Court’s decision
The Delhi High Court dismissed a commercial appeal under Section 37 of the Arbitration and Conciliation Act, affirming the Commercial Court’s refusal to refer a recovery suit to arbitration. The Court held that a mere back-to-back work arrangement or general reference to another contract’s terms does not amount to incorporation of an arbitration clause, particularly where the party sought to be bound is not a signatory and has never expressly consented to arbitration. Emphasising the statutory requirement of consensus ad idem, the Court ruled that disputes between a contractor and a subcontractor cannot be forced into arbitration based on an arbitration clause contained in a separate contract with a third party .
Facts
The dispute arose out of execution of structural fabrication and erection works at an industrial project in West Bengal. The appellant, a partnership firm engaged in fabrication and erection works, had received a work order from a third-party company for the project. Subsequently, the respondent company was engaged by the appellant as a subcontractor through email communications to execute certain on-site activities forming part of the larger work.
The respondent completed the works and raised invoices totalling approximately ₹72.47 lakhs, out of which about ₹44.77 lakhs were paid. The balance amount of around ₹29.82 lakhs remained unpaid. After issuing a legal notice and receiving no payment, the respondent instituted a commercial suit seeking recovery of the outstanding dues along with interest.
In the suit, the appellant filed an application under Section 8 of the Arbitration and Conciliation Act, seeking reference of the dispute to arbitration. The appellant relied on an arbitration clause contained in the work order between itself and the third-party project owner, contending that the subcontract with the respondent was on a “back-to-back” basis and therefore governed by the same terms and conditions, including arbitration. The Commercial Court rejected this application, leading to the present appeal.
Issues
The principal issue before the High Court was whether an arbitration clause contained in a contract between the appellant and a third party could be incorporated by reference into a subcontracting arrangement with the respondent, in the absence of any signed agreement or specific reference to arbitration between the appellant and the respondent. The Court also examined whether general references to “terms and conditions” or back-to-back execution were sufficient to meet the statutory threshold under Section 7 of the Arbitration and Conciliation Act.
Petitioner’s arguments
The appellant argued that the subcontract was expressly executed on a back-to-back basis with the main contract, and that emails exchanged between the parties showed clear understanding that the respondent was working in accordance with the main contractor’s terms and conditions. Reliance was placed on communications where the respondent allegedly acknowledged that it was executing work as per the project owner’s terms. The appellant contended that once performance was accepted on such terms, the arbitration clause stood incorporated by reference.
The appellant relied on judicial precedents to argue that arbitration clauses can be incorporated into later contracts by reference, even if the clause is not reproduced verbatim, provided the intention of the parties is clear.
Respondent’s arguments
The respondent opposed the appeal, contending that there was no privity of contract between it and the project owner, and that it had never agreed to arbitrate disputes with the appellant. It was argued that there was no signed subcontract, no document expressly incorporating an arbitration clause, and no material demonstrating conscious acceptance of arbitration as a dispute resolution mechanism.
The respondent further argued that the appellant failed to comply with Section 8(2) of the Act, as no original or duly certified arbitration agreement between the parties was produced. It was also contended that the plea of arbitration was an afterthought, raised only after the recovery suit was filed, since no reference to arbitration was made in earlier legal correspondence.
Analysis of the law
The High Court analysed Section 7(5) of the Arbitration and Conciliation Act, which permits incorporation of an arbitration clause from another document only where the reference clearly shows an intention to incorporate the arbitration clause itself. The Court reiterated that arbitration is founded on consent, and such consent cannot be inferred lightly or imposed by implication.
The Court distinguished between general reference to another contract and specific incorporation of an arbitration clause. While the former may import performance-related terms, it does not automatically import the dispute resolution mechanism. The statutory scheme requires clarity and certainty, particularly because arbitration ousts the jurisdiction of civil courts.
Precedent analysis
Relying heavily on Supreme Court jurisprudence, including principles laid down in cases interpreting Section 7(5), the Court reiterated that arbitration clauses from another contract are incorporated only where there is a specific reference to the clause or where standard form terms are expressly adopted. The Court distinguished precedents where arbitration was upheld on the ground that those cases involved either a single composite contract or express acceptance of standard terms containing arbitration.
Applying these principles, the Court held that the present case was a classic “two-contract” situation, where an arbitration clause in the main contract could not be extended to a subcontractor who was a complete outsider to that agreement.
Court’s reasoning
The Court found that the emails relied upon by the appellant merely indicated that the respondent was executing work linked to the main project. They did not amount to an unambiguous acceptance of the arbitration clause contained in the appellant’s contract with the project owner. There was no document showing that the respondent had agreed to resolve disputes through arbitration, nor was there any specific reference to arbitration in the communications between the parties.
The Court further noted that arbitration requires clear consensus ad idem, and such consensus cannot be presumed from vague or general references. Allowing arbitration in such circumstances would amount to compelling a party to give up its right to approach civil courts without its consent, which is impermissible in law. The Commercial Court was therefore correct in rejecting the Section 8 application.
Conclusion
The Delhi High Court dismissed the appeal and upheld the Commercial Court’s order refusing reference to arbitration. The recovery suit was permitted to proceed in accordance with law. The Court clarified that in the absence of an express arbitration agreement or specific incorporation by reference, disputes between a contractor and subcontractor cannot be forced into arbitration merely because the main contract contains an arbitration clause .
Implications
This judgment reinforces a strict, consent-based approach to arbitration, particularly in commercial and construction disputes involving multilayered contractual arrangements. It serves as a caution to contractors that back-to-back arrangements must clearly and expressly incorporate arbitration clauses if disputes are intended to be resolved outside courts. For subcontractors, the ruling safeguards access to civil remedies unless arbitration is unequivocally agreed upon.
Case law references
- NBCC (India) Limited v. Zillion Infraprojects Pvt. Ltd.
Held that general reference to another contract does not incorporate its arbitration clause without specific intention. - M.R. Engineers & Contractors v. Som Datt Builders
Laid down conditions for incorporation of arbitration clauses by reference. - Inox Wind Ltd. v. Thermocables Ltd.
Distinguished cases involving standard form contracts and express acceptance.
FAQs
1. Does a back-to-back subcontract automatically import an arbitration clause?
No. Without specific reference or express consent, arbitration clauses are not incorporated.
2. Can a non-signatory be forced into arbitration?
Only where there is clear evidence of consent or statutory exceptions; mere reference to another contract is insufficient.
3. What is required under Section 7(5) of the Arbitration Act?
A clear reference showing intention to incorporate the arbitration clause from another document.
