It is commonplace for businesses to enter into legal relationships with each other on the basis of contracts containing multiple documents. When disputes arise out of such contracts contained in multiple documents, often a question is raised if an arbitration clause contained in one of the documents but not in the other, would be binding on the parties. On 5 January 2018, the Hon’ble Supreme Court of India (Supreme Court) dealt with a similar issue in Inox Wind Limited v Thermocables Limited where the Supreme Court dealt with the question as to whether an arbitration clause contained in the terms and conditions annexed to a purchase order could be binding on parties. The Supreme Court allowed the appeal and thus overturned the judgment of the Hon'ble Allahabad High Court (High Court).
Facts of the case
The Appellant was engaged in the business of manufacturing of wind turbine generators (WTGs). The Respondent was a manufacturer of wind power cables and other types of cables. Two purchase orders were placed by the Appellant on the Respondent for supply of cables for their WTGs dated 13 December 2012 and 2 February 2013. The purchase order recorded that the supply had to be in accordance with the terms as mentioned in the purchase order and the standard terms and conditions (T&C) attached to the purchase order. The T&C contained a clause on dispute resolution providing that disputes be resolved by a sole arbitrator in accordance with the Arbitration and Conciliation Act, 1996 (the Act). On finding defects in the products supplied by the Respondent, the Appellant asked for a replacement which was denied. Consequently, the Appellant issued a notice on 30 October 2014 proposing a sole arbitrator in accordance with the standard T&C. The Respondent did not reply to the notice, therefore an application under section 11(6) of the Act was preferred by the Appellant before the High Court. The High Court dismissed the same on the ground that the Appellant could not prove the existence of an arbitration agreement. The High Court relied on the ruling of the Supreme Court in M R Engineers and Contractors Private Limited v Som Datt Builders Limited (M R Engineers case) where the Supreme Court held that since there is no special reference to the arbitration clause in the standard T&C, the arbitration clause cannot be said to have been incorporated into the purchase order.
The Supreme Court analysed the facts and the ratio of the M R Engineers case noting that the argument taken by the Appellant therein before the Supreme Court was that his case fell under section 7(5) of the Act. The court while considering the scope of section 7(5) in the M R Engineers case had held that in order to incorporate the arbitration clause contained in the second contract into the first contract, it is necessary that there is a conscious acceptance of the arbitration clause by the parties and therefore unless there was a specific reference to the arbitration clause, the parties cannot be referred to arbitration. The Supreme Court had however carved out the exception that in the case of standard form contracts concerning trade association and professional bodies, a specific reference to the arbitration clause is not required and the same would be considered to have been accepted by the parties. The Supreme Court also discussed the scope of the reference to the arbitration clause, where the entire terms and conditions of the second contract were referred to in the first contract or where the first contract was stated to be governed by the provisions of the second contract as compared to a situation where the reference to the second contract in the first contract, was only in a particular context. The Supreme Court gave primacy to the intention of the parties to see as to whether parties wanted to adopt the document in its entirety or refer to certain portions of it. In the M R Engineers case, the Supreme Court ultimately held that firstly, there was no intention of the parties to incorporate the main contract in its entirety into the sub-contract and secondly, the main contract therein was between the public works department and the Government of Kerala which contemplated dispute resolution through a panel of three arbitrators to be appointed by government agencies and therefore it could not be said to be applicable to the contesting parties. Therefore, it ruled that a general reference cannot incorporate an arbitration clause from an earlier contract.
The Supreme Court in the present case also dealt with common law jurisprudence on ‘incorporation by reference’ referring to the High Court of Justice, Queen’s Bench Division, Commercial Court’s decision in Sea Trade Maritime Corporation v Hellenic Mutual War Risks Association Limited where the difference between incorporation in a ‘single contract case’ and ‘two contract case’ was recognized. In ‘two contract case’, reference is made to a secondary document which is executed by at least one party different from the parties to the contract in question. In such contracts, reference to an earlier contract would not be sufficient to incorporate the arbitration clause. As opposed to that, if reference is made to standard terms in a contract that would be a ‘single contract case’ and the arbitration clause can be incorporated with general reference. This line of reasoning was again followed by the Queen’s Bench Division in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL holding that in two contract cases, the stricter rule had to be followed by insisting on a specific reference to the arbitration clause.
Taking note of the new development of law in terms of the dictum in the Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL, the Supreme Court expanded the scope of exceptions as laid down in the M R Engineers case to state that a general reference to a standard form is sufficient for incorporation of the arbitration clause even if it is not in the case of trade associations and professional bodies.
Since in the instant case the Respondent was aware of the standard T&Cs attached to the purchase order, the Supreme Court allowed the appeal and held the reference to be sufficient for incorporation of the arbitration clause mentioned therein.
The Supreme Court through this verdict has taken a commercial approach and further expanded the scope of reference to an arbitration clause on the basis of the understanding and intent of the parties. A departure from strictly applying the principles for specific reference to an arbitration clause in all forms of a multi-document contract is a welcome change and a push towards the alternative dispute resolution mechanism. The key takeaway from this judgment is that where commercial contracts are contained in multiple documents the cross referencing to the dispute resolution clauses is paramount. Secondly, clear and unequivocal drafting is imperative to ensure the identification, validity and enforceability of the arbitration clause. It would also be pertinent to state that the decision in M R Engineers case was rendered by a bench of two judges and therefore to the extent that the present decision differs with the MR Engineers case, it should have been referred to a larger bench for a definitive decision on these prinicples.