With the increasing use of arbitration clause in commercial contracts, different interpretations have emerged, with respect to the insertion of arbitration clause into the main contract when reference has been made from other documents executed between the parties. Such interpretation revolves around the question that
whether arbitration clause can be incorporated directly into a contract when the reference has been made from other documents executed between the parties or it require fulfilment of other conditions.
To address and clarify this issue, the Supreme Court in its recent judgment of
Hirani Developers vs. Nehru Nagar Samruddhi CHS Ltd and Anr. Etc. has reiterate the settled position of law with respect to interpretation of the ‘Reference’ and ‘Incorporation’ of Arbitration clause in a contract.
Facts of the case:
- Hirani Developers (‘Developer’) entered into a development agreement (‘DA’) with the Nehru Nagar Samruddhi CHSL (‘Society’) for its redevelopment. The development agreement is inclusive of a dispute resolution mechanism under the contract.
- Later, the Developer has entered into separate Permanent Alternate Accommodation Agreement (‘PAAA’) with the society and its member. Wherein all the executed PAAA were on the identical line and each of them contained the similar clauses. One such clause provides that all terms and conditions of the Development Agreement shall be form a part of the present agreement and shall be bindings on the parties hereto.
- Later, a dispute has arose between parties and certain society member (Respondent member) filed complaint against the Developer under the Consumer Protection Act of 2019. Meanwhile the Developer issue a section 21 notice under Arbitration and Conciliation Act 1996 (‘Act’), to invoke arbitration proceedings as per arbitration clause of the DA. However, the Respondent member refused the proposed arbitration.
- Aggrieved by the said refusal the Developer approaches the Hon’ble High Court of Bombay and filed application under section 11(6) of the Act seeking appointment of Arbitrator. The Hon’ble High Court via a common order rejected the said application on the ground that the arbitration clause executed between society and the developer, by a mere generic reference does not bound the members and they are not be subject to any privity of arbitration pertinent to the said DA.
- Being aggrieved by the said decision the Developer approaches the Hon’ble Supreme Court and challenge the said order.
Issues:
Whether the reference made under clause of PAAA, incorporating all the terms of the Development Agreement, amounts to incorporate the dispute resolution mechanism provided in the DA or whether it constitutes merely a general reference insufficient to import the arbitration clause?
Decision:
The Supreme court has perused the matter at hand and reiterated the settled position of law as laid down in the case of
M.R. Engineers and Contractors Private Limited vs Som Datt Builders Limited and followed in the case of
Duro Felguera, S.A. v. Gangavaram Port Limited and
NBCC (India) Limited v. Zillion Infraprojects Pvt. Ltd. Whereby the Court has clarified the difference between the incorporation and reference to Arbitration in a contract.
The court has emphasized and reiterated that
section 7(5) of the Act, which talks about Arbitration Agreement clarifies that, there has to be a “
Conscious Acceptance” of arbitration clause from another document by the parties as a part of their contract, then only such reference could be read as a part of the contract executed between the parties.
Further, the court has outlined the difference between
reference to another document in a contract and
incorporation of another document in a contract. Whereby in the former case, the parties only intend to adopt the specific part of the referred document for its application in the executed contract and in the latter case, the parties intended to include the entire referred document for its application into the executed contract.
Furthermore, the court has reiterated that when parties enter into a contract by making a general reference to another document, such general reference would not have the effect of including the arbitration clause in the executed contract unless a specific reference has been made to that effect. Therefore, by considering all these relevant settled positions, the Hon’ble Supreme Court set aside the common order passed by the Hon’ble Bombay High Court and upheld that this
specific case is the matter of incorporation of other document in the contract, as the parties have clearly intended to incorporate the whole of DA in the PAAA and by virtue of the same, the arbitration clause of DA has been incorporated under the PAAC and consequently, the court has upheld the incorporation of arbitration clause in the contract.
