Section 7(5) of The Arbitration Act I

One of the most controversial and interesting questions in contemporary Arbitration Law is incorporation by reference. It is a common practice in some industries, particularly shipping and construction, for the contractual relationship between the parties to be composed of several documents. It sometimes happens that a dispute arises with reference to one of these documents, while the Arbitration Clause is contained in another. Common Law Rules have evolved to ascertain whether the parties intended to incorporate the Arbitration Clause in one document into another, and the normal rule is that general incorporation to the other document does not suffice.

The Supreme Court considered this issue in a well-reasoned and comprehensive judgment in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696, recently quoted copiously in M/s. Dulo Felguera v. M/s. Gangavram Port Limited, [Arbitration Petition No. 30 of 2016] decided on 10.10.2017.

“In Som Datt Builders Limited, (2009) 7 SCC 696, the Supreme Court held that even though the contract between the parties does not contain a provision for Arbitration, an Arbitration Clause contained in an independent document will be incorporated into the contract between the parties, by reference, if the reference is such as to make the Arbitration Clause in such document, a part of the contract.”

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Justice Raveendran in Som Datt Builders referred to the provisions of Section 7(5) of the Arbitration Act, which provides that “[t]he 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.” The Court rightly noticed that the words “such as to make that arbitration part of the contract” meant that mere reference is insufficient. Clearly, Section 7(5) required “conscious acceptance” of the Arbitration Clause, and the Court held that this question would have to be answered in accordance with the normal rules of document construction, in the absence of statutory guidelines.

The primary indicator of this intention is the language of the incorporating clause. The Court noticed that contracts sometimes incorporate other contracts in their entirety, using language along the lines of “all the terms and conditions…” or “this contract shall be governed by the provisions of…” etc. In such cases, the Arbitration Clause is also incorporated. Where, however, the incorporating clause refers to a specific aspect of another contract, the presumption is that it was not intended to incorporate the Arbitration Clause. 

The second important proposition in this case is a distinction that the Court made between “standard form contracts” and other contracts. Relying on observations in Russell on Arbitration, the Court held that general reference may suffice if the reference was to a standard form of terms and conditions of “trade associations or regulatory institutions”. The reasoning is that parties that accept the terms and conditions of such well-known associations and institutions are presumably aware of the existence of the Arbitration Clause, particularly since these terms and conditions are almost always published. In this case, the Court observed that the reference was general and not to a standard form of a trade association. It was therefore regarded as insufficient on the facts of the case.

A final reason to reject the incorporation argument is the source for another important legal proposition – the Arbitration Clause, after incorporation, must remain consistent with the contract into which it is incorporated. 

In sum, the following important propositions emerge from the judgment in Som Datt Builders:

  1. Mere reference is insufficient for the purposes of Section 7(5), which mandates an inquiry into the intention of the parties on the basis of the normal rules of construction of contracts.
  2. General reference to another contract is normally insufficient, except where the reference is to the standard terms and conditions of a “trade association or regulatory institution”.
  3. The language of the incorporating clause is a crucial factor – if it refers to a specific aspect of another contract, such as supply or execution, the Arbitration Clause is not arbitrated, whereas incorporation in its entirety is sufficient to incorporate the Arbitration Clause as well.
  4. Incorporation fails if the Arbitration Clause on incorporation will be inconsistent with the terms or scheme of the contract into which it is incorporated.
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