SUPREME COURT HOLDS THAT A DISPUTE IS ARBITRABLE IF THE CONTRACT SHOWS INTENTION OF PARTIES TO REFER THE DISPUTE TO ARBITRATION

A two Judge Bench of the Supreme Court comprising of Justice B.R Gavai and Justice Sandeep Mehta passed a judgement dated 19.03.2024 in the matter of NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. C.A. No.-004417-004418–2024 where the Apex Court held that a general reference in a contract to an arbitration clause in another contract would not have the same effect, unless specific reference of the arbitration clause is given in the said contract.

Facts

The Appellant, NBCC (India) Limited is a Government of India Undertaking, engaged in construction of power plants and other infrastructure projects. The Respondent, M/s Zillion Infraprojects Pvt. Ltd. is engaged in the construction and infrastructure sector. The Appellant issued an invitation to tender majorly for Construction of the Weir across river Damodar in Jharkhand for a total value of Rs 19,08,46,612. The Respondent submitted its Techno Commercial Bid on 16.11.2006, and received a Letter of Intent (LOI) on 4.12.2006 for contract for construction of the Weir containing General Conditions of Contract, Special Conditions of Contract, Bill of Quantity, etc. which contained the Arbitration Clause.

Thereafter, a dispute arose between the Parties and the Respondent issued a Notice invoking Arbitration and further sought consent for the appointment of a former Judge of a High Court, as the Sole Arbitrator. The Appellant did not respond to the Notice, therefore, the Respondent filed an Application in the High Court of Delhi under Section 11(6) of the Arbitration and Conciliation Act 1996 (Arbitration Act) (Appointment of Arbitrator).

The High Court of Delhi allowed the Arbitration Petition and proposed the appointment of a former Judge of the High Court, as the Sole Arbitrator, to adjudicate the dispute between the Parties vide Interim Order dated 12.03.2021. The High Court confirmed the proposed appointment of the former Judge of the Delhi High Court, as the Sole Arbitrator vide Final Order dated 09.04.2021.

The Appellant filed the Appeal bearing C.A.No.-004417-004418–2024 thereby challenging both the High Court Orders dated 12.03.2021 and 09.04.2021 before the Supreme Court.

Reliance was placed on Clause 7.0 of the LOI by the Counsel of the Appellant stating that it clearly states that all the disputes between the Parties shall be resolved by Civil Court in Delhi. The Counsel, also contended that mere reference to the terms and conditions without there being an incorporation of arbitration clause in the L.O.I. would not make the dispute between the Parties amenable to the arbitration proceedings.

The Counsel for the Appellant submitted that according to the case of M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) 7 SCC 696, unless the L.O.I. specifically provides for incorporation of the arbitration clause, a reference to the arbitration proceedings would not be permitted in view of the provisions of sub-section (5) of Section 7 of the Arbitration Act (Arbitration Agreement).

Issues

Can the case be resolved through Arbitration in the absence of specific reference of Arbitration in the LOI?

Decision by Supreme Court 

After considering the facts and circumstances of the case, the Apex Court was of the view that as per the Clause 7.0 of the L.O.I. it specifically stated that disputes must be resolved through civil courts in Delhi, and thereby, indicated the Parties’ intention.

The Supreme Court perused Section 7(5) of Arbitration Act and explained that the issue was no more res integra since the same was considered in M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd. (supra).

The Apex Court provided that “when there is a reference in the second contract to the terms and conditions of the first contract, the arbitration clause would not ipso facto be applicable to the second contract unless there is a specific mention/reference thereto.” The Supreme Court concluded that the instant matter was not one of ‘incorporation’ but a case of ‘reference’ and clarified that a general reference would not have the effect of incorporating arbitration clause.

The Apex Court concluded by upholding the NBCC’s argument that as per LOI, only a civil suit can be filed in the Court to resolve the aforesaid disputes, and not arbitration. Hence, the High Court’s Orders were quashed, and set aside by the Apex Court.

Conclusion

The Supreme Court relied on the judgement of M.R. Engineers and Contractors Private Limited v. Som Datt Builders Ltd. (supra) and also on the Section 7 (5) of the Arbitration Act which states that the reference in a contract to a document containing an arbitration clause, constitutes a valid arbitration agreement, if the contract is in writing, and the reference is specifically made to incorporate the arbitration clause as a part of the contract.

Thus, the Appeal was allowed and High Court’s Orders dated 12.03.2021 and 09.04.2021 were set aside.

 

 

ARJAV JAIN

ASSOCIATE

Hansen International Law Firm