India: Exceptions To The Law Regarding Non-Incorporation Of Arbitration Clause Through General Reference: Widening The Horizons In The Light Of Inox Wind Ltd v. M/S Thermocables Ltd

Introduction and brief facts

The Hon'ble Supreme Court, vide its judgment dated 05.01.2018 in the recent case of Inox Wind vs. Thermocables Ltd¹⁰ has examined the scope of Section 7 (5) of the Arbitration and Conciliation Act, 1996 ("the Act"). In the process, the apex court judgment in the case of M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited¹¹ ("MR Engineers") was also distinguished. It also modified the settled position of law pertaining to the exception to the non-incorporation of arbitration clause contained in the general reference of a contract by holding that, "a general reference to a standard form of contract of one party will be enough for the incorporation of the arbitration clause".

The dispute in the instant case arose out of a contract pertaining to two purchase orders dated 13.12.2012 and 02.02.2013 for the supply of thermocables to Inox Wind (hereinafter to be referred as, "the Appellant" by Thermocables Ltd (hereinafter to be referred as "the Respondent".

As per the purchase order, the supply was to be made according to the terms and conditions mentioned in the order and the Standard Terms & Conditions which also contained the dispute resolution clause and the same was not disputed by the Respondent. When the dispute arose, an application under Section 11 (6) of the Arbitration and Conciliation Act (hereinafter referred as, "the Arbitration Act") was filed before the Hon'ble Allahabad High Court wherein the Hon'ble High Court dismissed the application on the ground that the Appellant had failed to prove the existence of a valid Arbitration Agreement. It was under this circumstance that the present SLP arose before the Hon'ble Supreme Court, challenging the impugned judgment of the Hon'ble Allahabad High Court.

Widening of exceptions

The Hon'ble High Court while dismissing the application under Section 11 of the Arbitration Act had relied upon the case of M.R. Engineers and Contractors Private Limited v. Som Dutt Builders Limited¹² wherein it had been held that an arbitration clause cannot be said to have been incorporated into the purchase order if there is no special reference to the arbitration clause in the standard terms and conditions. On a purposeful interpretation of Section 7(5) of the Arbitration Act, 1996, it was observed that a conscious acceptance of the arbitration clause in another document is required for incorporating it into the contract. In a nutshell, general words of reference or incorporation are not sufficient for referring the dispute to arbitration and a particular reference to arbitration clause is required.

Before arriving at its conclusion, the Hon'ble Supreme Court also traced the development of English law on the subject and appreciated the differences that exist in deciding whether a general reference is sufficient for incorporation in single contract cases as well as double contract cases. The Hon'ble Supreme Court then observed that in the case of M.R. Engineers (supra), it was held that in single contract cases, general reference is enough for incorporation of an arbitration clause from a standard form of contract. In the same case, which has been discussed elaborately by the Supreme Court, it was held to be a rule that 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. The Court finally held that although a general reference to an earlier contract is not sufficient for incorporation of arbitration clause, a general reference to a standard form would be enough for incorporation of the arbitration clause by relying upon the 24th Edition of Russell on Arbitration.

Conclusion

Coming to the conclusion, it was observed by the bench that the Russell on Arbitration's 24th Edition (2015) had gone through changes and had departed from the position taken in 23rd edition (2007) of the book, which was the basis of the reasoning in the MR Engineers case. The bench elucidated that contrary to MR Engineers there is no distinction that is drawn between standard forms by recognized trade associations or professional institutions for incorporation of an arbitration clause by reference on the one hand and standard terms of one party on the other hand. The Court also examined the development of case laws in England by referring to the decision of the Queen's Bench in the case of Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL¹³. Thus, in light of the development of law regarding incorporation after the judgment in M.R. Engineers, it was held that a general reference to a consensual standard form is sufficient for incorporation of an arbitration clause. In other words, it was held that general reference to a standard form of contract of one party will be enough for incorporation of arbitration clause.

Footnotes

10. [Civil Appeal No. 19 of 2018]

11. (2009) 7 SCC 696

12. [(2009) 7 SCC 696

13. [2010] EWHC 29 (Comm)

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