private Limited [(2009) 7 SCC 696], the Court observed that 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. Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains 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.
The Court read sub-section (5) of Section 7 of the Arbitration Act and opined that a reference to the document in the contract should be such that shows intent to incorporate the arbitration clause contained in the document into the contract.
- Incorporation vs Reference
According to the Hon’ble Court, this is a case of ‘reference’ and not ‘incorporation’. Hence general reference does not lead to automatic application of arbitration clause from referred contract. Therefore, a general reference would not have the effect of incorporating the arbitration clause, particularly in light of the fact that Clause 7.0 of the LOI expressly stipulates that the parties’ dispute resolution process must be limited to civil courts in Delhi.
- Clause 7.0 of LOI shows contrary intention
Clause 7.0 of the LOI expressly states that disputes shall be resolved only through civil courts of Delhi. This makes it clear that parties did not intend an arbitration agreement from the NBCC-DVC contract to apply to their contract.
Decision
The terms and conditions of the tender and the LOI that Damodar Valley Corporation issued to the Appellant bound the Respondent, and they superseded any other documents that the Appellant and the Respondent may have executed. Accordingly, the Court determined that this case qualified as a “two contract case.” [A “two contract case” is defined as a situation in which a secondary document executed by a party other than the parties to the contract in question is mentioned. The terms to be incorporated are usually found in a contract between one or more parties in a two contract case.]
The Court inferred the parties’ intentions from the use of the word “only” before the phrase “be through civil courts having jurisdiction of Delhi alone” and issued its orders in accordance with that interpretation.
Allowing NBCC’s appeal, the Hon’ble Supreme Court set aside the High Court of Delhi’s orders. It held there is no valid arbitration agreement between NBCC and Zillion based on the NBCC-DVC contract. Clause 7.0 of the LOI shows a contrary intention – to resolve disputes only through courts of Delhi. Mere reference to another contract does not incorporate its arbitration clause without specific mention.
Conclusion
The primary notion to be learned from this court’s decision is that when commercial terms are identified in several documents, it is crucial to pay close attention to the dispute resolution clauses. To guarantee the arbitration clause’s validity and enforceability, it is essential to draft precise and unambiguous language. The growing prominence of alternative dispute resolutions makes it crucial for the parties to contemplate and determine jurisdiction and forum issues beforehand in order to save money and time at litigation.
This article has been authored by Chaitanya Mehta, Managing Partner at Dhruve Liladhar & Co., Advocates, Solicitors & Notary.