‘Incorporation by Reference’: A Need to Reconsider Standards?


- Kartikey Sanjeev Bhalotia[1]

I. Introduction

Section 7 of the Arbitration and Conciliation Act, 1996 (‘Act’) lays down the base of the Act by defining an ‘arbitration agreement’. Sub-section (5) to the said provision statutorily recognises the concept of ‘incorporation by reference’, i.e., incorporation of an arbitration clause into a contract by reference to a secondary document. The sub-section reads: “(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.” A perusal of the above shows that there are two requirements that need to be fulfilled before an arbitration clause can be said to have been incorporated in a contract by reference:

a) the contract under consideration should be a written contract

b) the reference made, i.e., the words used for referring to the document containing the arbitration clause should be such that it has the effect of making the arbitration clause contained in the said document a part of the contract

While it might not be difficult to prove the first requirement, the Supreme Court of India has taken upon itself to lay down the various facets of what reference can be considered “such as to make that arbitration clause part of the contract”. This article analyses some of the landmark judgments of the Supreme Court which has delved into the aspect of ‘incorporation by reference’ in the Indian arbitration law jurisprudence. The article would then highlight how the existing standards laid down by the Supreme Court go beyond the statutory provision and therefore, requires a reconsideration for a push towards a more arbitration-friendly regime under the Indian jurisprudence.

II. M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd.

The Supreme Court in the case of M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd.[2] in the year 2009, was faced with the question whether in a contract where the Appellant was a sub-contractor of the Respondent, a general reference to the principal contract between the Respondent and the Public Works Department of Kerala, would be sufficient to be such as to have the effect of incorporating the arbitration clause contained in the principal contract. The court primarily tried to differentiate between “reference to another document in a contract” and “incorporation of another document in a contract, by reference”, and observed:

“In the first case, the parties intend to adopt only specific portions or part of the referred document for the purposes of the contract. In the second case, the parties intend to incorporate the referred document in entirety, into the contract. Therefore when there is a reference to a document in a contract, the court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract.”

The Supreme Court in coming to its decision heavily relied on Russell on Arbitration (23rd edn, Sweet & Maxwell 2007) while analysing various English courts judgements and summarised the English law on the point. The court held that a general reference to a document in a contract does not automatically lead to the incorporation of the arbitration clause contained therein, the parties while incorporating terms of a document, say another contract, need to refer to the arbitration clause ‘specifically’. The Supreme Court, like the English Courts, laid down one exception to the rule and held that a general reference may be sufficient in cases where the document referred is a ‘standard form contract’ of some recognised trade associations or regulatory institutions.

However, in laying down such a law, the court completely ignored their preceding analysis of the difference between “reference to another document in a contract” and “incorporation of another document in a contract, by reference”. Therefore, in relying on the English authorities the Supreme Court missed an opportunity towards laying down a simple test under Section 7(5).

To put this into perspective, let us assume that there exists a contract wherein the parties have referred to another document which contains an arbitration clause. Further, the document which has been referred to is not a ‘standard form contract’ issued by a recognised trade association or regulatory institution. In such a scenario, there might arise two possibilities, firstly, the reference made by the parties is to some specific parts of the said document; secondly, the reference is of such wide import that it has an unequivocal effect of incorporating that whole document in the contract, i.e., any person referring to such a contract would be of the opinion that the parties have intended to incorporate each and every clause of the referred document in their contract.

Now, if one was to apply the test of “reference to another document in a contract” and “incorporation of another document in a contract, by reference” which formed part of the obiter of the Supreme Court’s decision in M.R. Engineers the answer to the question whether the reference made by the parties have the effect of incorporating the arbitration clause contained in the said document would be simple, i.e., under the first case where a reference was made to a specific part, the incorporation would be limited to that specific part and no other part, while in the second case, as the reference was so general that it had the effect of incorporating that another document in the contract it would be held that it amounted to incorporating the arbitration clause like any other terms under that document. However, the Supreme Court went on to lay down a general law that placed a complete bar on general references, except in case of a standard form contract. Therefore, applying the same under the above scenario the document not being a standard form contract the courts would hold such reference as not having the effect of incorporating the arbitration clause.

This poses certain problems, especially because the reasoning is based primarily based on the technical aspect of an arbitration clause that though it might be a part of a contractual document, it is a contract in itself. This misnomer about an ‘arbitration clause’ may be known to corporate lawyers, however, it will not be rational to assume that the same is the case for a business person. “All terms of the contract are hereby incorporated” does not usually mean “all terms but the arbitration clause, are hereby incorporated” for contracting parties.

III. M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd.

The Supreme Court in the case of M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd.[3] was again faced with a similar question of deciding whether the arbitration clause stood incorporated in the absence of a specific reference to the same. The Supreme Court in coming to its decision made reference to an English judgment in Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited (The “Athena”) and introduced to the Indian arbitration law jurisprudence the concepts of ‘single contract’ and ‘two contract’ cases. The Supreme Court in making reference to the above decision laid down the meanings of these terms as follows:

“If there is a reference to a secondary document in a contract between two parties and that secondary document is a contract to which at least one party is different from the parties to the contract in question, 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 words to incorporate the arbitration agreement by a reference is permissible.”

The above explanation was observed to be similar to what the Supreme Court had held in M.R. Engineers. However, the Court chose not to rely on the said judgements completely. The Supreme Court took reliance on 2010 English judgement Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal S.A.L.[4] (‘Habas Sinai’) that expanded the ambit of ‘single contract’ cases by including within its meaning even the standard form contracts of one of the parties. This essentially meant that ‘single contract’ cases were no more restricted to standard form contracts by trade associations or regulatory institutions, but also included standard forms of one of the parties to the contract. Therefore, the Supreme Court expanded the exception of general reference as laid down by it in M.R. Engineers.

A reference to the observation made in Habas Sinai is relevant for our discussion:

“A commercial lawyer would probably understand that an arbitration clause is a separate contract collateral to another substantive contract and that the expression ‘arbitration clause’ is, on that account, something 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 specific terms under various headings and then agreed with the same counterparty terms 1-5 under the same headings as before and, as to the rest, that all the terms of the previous contract should apply, would, I think, be surprised to find that ‘all’ should be interpreted so as to mean ‘all but the arbitration clause’.”

The reference to the above observation by the Supreme Court clearly highlights a more pragmatic and arbitration-friendly approach. The same has been reiterated by the Supreme Court again in a 2019 judgement of Giriraj Garg v. Coal India Ltd & Ors.[5] However, the point still remains is that how do these observations take different forms in cases of different documents referred to, i.e., why does the difference of ‘single contract’ and ‘two contract’ even exists? Why is it that the intention of the parties is not judged on similar standards in references to all types of documents containing an arbitration clause?

The reason that the courts throughout have given for these difference in standards is that when the reference is made to a standard form of contract of a trade association or regulatory authority or one of the parties to the contract the parties can be expected to be familiar with the terms of such contract including the arbitration clause contained therein. However, in case of a ‘two contract’ case where the reference is made to a contract of one of the parties or any other document, not being a standard form contract, the parties have to be given a reasonable leeway of not being aware of all the terms of such contracts.

The status quo of the law in India on the incorporation of an arbitration clause by reference to some document may be simply summarised as follows:

a. The courts have laid down different standards for holding an arbitration clause successfully incorporated on the basis of the document being referred to and not on the intention of the parties in using the language they used for referring to the said document.

b. The courts have differentiated the cases of references in two categories, i.e., ‘single contract’ or ‘two contract’ case.

c. A ‘single contract’ case is such wherein, the reference is made to a ‘standard form contract’ of some recognised trade association or a regulatory institution or one of the parties to the contract. In such a case the courts have found a general reference (i.e not specifically making reference to the arbitration clause contained in the document) would be sufficient to be such as to have the effect of incorporating the arbitration clause contained in the principal contract.

d. A ‘two contract’ case is such wherein, the reference is made to a document which is not a standard form contract but any other contract may it be of one of the parties to the contract or among third parties, or any other document containing an arbitration clause. In such a case the courts have found that general reference to the terms of such a document would not be held to have incorporated the arbitration clause. It basically means that even if it is found that reference is so general that parties have intended to incorporate all the terms of the contract, but the arbitration clause.

IV. Conclusion

The author believes that the reasoning given by the courts in differentiating between a ‘single contract’ and ‘two contract’ cases, creates a difference when there is a need for none. This only leads to complicating the interpretation of the statutory terms of Section 7(5). The only criteria laid by the statutory provision are that the contract should be written, and the reference made should have the effect of making the arbitration clause a part of the contract. It is therefore argued that, if the words used to refer to the contract are such that they do not qualify the reference to some specific parts of the document containing the arbitration clause, and are of such wide amplitude that it a reasonable business person would consider it to cover all terms, the courts have to imply the intention on the part of the contracting parties to incorporate even the arbitration clause.

It has to be noted that Section 7(5) in itself does not differentiate between the types of the document referred to by the parties, it only requires for the reference (irrespective of the type of the document) to be such that it has the effect of incorporating the arbitration clause in the contract under consideration. The standard to test the intention of the contracting parties should be on the basis of a ‘reasonable-business-person’ standard and not a ‘well-informed-commercial-lawyer’ standard. In the opinion of the author, this is the correct interpretation of the statutory provision, and can substantially add to the evolution towards an arbitration-friendly regime of the Indian jurisprudence.

[1] The author is a 5th Semester student of B.B.A. LL. B (Hons.) at the National Law University Odisha (Cuttack). He can be contacted on his email address: Kartikey.bhalotia2@gmail.com [2] M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696 [3] M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd. (2018) 2 SCC 519 [4] Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal S.A.L. [2010] EWHC 29 (Comm) : [2010] 1 Lloyd's Rep 661 : [2010] 1 All ER (Comm) 1143 : [2010] Bus LR 880 [5] Giriraj Garg v. Coal India Ltd & Ors. (2019) 5 SCC 192

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