Incorporation by Reference Revisited: Giriraj Garg v. Coal India Limited

Following the amendment of 2015, Courts while appointing an arbitrator under Section 11 of the 1996 Act are required to confine themselves to examining whether or not an arbitration agreement exists between the parties. While conducting such assessments, Courts have encountered instances where the contract between the parties in dispute does not in itself contain an arbitration clause but instead the contract makes a reference to another document that does have an arbitration clause. The question of when such a reference is said to validly incorporate an arbitration agreement between the parties was addressed in Giriraj Garg v. Coal India Limited.

Factual Background

Coal India Limited in a 2007 Scheme outlined the process of coal distribution through e-auction. Mr. Garg was a registered buyer under this Scheme and participated in several e-auctions for sale orders under the scheme. Having been declared successful in a number of these bids, he was issued sale orders pursuant to which he made an earnest money deposit as required by the Scheme. The Scheme also required him to collect the coal within 45 days of the delivery order which he was unable to do. Coal India, considering this a breach of the Scheme, forfeited the earnest money deposit causing a dispute to arise.

While the sale orders did not have arbitration clauses, they each had a clause stating that the order would be governed by guidelines, circulars, notices, and instructions issued by Coal India among other governmental and statutory bodies.  The 2007 Scheme, however, did have an arbitration clause, and it was this clause that was invoked by the Petitioner.

Issues and Findings

The Supreme Court identified that it had to determine ’whether the arbitration Clause contained in the 2007 Scheme, would stand incorporated by reference in each of the sale orders.’ While Section 7(5) of the Act of 1996 allows for incorporation by reference, it requires that the reference be ‘such as to make the arbitration clause a part of the contract’. So the essential question was whether the general reference in the sales order to the applicability of guidelines, circulars, notices, and instructions of Coal India Ltd was of such a nature that it made the arbitration clause of the Scheme part of the contract.

Coal India Limited had successfully argued before the Jharkhand High Court that the clause would not stand incorporated by reference because the sale orders did not make a specific reference to the applicability of the terms and conditions of the 2007 Scheme and hence could not be considered to have the effect of making its arbitration clause a part of the contract.

The Supreme Court set aside the decision of the Jharkhand High Court relying upon the interpretation of Section 7(5) in M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd and the subsequent expansion of the interpretation in Inox Wind Ltd. v. Thermocables Ltd. The Court in the process also discussed analysis of such situations by English Courts[1] by classification of relevant contracts into two groups: ‘single contract cases’ and ‘two contract cases.’

‘Single contract cases’ are instances where the clause sought to be incorporated by reference into the contract is from a standard form of contract or any other source the parties involved in the present contract are familiar with.

‘Two contract cases’ are instances where the clauses sought to be incorporated by reference are from another contract in which at least one of the parties to the current contract was not involved, thereby creating the possibility of the unfamiliarity of a party with the terms incorporated by reference. English Courts have held that in ‘single contract cases’ incorporation of arbitration clauses by general reference to the standard form or other familiar document is permissible, but for ‘two contract cases’ a general reference to the other contract would be insufficient to incorporate the arbitration clause into the present contract.

The Court after having considered this reiterated the five-point interpretation of Section 7(5) laid down in M. R. Engineers.  The five points are:

I. The essential ingredients of a) clear reference to document; b) clear indication of intention to incorporate the arbitration case, and c) non-repugnance to terms of the current contract must be present.

II. Where the referred document is another contract, specific reference to the arbitration clause is required and general reference to the contract is insufficient.

III. Where reference to another contract is made only in the context of execution and performance, the terms of execution and performance alone and not the arbitration clause will be incorporated.

IV. Where the referred document is the standard form of terms and conditions of an independent Trade or Professional Institution, any arbitration clause included in such standard form is to be deemed to be incorporated by reference.

V. Where the referred document is the Conditions of Contract of one of the parties (like the General Conditions of Contract of a government party), the arbitration clause within such Conditions of Contract will be incorporated by reference

It can be seen that Points II and III refer to what English Courts would call ‘two-contract cases’ and Points IV and V refer to ‘single contract cases.’ The Court pointed out that the scope of points IV and V were expanded in Inox Wind such that general reference to any consensual standard form, including standard forms of not only professional bodies and trade associations but also the standard form of one of the parties, would be considered sufficient to incorporate the arbitration clause.

Declaring the 2007 Scheme to be a standard form document and the present case a ‘single contract case’ the Supreme Court justified the setting aside of the Jharkhand High Court order and held that the arbitration clause from the Scheme would indeed stand incorporated in the sale orders.

Conclusion

Lowering the threshold for the incorporation by reference of arbitration clauses from standard form documents has implications for organizations, governmental and otherwise institutions, that tend to use such standard documents with leave it or take it condition. Considering that there are many other aspects to standard form documents besides their arbitration clauses, it may not be practicable to do away with all general references to them in contracts. The interests of organizations that rely upon standard form documents will probably be best served if the arbitration clauses in such documents are remodeled to better reflect their intention to submit potential disputes to arbitration.  Although the judgment is a welcome push towards the pro-arbitration stance of Indian courts, it may very well become a cause of concern for those who do not intend to refer their dispute to arbitration but end up before an arbitral tribunal contesting their jurisdiction. Therefore, clear and unambiguous drafting of the contract along with the arbitration clause becomes quintessential for the primacy of parties’ will.

Edwin C. Thangaraj

[1] SEA 2011 Inc. v. ICT Ltd. [2018] EWHC 520 (Comm); Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm); Sea Trade Maritime Corporation v. Hellenic Mutual War Risks Association (Bermuda) Limited, The Athena [2006] EWHC 2530 (Comm).

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