Reference in second contract to first contract, would not make arbitration clause ipso facto be applicable to second contract – Supreme Court
When there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/reference thereto.
In a recent judgment, the Hon’ble Supreme Court has held that when there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract
ABCAUS Case Law Citation:
ABCAUS 3911 (2024) (03) SC
Important Case Laws relied upon by parties:
M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited (2009) 7 SCC 696
Duro Felguera, S.A. vs Gangavaram Port Limited (2017) 9 SCC 729
Elite Engineering and Construction Private Limited (2018) 4 SCC 281
Inox Wind Limited vs Thermocables Limited (2018) 2 SCC 519
In the instant case, the appellant had challenged the interim order and final judgment passed by the High Court of Delhi in Arbitration Petition whereby the High Court had allowed the application under Section 11(6) of the Arbitration & Conciliation Act 1996 (“the Arbitration Act”) and appointed the Sole Arbitrator to adjudicate the dispute between the parties to the present dispute.
The appellant was a Public Limited Company and Government of India undertaking, engaged in construction of power plants and other infrastructure projects on EPC and/or PMC basis. The respondent was a private limited company engaged in the construction and infrastructure sector.
The appellant had awarded a contract of Construction to the respondent. With the passage of time, certain disputes arose between the parties and the respondent issued a notice in terms of Tender Documents invoking arbitration and further seeking consent of the appellant for the appointment of a former Judge of a High Court, as Sole Arbitrator.
The appellant did not respond to the notice, as a result the respondent filed an application at the High Court under Section 11(6) of the Arbitration Act and the High Court allowed the Arbitration Petition and appointed of a former Judge of the High Court, as the Sole Arbitrator, to adjudicate the dispute between the parties.
The appellant submitted that the Letter of Intent (“L.O.I.”) though states that all terms and conditions as contained in the tender issued shall apply mutatis mutandis, it also makes it clear that where the terms and conditions have been expressly modified by the appellant, the same would not be applicable. It was submitted that clauses of the L.O.I. specifically stated that various conditions, i.e., contractual, financial and technical mentioned in the documents contained therein shall be binding on the respondent for execution of works and they shall form part of the agreement.
It was submitted that clause also stated that the L.O.I. shall also form a part of the agreement. That the intention was amply clear from clauses of the L.O.I., which stated that the redressal of dispute between the appellant and the respondent shall only be through civil courts alone. It further stated that the laws applicable to the contract between the parties shall be the laws enforceable in India.
It was submitted that merely because that the LOI had a reference to the terms and conditions as contained in the tender issued, the arbitration clause would not apply in view of specific modification made in L.O.I.
The Hon’ble Supreme Court observed that it had held Court has held that when the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. It has been held that the arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause. It has further been held that where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.
The Hon’ble Supreme Court pointed out that a perusal of sub-section (5) of Section 7 of the Arbitration Act itself would reveal that it provides for a conscious acceptance of the arbitration clause from another document, by the parties, as a part of their contract, before such arbitration clause could be read as a part of the contract between the parties.
The Hon’ble Supreme Court opined that it is clear that a reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document into the contract.
In the instant case, the Hon’ble Supreme Court observed that it was a case of a ‘two-contract’ case and not a ‘single-contract’ case. Though the tender provided for a reference of the dispute to the sole arbitration, as per LOI all terms and conditions as contained in the tender shall apply mutatis mutandis except where these have been expressly modified by the appellant. Finally, LOI specifically provided that the redressal of dispute only be through civil courts.
The Hon’ble Supreme Court held that when there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/reference thereto.
Accordingly, the Hon’ble Supreme Court held that the learned judge of the High Court had erred in allowing the application of the respondent. The appeals were accordingly allowed. The impugned orders were quashed and set aside.
Download Full Judgment Click Here >>
- Jewellery purportedly received from grandparent under Will added as unexplained credits
- SC lays down tests to determine if a debt is financial debt or operational under IBC
- Commonality of directors of companies does not mean deposits received was bogus
- Application though named as rectification but if tax is not legitimate, it also touches merit: HC
- Cost of acquisition as on 01.04.1981 taken as per valuer report by reverse indexing of FMV
