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A robust arbitration clause is necessary to ensure an enforceable framework for dispute resolution in any contract.The recent decision of the Hon’ble Supreme Court of India (the “Supreme Court”) in NBCC (India) Limited v. Zillion Infra Projects Pvt. Ltd.[1] (“NBCC v. Zillion Infra”) has clarified the critical difference between ‘reference to an arbitration clause’ and ‘incorporation of an arbitration clause’.
The Supreme Court has held that a mere reference to an arbitration clause does not bind the parties to arbitrate in case of a dispute. To bind the parties to arbitration, the reference should be such that the arbitration clause is incorporated in the agreement. Thus, it is crucial to understand how to correctly incorporate an arbitration clause by reference.
After briefly setting out the factual background in the case of NBCC v. Zillion Infra, the ingredients for correctly incorporating an arbitration clause by reference have been summarized in this note.
Factual Background in NBCC v. Zillion Infra
Damodar Valley Corporation (“DVC”) issued a tender to the appellant, NBCC (India) Limited (“NBCC”), a Government of India undertaking engaged in construction of power plants and infrastructure projects. NBCC, in turn, issued a tender in favor of the respondent, Zillion Infra Projects Private Limited (“Zillion Infra”) for ‘construction of a weir with allied structures’ across the river Damodar comprising the usual tender documents such as general conditions of contract, special conditions of contract, bill of quantity etc.
The tender issued by DVC in favor of NBCC contained an arbitration clause. The letter of intent issued by NBCC to Zillion Infra recorded that (a) all terms and conditions as contained in the tender issued by DVC to NBCC shall apply mutatis mutandis to the tender issued by NBCC and Zillion Infra unless any such term is expressly modified by NBCC;[2] and (b) the letter of intent shall form an integral part of the agreement.[3] More significantly, the letter of intent recorded that redressal of dispute between NBCC and Zillion Infra shall ‘only’ be through civil courts.[4]
With the passage of time, certain disputes arose between NBCC and Zillion Infra. Zillion Infra relied on the arbitration clause in the tender document issued by DVC to NBCC, invoked the arbitration clause and applied to the Delhi High Court for appointment of arbitrator.[5] Aggrieved by the order of the Delhi High Court appointing the arbitrator, NBCC filed a special leave petition before the Supreme Court.[6]
Supreme Court’s Decision in NBCC v. Zillion Infra
The Supreme Court relying on Section 7(5) of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) and its earlier decision in M.R. Engineers[7] drew a distinction between (a) ‘reference to an arbitration clause’ and ‘incorporation of an arbitration clause’, and (b) ‘single-contract’ and ‘two contract’ case. The Supreme Court held that, in the case of NBCC v. Zillion Infra, the arbitration clause was simply referred to but not incorporated and accordingly, the dispute shall be redressed only through the courts in Delhi.[8]
Lessons from the Supreme Court’s Decision in NBCC v. Zillion Infra
The following points emerge as best practices for incorporating an arbitration clause by reference:
- General reference is not sufficient: A general reference to another contract or the terms and conditions of another contract will not have the effect of incorporating the arbitration clause.[9]
- Specific reference is key: An arbitration clause from another contract can be incorporated only by specific reference to such arbitration clause.[10]
- General reference to a standard form contract is sufficient: A general reference to a standard form agreement of one party or trade association and professional bodies will be sufficient to incorporate an arbitration clause.[11]
- Intent of parties: Reference to the other contract should be such that it shows the intent of the parties to incorporate the arbitration clause into the parties’ contract.[12]
- The ‘conscious acceptance’ standard: Section 7(5) of the Arbitration Act provides for conscious acceptance of the arbitration clause from another contract.[13]
- Single contract v. Two contract: A single-contract case is one involving two or more agreements between the same parties, whereas a two-contract case involves two or more agreements between different parties. The principle of incorporation by way of express reference should be strictly followed where the two agreements in question are not between the same parties.
- Precise language in dispute resolution clauses: Words such as “exclusive” and “only” should be used cautiously in dispute resolution clauses in view of the consequence that it excludes other dispute resolution options.
Concluding remarks
The decision of the Supreme Court in NBCC v. Zillion Infra highlights the necessity of clear and specific reference to the arbitration clause in another agreement to ensure its incorporation in the parties’ contract and for its enforceability. It is common, especially in government projects, to incorporate the standard terms of the general conditions of contract by reference and the Supreme Court’s decision provides useful guidance in negotiation of those contracts.
The decision is also in line with the position in other developed arbitral jurisdictions. For instance, in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL,[14] the English High Court held that where the parties to all the contracts are same, it should be construed as a ‘single-contract’ and therefore, an express reference to the arbitration clause was not required. Further, in Barrier Limited v. Redhall Marine Limited,[15] the English High Court held that where there were no clear words to indicate that the parties intended to and/or had agreed to incorporate the arbitration clause from the main contract, general words of incorporation in the sub-contract were insufficient to imply incorporation of the arbitration clause. For both parties and their legal counsel, this decision signifies the importance of using precise language in contracts that reflect the mutual intent to arbitrate avoiding the time and cost of adjudication on such a fundamental issue.
Authors: Shahezad Kazi (Partner) and Ridhima Chandani (Associate)
Footnotes
[1] NBCC (India) Limited v. Zillion Infra Projects Pvt. Ltd., 2024 SCC Online SC 323.
[2] NBCC v. Zillion Infra, paragraph 20.
[3] NBCC v. Zillion Infra, paragraph 20.
[4] NBCC v. Zillion Infra, paragraph 20.
[5] NBCC v. Zillion Infra, paragraph 3.6.
[6] NBCC v. Zillion Infra, paragraph 3.10.
[7] M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696 (“M.R. Engineers”).
[8] NBCC v. Zillion Infra, paragraph 23.
[9] NBCC v. Zillion Infra, paragraph 10.
[10] NBCC v. Zillion Infra, paragraph 10.
[11] Inox Wind Ltd. v. Thermocables Ltd., paragraph 18, (2018) 2 SCC 519.
[12] NBCC v. Zillion Infra, paragraph 13.
[13] NBCC v. Zillion Infra, paragraph 12.
[14] Habas Sinai v. Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL, [2010] EWHC 29 (Comm) at [51].
[15] Barrier Limited v. Redhall Marine Limited, [2016] EWHC 381 (QB).