A Cautious Acceptance of Incorporation of Arbitration Clause by General Reference

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Author: Deeksha Malik*

Agreement to Arbitrate
Existence and Validity of Agreement to Arbitrate

In 2009, the Supreme Court of India, in the case of MR Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Pvt. Ltd.,[1] dealt with a situation where the arbitration clause contained in the main contract was sought to be incorporated in the sub-contract by a general reference to the former contract, and an application under section 11 of the Arbitration and Conciliation Act, 1996 was accordingly filed for appointment of an arbitrator. Holding that the said application was rightly rejected by the High Court on the ground of absence of an arbitration clause in the sub-contract, the Court observed that the arbitration clause in the main contract was tailor-made to meet the requirements thereof and, in the absence of a specific reference, the intention of the parties to incorporate the said clause in the sub-contract could not be inferred. The Court further noted that the only exception to the requirement of specific reference to an arbitration clause is a situation where the reference is made to a standard form of contract made by a trade association or a professional institution of which the parties are expected to be aware.

The ratio of MR Engineers was relied upon by the Supreme Court recently in the case of INOX Wind Ltd. v. Thermocables Ltd.,[2] wherein it widened the aforesaid exception to include a general reference to a standard form of contract of one of the parties. In this case, the terms provided in the purchase orders issued by the Appellant for supply of cables for its wind turbine generators were to govern the arrangement. Additionally, certain standard terms and conditions were attached to the orders and contained a dispute resolution clause. The Court dismissed the application for appointment of an arbitrator on the ground that the Appellant failed to prove the existence of an arbitration agreement. The Supreme Court, in an appeal filed before it in this behalf, opined that a general reference to an earlier contract does not incorporate the arbitration clause therein in the later contract, though a general reference to a standard form would suffice. The approach of the Apex Court in the INOX case is indeed a welcome pro-arbitration step, especially as regards commercial contracts that are generated from multiple documents.

Speaking generally, national courts of different jurisdictions have given effect to both general and specific references to arbitration clauses. In case of the former, however, courts have adopted a cautious approach, taking into account several factors such as the nature of the two contracts (one containing the arbitration clause and the other referring to the former contract), the extent to which the parties to the contract are expected to be aware of the arbitration clause, the clarity of the reference, the applicable custom and trade usage, and the like.

The case of Standard Bent Glass Corp. v. Glassrobots,[3] for example, involved a standard sales agreement which referred to industry guidelines called Orgalime S92, which contained an arbitration clause. Standard Bent denied having received Orgalime S92 as an appendix to the sales agreement and contended, therefore, that it could not have agreed to the arbitration provision contained therein. The US Court of Appeals for the Third Circuit observed that the standard sales agreement mentioned the said guidelines in the cover letter as an appendix thereto. Further, it provided that in case of difference, “the matter shall be submitted to arbitration as set out later in this Agreement.” Thereafter, the agreement provided that for other conditions, the parties shall apply Orgalime S92. Assuming Standard Bent was not aware of the general conditions in Orgalime S92 on the ground that the same was not attached to the agreement, it could have called for the same from the other party in the subsequent negotiations that took place between them. Moreover, incorporation of the general conditions of Orgalime S92, including its arbitration clause, was a common industry practice, and it was undisputed that the officials of Standard Bent had extensive experience in international trade. Thus, the intention of the parties to arbitrate could be reasonably inferred notwithstanding the general reference.

In Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL,[4] too, the court was confronted with a general reference situation. The matter involved a contract for supply of steel scrap by Sometal to Habas, which provided for stipulations relating to quantity, price, shipment, payment, and the like, and concluded with the words “All the rest will be the same as our previous contracts.” Of these previous contracts, some provided for an arbitration clause. The question, therefore, was whether the said clause could be said to have been incorporated in the contract in question. The court discussed different reasons why courts adopt a restrictive approach in matters of incorporation of an arbitration provision- these could be that an arbitration clause does not form part of the “subject matter” of the main contract, and general words should be taken to be referring only to such provisions which are germane to the contract, or that arbitration clauses tend to oust the jurisdiction of courts and, therefore, clear words are required to incorporate them. The court in the instant case noted that these concerns are primarily relevant to “two-contract” cases, where there are multiple contracts and all the parties therein are not the same. Since, in the case at hand, the parties in all the contracts were the same, the same restrictive approach could not be applied. The parties had access to all the prior contracts; further, when the parties referred to “all the rest” terms, there was no reason to exclude the arbitration clause.

As indicated in Habas, a restrictive approach is followed in cases where parties are different. In Africa Express Line Ltd. v. Socofi SA,[5] the Queen’s Bench Division (Commercial) of the High Court of Justice noted that the authorities make a distinction between cases where parties agree to incorporate standard terms (which are prevalent in the concerned trade or which are standard between the parties on account of their long standing relationship) into their contract and cases where reference is made to a separate contract altogether; in the second category of cases, incorporation by general reference is inadequate.

A review of the authorities suggests that generic references are here to stay, though courts are more likely to uphold these in cases where there are same parties entering into multiple contracts. The Supreme Court of India, too, has taken note of the same and adopted a cautious approach. Ideally speaking, parties should make specific reference to an arbitration clause provided in other contract(s) where all the parties to the multiple contracts are not the same. A clear and unambiguous drafting as regards cross-referencing would certainly save the parties from unwanted costs and consequences in future.

[1] MR Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Pvt. Ltd., 2009 7 SCC 696.

[2] INOX Wind Ltd. v. Thermocables Ltd., Civ. App. No. 19 of 2018.

[3] Standard Bent Glass Corp. v. Glassrobots, 333 F.3d 440.

[4] Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL, [2010] EWHC 29 (Comm).

[5] Africa Express Line Ltd. v. Socofi SA, [2009] EWHC 3223 (Comm).

*Deeksha Malik is a final-year student at National Law Institute University, India. She has a keen interest in the areas of corporate law and arbitration. One of her recent works in the area of arbitration is titled Corruption in International Commercial Arbitration: Arbitrability, Admissibility & Adjudication, published in Arbitration Brief, Washington College of Law. She may be reached at dkshmalik726@gmail.com.