Section 7(5) of The Arbitration Act II

The Supreme Court considered the ‘incorporation by reference’ 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 (2 Judges).

An important proposition in M.R. Engineers was a distinction that the Court made between “standard form contracts” and other contracts. Relying on observations in Russel on Arbitration, (23rd Edition, 2007) the Court held the rule to be that an Arbitration Clause in an earlier contract cannot be incorporated by a general reference. The exception to the rule is a reference to a standard form of contract by a trade association or a professional institution in which case a general reference would be sufficient for incorporation of an Arbitration Clause.

Recently, in M/s. Inox Wind Ltd. v. M/s. Thermocables Ltd., [Civil Appeal No. 19 of 2018] a Division Bench of the SC has modified the rule.

The development of law regarding incorporation after the judgment in M.R. Engineers requires careful consideration…

A perusal of… Russell on Arbitration, (24th Edition, 2015) would demonstrate the change in position of law pertaining to incorporation when read in conjunction with the earlier edition relied upon by this Court in M.R. Engineers’ case.

The question whether the general words of incorporation are sufficient to incorporate an Arbitration Agreement arose for consideration of the High Court of Justice, Queen’s Bench Division, Commercial Court in Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena, [2006] EWHC 2530 (Comm). In the said case the difference between incorporation in a ‘single contract case’ (where the Arbitration Clause is in standard terms to be found in another document) and a ‘two contract case’ (where the Arbitration Clause is contained in a secondary document which is a contract to which at least one party is different from the parties to the contract in question) was recognized. 

Again, in Habas Sinai, [2010] EWHC 29 (Comm) the following broad categories in which the parties attempt to incorporate an Arbitration Clause were recognized by the Court:

“(1) A and B make a contract in which they incorporate standard terms. These may be the standard terms of one party set out on the back of an offer letter or an order, or contained in another document to which reference is made; or terms embodied in the rules of an organisation of which A or B or both are members; or they may be terms standard in a particular trade or industry.

(2) A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties.

(3) A and B make a contract incorporating terms agreed between A (or B) and C. Common examples are a bill of lading incorporating the terms of a charter to which A is a party; reinsurance contracts incorporating the terms of an underlying insurance; excess insurance contracts incorporating the terms of the primary layer of insurance; and building or engineering sub contracts incorporating the terms of a main contract or sub-sub contracts incorporating the terms of a sub contract.

(4) A and B make a contract incorporating terms agreed between C and D. Bills of lading, reinsurance and insurance contracts and building contracts may fall into this category.”

In Habas’s case (supra), Justice Christopher Clarke followed the ratio in the case of ‘the Athena’ (supra) and held that in single contract cases (categories 1 and 2), a general reference would be sufficient for incorporation of an Arbitration Clause from a standard form of contract. In cases falling under categories 3 and 4 mentioned above which are two contract cases, it was held that a stricter rule has to be followed by insisting on a specific reference to the Arbitration Clause from an earlier contract. 

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, we are of the opinion that a general reference to a standard form of contract of one party will be enough for incorporation of the Arbitration Clause.

We are in agreement with the judgment in M.R. Engineer’s case with a modification that a general reference to a standard form of contract of one party along with those of trade associations and professional bodies will be sufficient to incorporate the Arbitration Clause.

In Inox Wind, a purchase order was issued by the Appellant in which it was categorically mentioned that the supply would be as per the terms mentioned therein and in the attached standard terms and conditions. The Respondent confirmed its acceptance of the terms and conditions mentioned in the purchase order except the delivery period. The dispute arose after the delivery of the goods. No doubt, there was nothing forthcoming from the pleadings or the submissions made by the parties that the standard form attached to the purchase order was of a trade association or a professional body. However, the Respondent was aware of the standard terms and conditions which were attached to the purchase order. The purchase order was a single contract and general reference to the standard form even if it was not by a trade association or a professional body was considered sufficient for incorporation of the Arbitration Clause.

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