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M/s. Inox Wind Ltd. Versus M/s Thermocables Ltd.

2018 (1) TMI 430 - SUPREME COURT OF INDIA

Appointment of arbitrator - Section 11 (6) of the Arbitration and Conciliation Act, 1996 - rejection of application on the ground that the arbitration clause in the main contract was not incorporated by reference in the contract between the Appellant and Respondent therein - scope of Section 7 (5) of the Act - Held that: - though general reference to an earlier contract is not sufficient for incorporation of an arbitration clause in the later contract, a general reference to a standard form woul .....

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s nothing forthcoming from the pleadings or the submissions made by the parties that the standard form attached to the purchase order is 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 is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clau .....

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ourt of Judicature at Allahabad dismissing the application filed by the Appellant under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act ). 3. The Appellant is a manufacturer of wind turbine generators (WTGs). The Respondent is engaged in the business of manufacture of wind power cables and other types of cables. Two purchase orders dated 13.12.2012 and 02.02.2013 were issued by the Appellant to the Respondent for supply of cables for their WTGs. A .....

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all the terms and conditions mentioned in the Purchase Order except the delivery period as is evident from a letter dated 15.12.2012. 4. The Respondent, pursuant to the Purchase Order, supplied wind power cables to the Appellant. While laying the cables supplied by the Respondent-company, the Appellant discovered that the outer sheaths of the cables of 150 sq. mm. were cracked. This forced them to stop the WTGs so as to avert damage to expensive equipment. According to the Appellant, the Respon .....

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of an arbitration agreement. The High Court relied upon the judgment of this Court in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696 to hold that there is no special reference to the arbitration clause in the standard terms and conditions, so the arbitration clause cannot be said to have been incorporated into the purchase order. 6. We have heard the counsel for the Appellant and Respondent. The judgment of this Court in M.R. Engineers case (supra) .....

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nditions applicable to the main contract. A dispute arose between the parties which made the Appellant therein to approach the High Court for appointment of an arbitrator under Section 11 (6) of the Arbitration and Conciliation Act, 1996. The High Court of Kerala rejected the application on the ground that the arbitration clause in the main contract was not incorporated by reference in the contract between the Appellant and Respondent therein. In the appeal before this Court, the Appellant submi .....

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ave to be followed as there were no guidelines in Section 7(5) regarding the conditions that need to be fulfilled before construing a reference to a portion of a contract as a reference incorporating the whole of it along with the arbitration clause contained in it. While distinguishing reference to another document from incorporation , this Court observed that the relevant factor was the intention of the parties either to adopt the document in its entirety or to borrow specific portions of the .....

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of the said document, or that the terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract. When there is such incorporation of the terms and conditions of a document, every term of such document (except to the extent it is inconsistent with any specific provision in the contract) will apply to the contract. If the document so incorporated contains a provision .....

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purpose of ascertainment of specifications of the goods to be supplied. The referred document cannot be looked into for any other purpose, say price or payment of price. Similarly, if a contract between X and Y provides that the terms of payment to Y will be as in the contract between X and Z, then only the terms of payment from the contract between X and Z, will be read as part of the contract between X and Y. The other terms, say relating to quantity or delivery cannot be looked into. 19. Sub .....

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rbitration 23 rd Edition (2007) which were relied upon by this Court for interpretation of Section 7 (5) of the Arbitration and Conciliation Act, 1996 are as under: (M.R. Engineers case, para 20-21) 20. The following passages from Russell on Arbitration throw considerable light on the position while dealing with Section 6(2) of the (English) Arbitration Act, 1996 corresponding to Section 7(5) of the Indian Act. (See pp. 52-55, 23rd Edn.): Reference to another document.-The terms of a contract ma .....

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ake questions of incorporation irrelevant, if for example it is clear that the contractual documents in question are entirely separate and no intention to incorporate the terms of one in the other can be established. However, the contractual document defining and imposing the performance obligations may be found to incorporate another document which contains an arbitration agreement. If there is a dispute about the performance obligations, that dispute may need to be decided according to the arb .....

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neffective. The draftsmen of the Arbitration Act, 1996 were asked to provide specific guidance on the issue, but they preferred to leave it to the court to decide whether there had been a valid incorporation by reference. (Para 2.044) *** Subject to drawing a distinction between incorporation of an arbitration agreement contained in a document setting out standard form terms and one contained in some other contract between different parties, judicial thinking seems to have favoured the approach .....

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parties can be expected to be more familiar with those standard terms including the arbitration clause. (Para 2.048) 21. After referring to the view of Sir John Megaw in Aughton Ltd. v. M.F. Kent Services Ltd. [(1991) 57 BLR 1] that specific words were necessary to incorporate an arbitration clause and that the reference in a sub-contract to another contract's terms and conditions would not suffice to incorporate the arbitration clause into the sub-contract, followed in Barrett & Son (B .....

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east in the case of reference to a non-standard form contract in the context of construction and reinsurance contracts and bills of lading a specific reference to the arbitration agreement is necessary. 9. This Court also discussed the scope of Section 7 (5) of the Act and summarised as follows: (M.R. Engineers case, para 24) 24. The scope and intent of Section 7(5) of the Act may therefore be summarised thus: (i) An arbitration clause in another document, would get incorporated into a contract .....

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o 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. 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. (iii) Where a contract between the parties provides that the execution or performance of that contract shall be in t .....

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n (as for example the standard terms and conditions of a trade association or architects association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions. (v) Where th .....

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e sub-contract. Further, this Court held that the arbitration clause in the main contract was inapplicable to the contract between the parties as the main contract was between the Public Works Department, Government of Kerala and the contractor in which the arbitration clause contemplated appointment of a committee of three arbitrators, with one each to be appointed by the State of Kerala and the Respondent therein and the third to be nominated by the Director General Road Development, Ministry .....

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(2) The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement. 12. It will be useful to understand the interpretation of the incorporation issue in England. 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 B .....

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d be a two contract case. In other words, if the secondary document is between other parties or if only one of the parties to the contract in dispute is party to an earlier contract to which a reference is made, then it would be a two contract case. In such a contract general reference to the earlier contract would not be sufficient to incorporate the arbitration clause. However, if the reference is to standard terms in a contract that would be a case of single contract and the use of general wo .....

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bbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm). The contract in the said case pertained to sale of 10,000 metric tons of steel scrap. There were several terms in the contract under the headings material, quantity, price, shipment, discharge, rate, payment and final weight. Apart from the said terms, the contract contained a clause which was in the following terms: All the rest will be same as our previous contracts. 14. The dispute that arose in that case was whether genera .....

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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 t .....

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tract. (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. 15. 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 catego .....

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act cases. Further the judgments of Sir John Megaw and Lord Justice Ralph Gibson are, in part in conflict so as to preclude either of them being binding authority even in a two contract case. The agreement of Evans LJ with Sir John Megaw's analysis of the authorities with regard to arbitration clauses and specifically with regard to the incorporation of charterparty arbitration clauses into bills of lading was obiter. 16. The point pertaining to the independent nature of an arbitration claus .....

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mething of a misnomer for the arbitration contract which is ancillary to the primary contract . But a businessman would have no difficulty in regarding the arbitration clause (as he would call it) as part of a contract and as capable of incorporation, by appropriate wording, as any other term of such a contract; and it is, as it seems to me to a businessman's understanding that the court should be disposed to. give effect. A businessman who had agreed with his counterparty a contract with 10 .....

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is as under: (See pp. 52-54, 24rd Edn.) Reference to standard form terms, single and two contract cases. If the document sought to be incorporated is a standard form set of terms and conditions the courts are more likely to accept that general words of incorporation will suffice. This is because the parties can be expected to be more familiar with those standard terms, including the arbitration clause. In Sea Trade Maritime Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd, (The Athen .....

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ted that: In principle, English law accepts incorporation of standard terms by the use of general words and, I would add, particularly so when the terms are readily available and the question arises in the context of dealings between established players in a well-known market. The principle, as the dictum makes clear, does not distinguish between a term which is an arbitration clause and one which addresses other issues. In contrast, and for the very reason that it concerns other parties, a stri .....

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luded that in a single contract case general words of incorporation are sufficient, whereas by its nature a two contract case may require specific reference to the other contract, unless the secondary document is stated to be based on standard form terms containing an arbitration agreement. In that case, presumably specific reference to the arbitration clause would not be needed. As discussed below, this approach has been endorsed in subsequent cases, albeit drawing a slightly different but mate .....

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principle applicable to standard form contracts, where general words of incorporation will suffice, to other types of contract where the same rationale can be said to apply. Thus, if the document sought to be incorporated is a bespoke contract between the same parties, the courts have accepted this as a single contract case where general words of incorporation will suffice, even though the other contract is not on standard terms and constitutes an entirely separate agreement. The rationale for .....

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iginal contract and a third party, where the contracts as a whole were entered into in the context of a single commercial relationship .(Para 2-050) [Emphasis Supplied] 18. This Court in M.R. Engineers case, which is discussed in detail supra, 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 .....

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ld that in single contract cases general reference is enough for incorporation of an arbitration clause from a standard form of contract. There is no distinction that is drawn between standard forms by recognized trade associations or professional institutions on one hand and standard terms of one party on the other. Russell on Arbitration 24 th Edition (2015) also takes note of the Habas s case. 19.We are of the opinion that though general reference to an earlier contract is not sufficient for .....

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