Summary of the decision

In the case of NBCC (India) Limited versus Zillion Infraprojects Pvt. Ltd, the Supreme Court of India held that an arbitration clause cannot be considered to be incorporated in an agreement by any general reference to another agreement which contains such an arbitration clause.

Background

NBCC (India) Limited (NBCC) (formerly known as National Buildings Construction Corporation Ltd), is a public limited company and a Government of India undertaking, engaged in construction of power plants and other infrastructure projects. Zillion Infraprojects Pvt. Ltd (Zillion) (formerly known as Durha Constructions Pvt. Ltd), is a private limited company, engaged in the construction and infrastructure sector.

NBCC had issued an invitation for tender for construction of a weir across the river Damodar. The tender documents comprised, amongst other things, a ‘General Conditions of Contract’ (General Conditions) that had been issued by the Damodar Valley Corporation (DVC) to NBCC.

On fulfilment of the tender criteria, NBCC awarded the contract to Zillion by a Letter of Intent dated 4 December 2006 (LOI).

Whilst the General Conditions contained an arbitration clause, the LOI provided that (i) all terms and conditions as contained in the tender (including the General Conditions) issued by DVC to NBCC shall apply mutatis mutandis except where these have been expressly modified by NBCC; and (ii) the redressal of dispute between NBCC and Zillion shall only be through civil courts having jurisdiction of Delhi alone.

With the passage of time, certain disputes arose between the parties. Since the General Conditions contained the clause on arbitration, Zillion invoked the arbitration clause under the General Conditions. NBCC did not respond to the notice from Zillion invoking arbitration, which led Zillion to file an application under section 11(6) of the Arbitration and Conciliation Act 1996 (Arbitration Act) before the Delhi High Court seeking appointment of an arbitrator. The Delhi High Court allowed the application and confirmed appointment of the arbitrator.

Contention of the parties

NBCC appealed against the appointment of the arbitrator. NBCC contented that the dispute should not be referred to arbitration as the arbitration clause in the General Conditions was novated by the LOI (as the LOI provided that disputes be redressed through civil courts having jurisdiction in Delhi). However, the Delhi High Court rejected this argument and held that the LOI only novated the choice of court (i.e. courts of Delhi) as otherwise mentioned in the General Conditions (i.e., courts of Kolkata), and the arbitration clause as such continued to be applicable. Aggrieved by the orders of the Delhi High Court, NBCC appealed to the Supreme Court.

Supreme court ruling

Whilst analysing the present case, the Supreme Court examined its earlier decision in MR Engineers & Contractors Private Limited vs Som Datt Builders Limited[1]  which also referred to the provisions of section 7(5) of the Arbitration Act[2].

At the end, the Supreme Court held that the arbitration clause in the General Conditions did not get ‘incorporated’ in the LOI (and is a case of ‘reference’ only) and overruled the decision of the Delhi High Court.

Key take aways

Below points to keep in mind whilst drafting contracts with the intention to incorporate an arbitration clause from another contract[3]:

• The contract should contain a clear reference to the documents containing arbitration clause.
• The reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract.
• Making a general reference to another contract has no effect of incorporating the arbitration clause from the referred document. There has to be a specific reference to the arbitration clause.
• If the contract provides that its execution or performance will be in terms of another contract, which contains the terms and conditions relating to performance and a provision for arbitration, then, only the terms of the referred contract pertaining to execution or performance will be applicable and not in relation to the arbitration agreement in the referred contract unless there is a special reference to the arbitration clause as well.
• If the contract provides that the standard form of terms and conditions of an independent trade or professional institution will apply to the contract, then such standard form of terms and conditions including any provision of arbitration in such standard terms and conditions, will be deemed to be incorporated by reference.
• If the contract stipulates that the conditions of one of the parties to the contract shall form part of their contract (e.g. the general conditions of contract of the Government where the Government is a party), the arbitration clause forming part of such general conditions of contract will apply to the contract between the parties.

[1] (2009) 7 SCC 696

[2] Section 7(5) of the Arbitration Act states, “The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make the arbitration clause part of the contract”.

[3] Basis the Supreme Court judgment in M.R. Engineers.