2009 (7) TMI 1151 - SC - Companies Law

Whether an arbitration clause contained in a main contract, would stand incorporated by reference, in a sub-contract, where the sub-contract provided that it shall be carried out on the terms and conditions as applicable to the main contract? Held that - As there is no arbitration agreement between the parties, it is unnecessary to examine the contention of the respondent that no dispute existed between the parties in view of the full and final settlement receipt executed by the appellant. There is no error in the order of the High Court rejecting the application of the appellant on the ground that there is no arbitration agreement. Appeal dismissed.

Issues Involved:
1. Interpretation of sub-section (5) of section 7 of the Arbitration and Conciliation Act, 1996.
2. Incorporation of an arbitration clause by reference in a sub-contract.
3. Validity of the arbitration agreement between the contractor and sub-contractor.
4. Applicability of the arbitration clause in the context of disputes between the contractor and sub-contractor.

Detailed Analysis:

1. Interpretation of Section 7(5) of the Arbitration and Conciliation Act, 1996:
Section 7 of the Act defines an arbitration agreement. Sub-section (5) states that a 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 that arbitration clause part of the contract. The court emphasized that a mere reference to a document is insufficient to incorporate an arbitration clause; there must be a clear intention to incorporate the arbitration clause as part of the contract.

2. Incorporation of an Arbitration Clause by Reference in a Sub-Contract:
The court distinguished between mere reference to a document and incorporation by reference. It explained that when a contract refers to another document, it must be determined whether the intention was to incorporate the entire document or only specific parts. For an arbitration clause to be incorporated, there must be a specific reference indicating an intention to include the arbitration clause from the referred document into the contract.

3. Validity of the Arbitration Agreement Between the Contractor and Sub-Contractor:
The court analyzed the work order between the contractor and sub-contractor, which stated that the sub-contract shall be carried out on the terms and conditions applicable to the main contract. The court concluded that this indicated an intention to adopt only the terms related to the execution of the work, not the arbitration clause. The arbitration clause is considered a collateral term, independent of the substantive terms of the contract, and thus not automatically incorporated by a general reference.

4. Applicability of the Arbitration Clause in the Context of Disputes Between the Contractor and Sub-Contractor:
The court found that even if the arbitration clause from the main contract was incorporated into the sub-contract, it would not apply to disputes between the contractor and sub-contractor. The arbitration clause in the main contract was tailored to disputes between the principal employer and the contractor, involving specific procedures and entities not relevant to the sub-contract. This made the arbitration clause inapplicable to the disputes in question.

Conclusion:
The court concluded that there was no arbitration agreement between the parties, as the arbitration clause from the main contract was not incorporated into the sub-contract. Consequently, the application for arbitration was rightly rejected by the High Court.

Additional Notes:
The court referenced several cases to support its interpretation, including *Atlas Export Industries v. Kotak & Co.* and *Groupe Chimique Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd.*, which dealt with the incorporation of arbitration clauses from standard terms and conditions of trade associations. These cases were distinguished from the present case, as they involved specific agreements to be bound by the standard terms, including arbitration clauses, unlike the general reference in the current sub-contract.

The judgment also highlighted the principle that arbitration clauses are agreements within agreements, requiring clear and specific incorporation into the contract to be enforceable.

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