Source: Supreme Court

Why in News?

Recently, a bench of Justices B R Gavai and Sandeep Mehta held that arbitration clause to refer dispute to arbitration must be mentioned in the main contract.

• The Supreme Court held this in the case of NBCC (India) Limited v. Zillion Infra Projects PVT. LTD.

What was the Background of NBCC (India) Limited v. Zillion Infra Projects PVT. LTD Case?

• NBCC (India) Limited, formerly known as National Buildings Construction Corporation Ltd., is a Public Limited Company and a Government of India undertaking engaged in construction projects.
• Zillion Infraprojects Pvt. Ltd., formerly known as Durha Constructions Pvt. Ltd., is a Private Limited Company operating in the construction and infrastructure sector.
• NBCC issued an invitation for tender for the construction of a Weir across river Damodar at DVC, CTPS, Chandrapura, Dist – Bokaro, Jharkhand – Package “A”.
• Zillion Infraprojects Pvt. Ltd. submitted its bid and was awarded the contract for the construction of the Weir by NBCC.
• Disputes arose between NBCC and Zillion Infraprojects Pvt. Ltd., leading to Zillion invoking arbitration.
• NBCC did not respond to Zillion's notice invoking arbitration, prompting Zillion to file an application under Section 11(6) of the Arbitration Act in the High Court.
• The High Court allowed the application, appointing a former Judge of the High Court as the Sole Arbitrator.
• NBCC appealed against the High Court's decision, challenging both the interim and final orders.

What were the Court’s Observations?

• The Court examined Section 7(5) of the A&C Act and reiterated principles established in M.R. Engineers case regarding incorporation of arbitration clauses.
• It noted that Clause 7.0 of the L.O.I. specifically stated that disputes must be resolved through civil courts in Delhi, indicating the parties' intention.
• The Court concluded that the present case was a reference case, not an incorporation case, and upheld NBCC's argument.
• The High Court's orders were quashed, and the appeals were allowed with no costs awarded.

What are the Landmark Judgments on Arbitration Clause in Contract?

• M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009):
  • In this case, the Supreme Court held that for an arbitration clause in one document to be incorporated into another contract by reference, specific conditions must be met.
  • It clarified that a general reference to another contract would not automatically incorporate the arbitration clause unless there is a specific mention.
  • The Court laid down criteria for incorporation and emphasized the importance of clear intention between parties.
• Duro Felguera, S.A. v. Gangavaram Port Limited (2017):
  • The Supreme Court, in this case, reiterated the principles established in M.R. Engineers case regarding the incorporation of arbitration clauses.
  • It emphasized the need for specific reference to arbitration clauses for their incorporation into a contract by reference.
• Elite Engineering and Construction (Hyderabad) Private Limited v. Techtrans Construction India Private Limited (2018):
  • Following the precedent set in M.R. Engineers case, the Supreme Court upheld the principle that a general reference to another contract would not suffice for the incorporation of an arbitration clause.
  • It reiterated that there must be a specific mention or reference to the arbitration clause for it to be incorporated into the contract.
• Inox Wind Limited vs Thermocables Limited (2018):
  • In this case, the Supreme Court distinguished from the principles laid down in M.R. Engineers case.
  • It held that a general reference to a standard form of contract, along with those of trade associations and professional bodies, would be sufficient to incorporate the arbitration clause.
  • However, the Court stressed the importance of examining the specific circumstances of each case to determine the applicability of arbitration clauses.