Incorporation by Reference: Key Takeaways from the NBCC vs Zillion Infraprojects Judgment

Citation Codes: 2024 INSC 218

Date of Judgment: 19 March 2024

Court: Supreme Court of India  

Coram: Justice BR Gavai & Justice Sandeep Mehta

Link to the Judgement

Introduction

In an era where arbitration clauses have become boilerplate in most contracts, the Supreme Court of India, in its judgement of NBCC (India) Ltd vs Zillion Infraprojects Pvt Ltd. have further explored the breadth of the arbitration clauses and the intention of the parties. The Supreme Court of India in its judgment, delivered on 19 March 2024, not only examined the interpretation of a contractual language but also highlighted the doctrine of incorporation by reference. The doctrine of incorporation by reference allows terms from one document to be incorporated into another by reference.

Failure to clearly incorporate terms by reference can lead to ambiguity and unintended legal consequences. Therefore, this judgement serves as a critical reminder about the importance of precision drafting, particularly in relation to dispute resolution clauses.

Factual Background

NBCC (India) Limited (“Appellant”) issued an invitation for tender on 3 November 2006 in relation to the construction of power plants and infrastructure projects. M/s Zillion Infraprojects Pvt. Ltd. (hereinafter “Respondent”)submitted its bid, whereupon successfully meeting the tender criteria, the Respondent was awarded the contract on 4 December 2006 for Construction of Structures across river Damodar, Jharkhand for a consideration of Rs. 19,08,46,612/-. The contract contained the general conditions, special conditions, bill of quantity etc. (“Tender documents”).

Over time, following several disagreements, the Respondent issued a notice on 6 March 2020 invoking arbitration under Clause 3.34 of Additional Terms & Conditions of Contract in tender documents. Since the notice remained unanswered by the Appellant, the Respondent approached the Delhi High Court under Section 11(6) of the Arbitration & Conciliation Act, 1996 (“The Arbitration Act”). The Delhi High Court pronounced its decision on 9 April 2021, confirming the appointment of a former Judge of the Delhi High Court as the Sole Arbitrator to resolve the parties’ dispute.  

Issue

Whether an arbitration clause contained in the tender documents is incorporated in the Letter of Intent (“LOI”) where the LOI generally refers to the tender documents without it explicitly mentioning the arbitration clause of the tender documents.

Appellant’s Position

The Appellant argued that the Delhi High Court erred by exercising its power under Section 11(6) of the Arbitration Act since the arbitration clause was not applicable. Reliance was placed on Clause 2.0 of LOI stipulating that the terms of the tender issued by Damodar Valley Corporation to the Appellant, were only applicable where they have not been expressly altered by the Appellant.  Further, clause 7.0 of the LOI particularly provided for any disputes to be resolved exclusively and only through the civil courts in Delhi. Thus, the Appellant contended that this suggests that arbitration was not intended by the parties.

The Appellant argued that merely referencing the Tender Documents did not formally incorporate the arbitration clause into the LOI. Reliance was placed on the decision of Supreme Court in M.R. Engineers and Contractors Pvt. Ltd. v Som Datt Builders Ltd., where it was held that a general reference to another contract does not incorporate its arbitration clause. Incorporation requires specific reference to the arbitration clause. [¶12].

Respondent’s Position

The Respondent’s position, on the other hand, was that arbitration was incorporated sufficiently for them to seek its enforcement.  

In respect of the incorporation of the arbitration clause, the Respondent argued that clause 2.0 of the LOI specifically referenced the terms of the tender, which in turn contained an arbitration clause. Therefore, this reference must be considered as effectively incorporating the arbitration clause into the LOI. Further, the Respondent emphasised that the parties intended to resolve any potential disputes through arbitration, which is evident from the tender documents that clearly outlined the process of dispute resolution.

While the Respondent acknowledged that clause 3.34 of the Additional Terms and Conditions of Contract provided the jurisdiction to the City of Kolkata, the LOI changed the jurisdiction to the civil courts in Delhi. However, the Respondent argued that the Delhi High Court appropriately considered this contradiction and produced its decision.

Decision and Reasoning

After considering the submissions of both parties, the Supreme Court of India ruled in favour of the Appellant and set aside the orders made by the Delhi High Court allowing the arbitration application.

In arriving at this decision, the Supreme Court reiterated the principle established in the case of M.R. Engineers and Contractors Pvt. Ltd. v Som Datt Builders Ltd., that for an arbitration clause stipulated in a separate contract to be considered a part of the contract, there must be specific and clear reference to arbitration clause. In this case, the LOI and the tender document represented a two-contract scenario.

The Supreme Court highlighted that the inclusion of “only through civil courts having jurisdiction of Delhi alone” for dispute resolution in Clause 7.0 of the LOI indicated the intention of the parties to exclude arbitration as a dispute resolution mechanism, noting particularly that the use of the word “only” to reference the jurisdiction further evidenced the unequivocal nature of the parties’ intention.

The Supreme Court ruled that general references do not automatically incorporate an arbitration clause. Relying on section 7(5) of the Arbitration Act, the Supreme Court stated that an arbitration agreement can be established through a specific written reference to an arbitration clause contained in another document. A general reference to a document without explicitly referencing the arbitration clause is insufficient for the incorporation of the arbitration clause.

Thus, the Supreme Court concluded that the absence of a specific reference to the arbitration clause, combined with the explicit reference to civil court jurisdiction, indicated the intention of the parties to resolve their disputes through litigation instead of arbitration.

Conclusion

The Supreme Court of India’s decision in this matter underscores the importance of clarity and specificity in contracts, particularly in relation to the dispute resolution mechanism. The Court quashed the Delhi High Court’s orders and clarified that mere general references to another document do not sufficiently incorporate arbitration clauses where the intention is not explicit. This decision is a crucial reminder for parties entering into contracts to consider their positions in the unfortunate event of disputes and clearly draft clauses to this effect in their contracts.

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