Authors: Ketan Gaur*, Neil Chatterjee**, Nidhisha Garg***
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In a bid to promote the resolution of disputes through arbitration, there has been a push towards the incorporation of arbitration agreements in contracts executed between public-sector undertakings and private parties. In the last decade, several Indian public institutions have issued circulars, office memoranda, guidelines, manuals, and standard terms or general conditions of contract (‘Public Notifications’) providing for resolution of disputes through arbitration.
However, parties are often faced with the issue of whether the arbitration clauses in these Public Notifications are incorporated into their existing contracts, which do not otherwise provide for arbitration. This also raises the question of whether, in future contracts that neither provide for arbitration nor refer to these Public Notifications, the arbitration clause in the Public Notifications is incorporated into those contracts. This is a fundamental issue because, in the absence of an arbitration agreement, parties cannot resolve their disputes through arbitration, rendering the policy to promote arbitration ineffective. This issue arose before the High Court of Calcutta in Dhansar Engineering Private Limited v. Eastern Coalfields Limited, where the Hon’ble High Court refused to refer the parties to arbitration. Despite the fact that the parties entered into the contract after the issuance of the Public Notification, the Court stressed that there was no reference to the arbitration clause in the Public Notification.
In this article, the authors analyze the decision in Dhansar Engineering in the context of precedents of the Supreme Court of India and other High Courts. The authors conclude that, based on the peculiar facts of Dhansar Engineering, the High Court was correct in refusing to refer the parties to arbitration. This decision should serve as a point of concern for parties and public-sector undertakings seeking to arbitrate their disputes in furtherance of Public Notifications mandating the resolution of disputes through arbitration. A fortiori, it is imperative for parties to refer to (or incorporate) the arbitration clause in the Public Notification, whether the contract is signed before or after the Public Notification, in order to take advantage of the arbitration clause. Failing to do so may result in courts not recognizing the existence of an arbitration agreement between the parties.
The Case of Dhansar Engineering
A work order was issued to Dhansar Engineering by Eastern Coalfields Limited (ECL) on 24 May 2017, and a contract was entered into on 30 August 2017 (‘Contract‘).
In the interim, a policy circular was issued on 7 April 2017 (‘Policy Circular’) providing for the resolution of all disputes between inter alia ECL and private contractors by arbitration. Clause 5 addressed existing contracts and required the contractor to expressly consent to arbitration through a written agreement. This is usually referred to as a submission agreement, where, after a dispute arises, the parties agree to refer their dispute to arbitration. Dhansar Engineering’s contract did not reference the Policy Circular, despite being entered into after the Policy Circular. As such, the argument raised by Dhansar Engineering was that the arbitration agreement in the Policy Circular was incorporated by reference into the Contract. Accordingly, a valid arbitration agreement exists between the parties as per Section 7 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’).
The High Court was of the view that there was no reference to the Policy Circular in the Contract, and therefore, the arbitration agreement in the Policy Circular could not be incorporated into the Contract. The Policy Circular was considered only “an agreement to enter into an arbitration agreement in the future,” and not an arbitration agreement itself. As there was no consent to arbitrate, the High Court refused to appoint an arbitrator.
The Current Legal Position
The seminal decision on incorporation by reference is the Supreme Court’s ruling in M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited. The Supreme Court differentiated between incorporation by reference and reference by incorporation. In the former, the document referred to is incorporated in its entirety into the contract.
On the other hand, in reference by incorporation, a reference to a document in a contract in a particular context does not incorporate the entire document into the contract. For instance, if a contract provides that the specification of the supplies will be as provided in an earlier purchase order, then the incorporation is limited to the specifications of the goods to be supplied. The arbitration agreement in the earlier contract will not be incorporated, unless specifically referred to.
As such, if a document containing an arbitration clause is referred to in its entirety in a contract and is treated as a part of the contract, the entire document along with the arbitration clause therein is incorporated. This happens, for instance, when the standard form contract of one party is stated to form a part of the parties’ agreement.
However, where a specific reference is required in an existing or future contract—such as in the case of Public Notifications prescribing resolution through arbitration—the following criteria laid down by the Supreme Court are imperative to be followed:
- (a) The contract must contain a clear reference to the document containing the arbitration clause;
- (b) The reference should clearly indicate an intention to incorporate the arbitration clause;
- (c) The arbitration clause should be appropriately capable of resolution of the anticipated dispute(s) and should not be repugnant to any term of the contract.
As such, in the case of Dhansar Engineering, it was imperative for the parties to specify in their contract their intent to incorporate the arbitration agreement contained in the Policy Circular. This is more so since the contract therein came into existence after the Policy Circular came into effect.
This approach has been consistently followed by the Supreme Court. For instance, in Inox Wind v. Thermocables Limited, the Supreme Court held that although ordinarily a specific reference to an arbitration clause is required for incorporation, a reference to a general set of terms of a party is sufficient to incorporate the arbitration clause contained in those general terms. This is usually considered a “single-contract case”, i.e., where the arbitration clause is found in another document laying down the standard terms and conditions, and both parties are familiar with those conditions. This differs from a “two-contract case”, where one of the parties to the document containing the arbitration clause is different from the document containing the reference to incorporate, in which case a specific reference to the arbitration clause is required.
This is so because in a “single contract case”, parties are presumed to have spent considerable time, energy, and effort in negotiating the terms of the former contract. To expect them to reproduce, reiterate, or continue to make specific references to each of those clauses under the former contract in the subsequent contracts may be unreasonable. This stands in contrast to the case in Dhansar Engineering, where the contract was not issued under the Policy Circular, and Dhansar Engineering could not be taken to be familiar with the Policy Circular, which was a document of Coal India Limited alone. The parties in that case had not spent time negotiating the Policy Circular. As such, a specific reference to the arbitration clause of the Policy Circular was necessary, as it was a “two-contract case”.
Likewise, in Giriraj Garg v. Coal India Limited & Ors., the Supreme Court upheld a generic reference to standard form terms as a valid incorporation of the arbitration clause. This was a “single contract case” where the purchase orders with the successful bidder under a scheme (‘Scheme’) of Coal India Limited, were said to successfully incorporate the arbitration clause contained in the Scheme. Notably, the purchase orders did not make any reference to the Scheme but made a generic reference stating that the purchase orders would be governed by the guidelines, circulars, office orders, etc. This was deemed sufficient to incorporate the arbitration clause contained in the Scheme as both the parties were familiar with the terms of the Scheme.
In the case of existing contracts faced with arbitration clauses in subsequent Public Notifications, the decisions of the Supreme Court in Mahanadi Coalfields Limited v. IVRCL AMR Joint Venture and NBCC (India) Limited v. Zillion Infraprojects Pvt. Ltd. shed considerable light. In Mahanadi Coalfields, one of the issues before the Supreme Court was of the import of Clause 5 of the Policy Circular in Dhansar Engineering, which required the contractor to expressly consent to arbitration by a written agreement. Relying on the ratio of Dhansar Engineering, the Court refused to refer the parties to arbitration.
In NBCC (India), the Supreme Court was faced with conflicting clauses – an arbitration agreement in a tender document that was generally referenced in a letter of intent, and an exclusive jurisdiction clause in favour of courts in Delhi in the letter of intent. Holding that the case was a “two-contract case”, the Supreme Court was of the view that a general reference to the tender document would not incorporate the arbitration clause contained therein into the letter of intent. This was because the tender conditions applied so long as they were not modified by the contracting parties, which was the case here.
In the context of Public Notifications, an important decision is Mep Rgsl Toll Bridge Private Limited v. Maharashtra State Road Development Corporation, decided by the High Court of Bombay. The High Court was asked to issue a writ of mandamus to a public-sector undertaking to arbitrate a dispute as per the Government of Maharashtra’s policy initiative of 2016 to promote institutional arbitration in government contracts (‘Policy’). The contract between the parties contained a dispute resolution clause, which was also sought to be recognized through a writ as a binding arbitration agreement. The High Court refused to issue the writ, holding that the Policy did not ipso facto amend contracts to mandatorily impose an arbitration agreement between the parties. The policy required the consent of the parties to suitably amend a contract so as to reflect the incorporation of an arbitration agreement. This could not be done by way of a writ of mandamus. The Government’s intention to promote institutional arbitration could not supersede the basic requirements for a valid contract.
Way Forward and Conclusion
The growing need to promote arbitration, and in particular institutional arbitration, presents its own challenges when Public Notifications are interpreted to incorporate the arbitration clause into existing or future contracts. It is essential that private parties entering into government contracts, or already in such contracts, bear in mind the criterion for arbitrating with government entities, institutions, or undertakings in furtherance of these Public Notifications. Ordinarily, a Public Notification may be referenced in a contract without specifically mentioning the arbitration clause contained therein. In cases like Dhansar Engineering, there may be a complete omission to refer to the Public Notification altogether, much less the arbitration clause therein. This may prove fatal where a Public Notification functions as an agreement to enter into an arbitration agreement, like the Policy Circular in Dhansar Engineering and the Policy of the Government of Maharashtra in Mep Rgsl Toll Bridge.
As such, in existing government contracts, it may be essential for parties to amend their contract to incorporate the arbitration clause contained in the Public Notification. Alternatively, the parties may enter into a submission agreement after a dispute arises, agreeing to arbitrate as per the arbitration clause contained in the Public Notification. In future contracts entered into subsequent to the Public Notifications, it may be ideal to make a specific reference to the arbitration clause in the Public Notification, or to incorporate the precise language into the contract itself. Short of this, courts are unlikely to recognize the existence of a valid arbitration agreement incorporated into the contract as per Section 7 of the Arbitration Act. Even in “single-contract cases”, it is essential that at least a general reference be made to the terms and conditions negotiated and agreed by the parties on previous occasions that either contain an arbitration clause or refer to the arbitration clause in the Public Notification. An attempt to initiate arbitration on the basis of an avowed policy of the appropriate government to promote arbitration, short of a written consensual agreement between the parties, may not hold up before courts in India.
*Ketan Gaur is a Partner at Trilegal in the dispute resolution practice. He is based out of the Delhi office and specialises in international commercial arbitration and general commercial litigation. Ketan is registered as a foreign lawyer in Singapore and has acted as Indian law counsel before the Singapore International Commercial Court and the Singapore Court of Appeal in arbitration related proceedings.
**Neil Chatterjee is a Senior Associate at Trilegal in the dispute resolution practice. He is based out of the Delhi office. He holds a Masters in International Dispute Settlement from the University of Geneva and the Geneva Graduate Institute.
***Nidhisha Garg is an Associate at Trilegal in the dispute resolution practice. She is based out of the Delhi office. She earned her Bachelor of Laws degree from the National Law Institute University, Bhopal.