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TMI Blog2009 (7) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2. The Public Works Department, Government of Kerala, (in short `PW Department') entrusted the work of Four Laning and Strengthening of Alwaye - Vyttila and Aroor - Cherthala and Strengthening of Vyttila to Aroor Section of NH 47 - N2 amp; N3 packages which included the work of Construction of Project Directorate Building for National Highway Four Laning Project at Edapally, Cochin to the respondent. The said contract between PW Department and the respondent contained a provision for arbitration, as per clause 67.3 of the General Conditions of Contract. The relevant portion of the said clause is extracted below: Arbitration 67.3. Any dispute in respect of which : (a) the decision, if any, of the Engineer has not become final and binding pursuant to Sub-Clause 67.1, and (b) amicable settlement has not been reached within the period stated in Sub-Clause 67.2. shall be referred to the adjudication of a Committee of three arbitrators. The Committee shall be composed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the PW Department and requested the respondent to make a claim on the PW Department in that behalf; that the respondent accordingly made necessary claims in that behalf on the PW Department; that the said claims, as also several other claims of the respondent against the PW Department were referred to arbitration and the arbitrator made an award dated 18.8.1999. According to appellant, the Arbitrator awarded certain amounts in regard to its claims put through the respondent and in terms of the arrangement between the respondent and the appellant, the respondent is liable to pay to the appellant, eighty percent of the amounts awarded for such claims, that is Rs.37,55,893/-, along with Rs.1,55,807/- towards pre- reference interest upto 4.12.1996 and compensation at 18% per annum for non-payment of Rs.37,55,893/- from 5.12.1996. The appellant alleged that a sum of Rs.1,76,936/- was also due by the respondents towards unlawful deductions. The appellant therefore lodged a claim on the respondent by letter dated 5.7.2000, for payment of Rs.65,11,341/-. As the claim was not settled, the appellant sent a letter dated 6.12.2000 seeking reference of the disputes by arbitration. 5. As t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the contract. ; [emphasis supplied] Having regard to section 7(5) of the Act, even though the contract between the parties does not contain a provision for arbitration, an arbitration clause contained in an independent document will be imported and engrafted in the contract between the parties, by reference to such independent document in the contract, if the reference is such as to make the arbitration clause in such document, a part of the contract. The wording of Sec. 7(5) of the Act makes it clear that a mere reference to a document would not have the effect of making an arbitration clause from that document, a part of the contract. The reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document, into the contract. If the legislative intent was to import an arbitration clause from another document, merely on reference to such document in the contract, sub-section (5) would not contain the significant later part which reads : and the reference is such as to make that arbitration clause part of the contract , but would have stopped with the first part which reads : The reference in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of disputes by arbitration, the said arbitration clause also will apply to the contract. 10. On the other hand, where there is only a reference to a document in a contract in a particular context, the document will not get incorporated in entirety into the contract. For example if a contract provides that the specifications of the supplies will be as provided in an earlier contract or another purchase order, then it will be necessary to look to that document only for the limited purpose of ascertainment of specifications of the goods to be supplied. The referred document cannot be looked into for any other purpose, say price or payment of price. Similarly if a contract between X and Y provides that the terms of payment to Y will be as in the contract between X and Z, then only the terms of payment from the contract between X and Z, will be read as part of the contract between X and Y. The other terms, say relating to quantity or delivery cannot be looked into. 11. Sub-section (5) of Section 7 merely reiterates these well settled principles of construction of contracts. It makes it clear that where there is a reference to a document in a contract, and the reference shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setting out standard form terms and one contained in some other contract between different parties, judicial thinking seems to have favoured the approach of Sir John Megaw in Aughton, namely that general words of incorporation are not sufficient. Rather, particular reference to the arbitration clause needs to be made to comply with s. 6 of the Arbitration Act 1996, unless special circumstances exit [Para : 2.047] Reference to standard form terms. If the document sought to be incorporated is a standard form set of terms and conditions the courts are more likely to accept that general words of incorporation will suffice. This is because the parties can be expected to be more familiar with those standard terms including the arbitration clause [Para : 2.048] After referring to the view of Sir John Megaw, in Aughton Ltd. v. M.F. Kent Services Ltd. [1991 (57) BLR 1] that specific words were necessary to incorporate an arbitration clause and that the reference in a sub-contract to another contract's terms and conditions would not suffice to incorporate the arbitration clause into the sub-contract, followed in Barrett amp; Son (Brickwork) Ltd. v. Henry Boot Nanagement Ltd. [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to incorporate the arbitration clause into the contract, (iii) The arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract. (ii) When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause. (iii) Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also. (iv) Where the contract provides that the standard f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case relied upon by the appellant is a decision rendered by a designate of the Learned Chief Justice of India in Groupe Chimique Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd. - 2006 (5) SCC 275. In that case a purchase order placed by the respondent on the petitioner stated that all other terms and conditions are as per FAI terms. ( FAI Terms referred to the terms and conditions for sale and purchase of phosphoric acid of Fertilizer Association of India). Clause 15 of FAI terms provided for settlement of disputes by arbitration. Certain disputes having arisen, the petitioner appointed its arbitrator and called upon the respondent to appoint its arbitrator. When respondent failed to comply, the petitioner filed a petition under Section 11 of the Act for appointment of the second Arbitrator. In the counter to the petition under Sec. 11 of the Act, the respondent did not deny the fact that the purchase orders were placed with the petitioner nor denied the fact that the purchase orders were all placed subject to FAI terms and conditions, including clause 15 of FAI terms which provided for arbitration. This court held that the purchase orders placed by the respondents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-contract between the parties. We are fortified in this view, by the decision in Alimenta SA. v. National Agricultural Co-op. Marketing Federation of India Ltd. [1987 (1) SCC 615]. The NAFED - the respondent therein entered into two contracts with Alimenta S.A. for the supply of certain goods referred to HPS. Clause 11 of the first contract stipulated that other terms and conditions as per FOSFA- 20 contract terms . (FOSFA-20 being a standard form of contract of the Federation of Oils, Seeds and Fats Association Ltd. containing an Arbitration clause). Clause 9 of the second contract provided that all other terms and conditions for supply not specifically shown and covered hereinabove shall be as per previous contract signed between us for earlier supplies of HPS . The question before this court was whether the arbitration clause in FOSFA -20 was incorporated in the first contract by way of Clause 11 and in the second contract by virtue of Clause 9. The Court held that while the Arbitration clause was incorporated in the first contract, the same was not incorporated in the second contract. The following reasoning of the Court while dealing with the second contract is relevant f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n incorporated into the sub-contract by reference, we are of the view that the appellant could not have claimed the benefit of the arbitration clause. This is in view of the principle that the document to which a general reference is made, contains an arbitration clause whose provisions are clearly inapt or inapplicable with reference to the contract between the parties, it would be assumed or inferred that there was no intention to incorporate the arbitration clause from the referred document. In this case the wording of the arbitration clause in the main contract between the PW Department and contractor makes it clear that it cannot be applied to the sub-contract between the contractor and the sub-contractor. The arbitration clause in the main contract states that the disputes which are to be referred to the committee of three arbitrators under clause 67(3) are disputes in regard to which the decision of the Engineer (`Engineer' refers to person appointed by State of Kerala to act as Engineer for the purpose of the contract between PW Department and the respondent) has not become final and binding pursuant to sub-clause 67.1 or disputes in regard to which amicable settlement has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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