Introduction
As a process centered around party autonomy, the consent of the parties plays a pivotal role in Arbitration. In furtherance of that, we must ask ourselves, does the previous conduct of parties supersede and override present consent and intention to arbitrate or not? This issue is particularly significant in the context of Section 7(5) of the Arbitration and Conciliation Act 1996, which permits the incorporation of an arbitration agreement through reference to a previous document containing an arbitration clause.
The Supreme Court’s (SC) judgment in the case of NBCC (India) Ltd. vs. Zillion Infraprojects (P) Ltd (NBCC) delivered on 19 March 2024, is the most recent judicial pronouncement on this aspect. In this piece, while analyzing the concerned provision, we also attempt to review key decisions from Indian courts and other jurisdictions that distinguish between general and specific references to arbitration clauses.
Our analysis includes an examination of the distinction between the “single-contract case” and the “two-contract case,” and their implications on the incorporation of arbitral clauses. The piece also discusses the concept of “composite reference,” which addresses incorporating arbitration agreements across multiple related contracts and parties. We further suggest alternatives to strict application of specific references to arbitration clauses and advocate for flexible and clear contract drafting to reflect the parties’ intentions and preempt disputes.
Judicial Evolution: Key Precedents and Principles on Arbitral Clause Incorporation
The SC’s judgment in NBCC is the law as of date. However, to understand how the Indian Supreme Court arrived at this position over time, it is pertinent to also briefly understand the Court’s preceding stance on the provision.
One such important pronouncement was the case of M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., wherein the SC interpreted section 7(5) at length. In this case, the court distinguished between “general reference” and “specific reference” to a contract, citing the understanding from ‘Russel on Arbitration 23E’ by Francis Russel. It held that a general reference to a previous contract would not have the effect of incorporation of an arbitral clause. The judgment in paragraph 09, highlights a middle ground wherein, neither a general reference nor a specific reference to a pre-existing contract is required to effectuate the inclusion of an arbitration agreement. This is when reference is made to the “terms and conditions” of the previous contract, with an unambiguous intention for the same to be applicable. In such a case, the dispute resolution clause, i.e., the arbitration agreement too would be included.
The court in paragraph 12 further carved out an exception to the rule of specific reference. It held that even if a general reference was made not to a contract, but to Terms and Conditions by Trade Associations or Regulatory institutions, which is well circulated and parties are well versed with it, that would also lead to the inclusion of the arbitration agreement. This view aligns with the Italian Supreme Court’s judgment in the Del Medico v. Ibeprotein case, wherein the court highlighted the factors such as knowledge of standard trade practices, furthering the tenets of customization and practices.
In fact, in the recent case of M/s. Oravel Stays Pvt. Ltd. vs. Nikhil Bhalla, the Delhi High Court went as far as saying that the arbitration clause contained in the terms and conditions available on a company’s website would be incorporated into the agreement between the parties if the agreement expressly references it and provides a hyperlink to the Terms and Conditions.
However, an aspect not addressed by the courts was the fate of the incorporation of an arbitration clause via reference when one of the contracts (among the former and latter) involves a third party. The case of M/S. Inox Wind Ltd. vs M/S. Thermocables Ltd. (M/S. Inox), addressed the same by crystalizing the notion of a single-contract and a two-contract case. In simpler terms, a single contract case is one wherein the parties are the same in the initial contract and the latter contract, whereas, in a two-contract case, one of the two contracts involves a third party, too. The court in paragraph 18 of this judgment held that in a single-contract case, a general reference would be sufficient to effectuate the incorporation of an arbitration agreement from the referring contract but a two-contract case must have a specific reference to the arbitration clause to the referring contract for the reference to arbitration agreement happen. The same principle has been applied across jurisdictions, such as in the England and Wales High court decision of Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL.
Composite Reference: Judicial Insights
The SC, in the case of Chloro Controls (I) Pvt. Ltd. vs Severn Trent Water Purification Inc. & Ors., dealt with the notion of “composite reference” i.e. deciding on the inclusion of arbitral clauses with multiple but related parties and contracts. In essence, it touched upon the court’s authority to resolve disputes through arbitration wherein, ancillary agreements are intricately linked to the principal agreement and the performance of one agreement is inherently intertwined with others. The court laid down three prerequisites for consolidating disputes into one arbitration to take place which were.
- The ancillary contracts arise out of a main/parent contract,
- Towards the fulfillment of a single economic transaction; and
- When the doctrine of “group of companies” can be applied.
The SC furthered its stance in Ameet Lalchand Shah & Ors. vs. Rishabh Enterprises & Ors by observing that where several parties are involved in a single commercial project executed through several agreements/contracts all the parties can be covered within the arbitration clause in the main agreement. While this primarily deals with subjecting third parties to an agreement, it also touches upon implied intent to arbitrate being read into ancillary agreements if the mother agreement mentions the same.
- Flexibility v Rigidity: Evaluating Incorporation through Specific References
Since the judgment in the case of M/S Inox the courts in India have adhered to the application of the specific reference in the two-contract case. The Apex court in NBCC also reinforced this approach and emphasized the need for a specific reference to incorporate the arbitral clause. While these judicial precedents provide clarity, still it becomes essential to examine the potential limitations of strict adherence to specific reference requirements in two-contract cases. A rigid application of this rule can lead to an inadequate and erroneous interpretation of the actual contractual intentions of the parties. There are instances where parties, despite having a long-standing commercial relationship and multiple related contracts, may not explicitly reference an arbitration clause in every subsequent agreement, yet they intend to resolve disputes through arbitration.
The Singapore Court of Appeal in the case of Int’l Research Corp . plc v . Lufthansa Sys . Asia Pac .Pte Ltd. examined the issue of strict application of specific references in two-contract cases. The court observed that the strict rule of specific reference originated in the context of bills of lading and charter parties, i.e., contracts involving negotiable instruments, and should ideally not be treated as a general rule of application. The court further highlighted that the real issue is one of contractual interpretation, i.e., whether the parties intended to incorporate an arbitration agreement by referencing it in their contract or a document containing it.
This approach of the court has also been endorsed by Professor Gary Born, in his treatise on International Commercial Arbitration 3ED. In section 5.05, which deals with international arbitration agreements, he suggests that distinctions between “general” and “specific” references, while relevant, should not be decisive. In international commercial settings, where incorporating terms by reference is customary and arbitration is preferred, a more flexible interpretation will help accurately ascertain the parties’ intentions. The suggestion is to move away from a strict application to the specific reference rule and instead focus on the broader context and objective circumstances to determine the parties’ true intentions. This approach will ensure that contracts are interpreted in a manner that aligns with the parties’ actual intent, facilitating fair and efficient resolution of disputes through arbitration, and encouraging more precise drafting of contracts
Can the issue be pre-empted at the contract drafting stage?
In furtherance of the issues, we have attempted to address, it becomes imperative for the parties to draft their document of legal relationship in a manner that objectively, lays down their intention to arbitrate and the scope of disputes falling under the ambit of the arbitration agreement, i.e., if at all there is a clear and unambiguous existence of one. On a bare reading of section 7(5), it must be noted that the provision reads as “reference in a contract to a document containing an arbitration clause” meaning, the reference can be made to any document, such as standard templates, sample arbitration agreements, legal notices, etc., and not necessarily a contract.
Some parties choose a template of a standard contract as the reference contract. However, the lack of knowledge of one party about the contents of the same can lead to differences. Similar was the case of Standard Bent Glass Corp. v. Glassrobots, wherein the contract referred to industry guidelines called Orgalime S92 which also included an arbitration clause, but did not have it attached as an appendix. On Standard Bent pleading lack of knowledge w.r.t the terms of Orgalime 92, the US Court of Appeals for Third Circuit observed two things. Firstly, it is a standard guideline prevalent in the industry. Secondly, the party could have simply asked for a copy of the same rather than pleading no knowledge and effectuating the arbitration agreement.
In furtherance of the same, an alternative to preempt such differences could be a judicial interpretation or a legislative interpretation wherein, if an authorized standard template of an agreement prevalent in the industry includes an arbitration agreement, then a general reference to the same should effectuate incorporation of an arbitration agreement notwithstanding its attachment as an appendix. We suggest this should be the norm unless the parties make a specific unambiguous exclusion of such an arbitral clause.
Existing fallacies and a plausible redressal
Through multiple judicial precedents, Indian courts have now accepted the application of the notions of single and double contract cases along with the hierarchical requirements of specific and general reference while deciding cases regarding the reference to and incorporation of arbitral clauses. However, the ambiguity surrounding these notions leads to divergent interpretations, resulting in inconsistent application of relevant provisions. Defining these requirements at the pre-dispute stage would significantly reduce interpretational discrepancies, promoting a more consistent and uniform approach.
In furtherance of the same, it would be prudent for courts to recommend that the legislature formalize these principles through an amendment when deciding such cases. Doing so would provide greater clarity on single and double contract cases and specific versus general references. Moreover, such legislative clarity would likely reduce litigation under Sections 8 and 11 of the Arbitration and Conciliation Act, as the prerequisites for referring disputes to arbitration would be more definitive, reflecting a crystalized version of the aforementioned and now generally accepted principles.
Conclusion
After having examined the landmark judicial pronouncements and scholarly opinions, it is essential to note that the central issue continues to be the thorough determination of the parties’ true intent in choosing the dispute resolution clause.
Leaving acts of the parties in furtherance of strategic ambiguities aside, part of the problem also concerns parties not objectively drafting contracts, reflecting their intention whether or not to arbitrate disputes. Principles evolved through factual matrices of particular cases tend to be unidimensional and a square application of the same to others can disrupt party autonomy. To that end, principles of general vs. specific reference, single-contract, and two contract-theory hold relevance; they must not supersede the parties’ true intention as being the decisive factor in the incorporation of arbitration agreements through reference to another document.
(This post has been authored by Shivang Monga and Prakrit Patro, fourth-year students at Maharashtra National Law University, Mumbai)
CITE AS: Shivang Monga and Prakrit Patro, ‘Understanding Parties Intention Beyond Contracts Incorporation Of Arbitration Agreements via Reference’ (The Contemporary Law Forum, 19 October 2024) <https://tclf.in/2024/10/19/understanding-parties-intention-beyond-contracts-incorporation-of-arbitration-agreements-via-reference/>date of access.