by Aaditi & Satyam, Junior Editors at CBLT*
INTRODUCTION
Arbitration is a widely used method of Alternate Dispute Resolution (ADR), it is used to solve disputes outside of the traditional court system. Arbitration and Conciliation Act, 1996 (the Act) is the governing legislation of the Indian arbitration system. The act came into force on January 25th, 1996 and has seen amendments in 2015, 2019 and 2021. Limited court intervention is one of the key features of arbitration and courts can only intervene in specific instances such as appointing arbitrators (Section 11), interim measures (Section 9), and setting aside awards (Section 34). Arbitration presents several advantages and disadvantages, particularly relevant to its application under the Act.
Arbitration offers several benefits, including the autonomy to design procedures, ensuring confidentiality, and utilizing industry-specific expertise. It alleviates the judicial system by reducing court burdens and preserving business relationships due to its less adversarial nature. However, arbitration also has disadvantages. Awards are final with limited appeal grounds, which can be problematic if errors occur. The confidentiality can lead to a lack of transparency and public accountability. Arbitrators lack standardized training, leading to variability in expertise. Additionally, court challenges can delay the enforcement of awards, undermining the purpose of quicker resolution.
The case of NBCC (India) Ltd. v. Zillion Infraprojects Pvt. Ltd. addresses the enforceability of arbitration clauses within contractual agreements, clarifying the requirements for incorporating such clauses from referenced documents. NBCC (India) Limited, a public sector undertaking involved in infrastructure projects, and Zillion Infraprojects Pvt. Ltd. entered into a contract for the construction of a weir across the river Damodar. Disputes arose, leading Zillion Infraprojects to invoke arbitration as per the tender document. The Supreme Court's ruling emphasized the necessity for clear and explicit arbitration agreements to ensure their validity and enforceability, overturning the High Court's decision that had allowed the arbitration. This case highlights the importance of conscious acceptance and specific reference to arbitration clauses within contracts to avoid ambiguity and ensure enforceability.
2. FACTUAL BACKGROUND OF THE CASE
The case of NBCC (India) Ltd. vs. Zillion Infraprojects Pvt. Ltd. is significant as it clarifies the interpretation and incorporation of arbitration Clauses in contracts. NBCC (India) Limited (Formerly known as National Buildings Construction Corporation Ltd.), the appellant, is a public sector undertaking, engaged in the construction of infrastructure projects, who entered into a contract with Zillion Infraprojects Private Limited (Formerly known as Durha Constructions Pvt. Ltd.) for the construction of a weir across the river Damodar at Damodar Valley Corporation (DVC), Chandrapura Thermal Power Station (CTPS), Chandrapura, Jharkhand. Due to arising disputes in the project, Zillion Infraprojects issued a notice on March 6th, 2020, in terms of Clause 3.34 of Section III Volume II of the Tender Documents General Conditions of Contract (GCC), thereby invoking arbitration and further seeking the consent of the appellant for the appointment of a former Judge of a High Court, as Sole Arbitrator.
The appellant did not respond to the notice as mentioned earlier invoking arbitration, so the respondent filed an application at the High Court under Section 11(6) of the Arbitration Act. Section 11(6) states that where a party fails to act as required under an appointment procedure agreed upon by the parties, or the parties or the two appointed arbitrators fail to reach an agreement expected of them under that procedure, the Court (Supreme Court, High Court or any institution designated by such court) shall make the appointment or take necessary measures. The High Court allowed the Arbitration Petition and appointed a former Judge of the High Court, as the Sole Arbitrator, to adjudicate the dispute between the parties.
NBCC argued that the High Court erred in invoking its power under Section 11(6) of the Arbitration Act. A bare perusal of the agreement between the appellant and the respondent indicates that the primary contract was the tender document, which was referred to in the letter of Intent (“LOI”). The LOI (within Clause 2.0) stated that the conditions contained within the tender document shall apply mutatis mutandis i.e., with the necessary changes generally applicable and subject to minor adjustments.
This was the primary contention in favour of arbitration by Zillion Infraprojects Pvt. Ltd. Clause 3.34 of Section III Volume II of the Tender Documents (GCC) provides for a reference of the dispute to the sole arbitration of the Secretary, CEO of Damodar Valley Corporation, Kolkata-54 or to a person appointed by him for that purpose. NBCC (India) Ltd. contended that the High Court had erred since Clause 7.0 of the LOI clearly stated that the redressal of disputes shall only be through the civil courts. Hence, there was confusion between the two Clauses of the LOI, which conveyed contrasting ideas.
3. ANALYSIS AND REASONING OF THE COURT
Relying on the judgment of the Supreme Court in MR Engineers and Contractors Private Limited vs. Som Datt Builders, it was argued that unless the Letter of Intent (LOI) specifically includes an arbitration Clause, arbitration proceedings cannot be initiated under Section 7(5) of the Arbitration Act. The apex court accepted this argument and reiterated the essentials governing this section of the Act:
1. If a contract stipulates that its execution/performance will be as per another contract, the terms of the referred contract will apply only for execution, not the arbitration Clause, unless specifically mentioned.
2. Section 7(5) of the Arbitration Act requires a conscious acceptance by the parties of the arbitration Clause from another document for it to be considered part of their contract.
The core of the dispute was the interpretation and application of the arbitration Clause. NBCC contended that the arbitration Clause from the DVC's tender was applicable, whereas Zillion Infraprojects Pvt. Ltd. argued that the Clause was not incorporated into their contract. The Court stated that the present case involves a ‘two contract case’ as the respondent was bound by the terms and conditions under the tender and the LOI issued by Damodar Valley Corporation to the appellant and that it was prevailing over any other document executed by the appellant and the respondent. In "two contracts" cases, a reference is made to a secondary document, which is executed by at least one party different from the parties in the primary contract.
Typically, the terms to be incorporated are in a contract between various parties. This means that the terms of the secondary contract are brought into the primary contract, even though not all parties to the primary contract are signatories to the secondary document. On the other hand, in "one contract" cases, the reference is made to standard terms within the same contract. These standard terms are already included in the primary contract and are agreed upon by all parties involved, ensuring that the terms are directly applicable without needing an external document.
3. VERDICT AND ANALYSIS
The Supreme Court of India overturned the High Court's judgment in the case of NBCC (India) Limited v. Zillion Infraprojects Private Limited, ruling that no arbitration Clause existed between the two parties. The Court's decision was based on two main points. First, Clause 7 of the contract specifically stated that disputes would be resolved "only" through civil courts in Delhi. The use of the word "only" indicated that the parties intended to limit dispute resolution to the courts in Delhi, excluding arbitration. Second, the Court rejected Zillion's argument that Clause 7 merely changed the jurisdiction from Calcutta to Delhi without affecting the arbitration agreement in the DVC Contract.
The Supreme Court determined this case to be a "two contract case," meaning the terms of the tender and the Letter of Intent (LOI) issued by Damodar Valley Corporation to NBCC overrode any other agreements between NBCC and Zillion. The Supreme Court emphasized the need for clear and specific arbitration Clauses for disputes to be arbitrable. It also highlighted the principle of minimal judicial intervention in arbitration, respecting the contractual autonomy of the parties.
The verdict in the case given by the Supreme Court reiterated the technicalities and clarified the principle of conscious acceptance while invoking arbitration Clauses in a contract. The Apex court, in this landmark judgement, clearly held that for any party to invoke arbitration under any jurisdiction, there must be an aware acceptance and mutual agreement of the same. Two sections of the Act were scrutinised and discussed in great detail by the Court. The first is, Section 7 Sub-Clause (5) of the Act which is when parties enter into a contract making a general reference to another contract for either execution or performance, it would have the inevitable result or ipso facto to incorporate the arbitration Clause contained in that document.
In this case, the court held that the arbitration Clause from another contract can only be incorporated into the agreement when a specific reference to the arbitration Clause has been added. This particular Clause should show the intention behind incorporating an arbitration, Clause. Furthermore, this judgment will influence the judicial approach to arbitration agreements, likely leading to a stricter interpretation of Section 7(5). Courts will emphasize the need for explicit references to arbitration Clauses, ensuring that arbitration agreements are not implied or assumed based on general references. This ruling will likely lead to a more concise, straightforward and clear Clause for arbitration and the need for specificity. It also reaffirms a sense of reassurance in the parties that the judicial institutions respect the autonomy of the parties to decide the terms of their agreement, including the method and jurisdiction of dispute resolution. This ruling serves as a reminder for the parties drafting an arbitration Clause to emphasise precision and legal provision more. The second provision discussed in this case is Section 11 of the Act which showed that courts need to step in when the agreed method for choosing arbitrators fails, ensuring procedural issues don't block the arbitration process.
Based on these two sections, as well as relying on precedent judgements, the Supreme Court ruled in favour of the appellant, hence, delineating the enforceability of arbitration Clauses in contracts. In analyzing the Supreme Court’s decision in the case, several novel insights emerge. The Court's determination that general references to another contract are insufficient for incorporating an arbitration clause signifies a pivotal shift in arbitration jurisprudence. By mandating specific reference to the arbitration clause, the ruling addresses previous ambiguities where broad references could lead to disputes regarding enforceability. This distinction between single-contract and two-contract scenarios clarifies the necessity for explicit incorporation when multiple agreements involve different parties, thereby refining the principles of contract interpretation.
Moreover, the Court’s recognition of general references to standard form contracts—while consistent with industry practices—demonstrates a pragmatic approach to incorporating commonly accepted terms. This facilitates the integration of standardized arbitration provisions, streamlining the drafting process for such agreements. The Court's emphasis on the “conscious acceptance” standard reflects a more stringent approach to contract formation, aimed at preventing inadvertent arbitration commitments. This decision not only aligns with international best practices but also sets a precedent for clearer and more specific arbitration clauses, thereby enhancing their enforceability and potentially influencing arbitration standards on a global scale.
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