Recently, the Supreme Court stepped in to examine whether parties can be compelled to arbitrate even when a later agreement does not independently contain an arbitration clause. The dispute arose from a redevelopment arrangement involving Hirani Developers and members of a housing society, where the developer alleged that the Bombay High Court had taken an unduly narrow view of Section 7(5) of the Arbitration and Conciliation Act, 1996 by refusing to recognise an arbitration agreement incorporated through reference. The controversy ultimately led the Apex Court to closely scrutinise how far contractual incorporation clauses can bind parties to arbitration.
The controversy arose from a redevelopment project where the original Development Agreement between Hirani Developers and a housing society contained an arbitration clause under Clause 36. Subsequently, separate Permanent Alternate Accommodation Agreements were executed with individual society members, and though these later agreements did not contain a separate arbitration clause, Clause 14 stated that all terms and clauses of the earlier Development Agreement would remain binding on the parties. After disputes arose and some members approached the Consumer Commission, the developer invoked arbitration under Section 21 of the Arbitration Act.
However, the members opposed the move, arguing that no independent arbitration agreement existed between them and the developer. Accepting this contention, the High Court refused to appoint an arbitrator under Section 11 of the Arbitration Act, holding that the later agreements did not specifically incorporate the arbitration clause.
The Division Bench of Justice Sanjay Kumar and Justice K. Vinod Chandran observed that “Section 7 of the Arbitration Act is titled ‘Arbitration agreement’. Section 7(5) therein provides that the reference in a contract to a document containing an arbitration clause would constitute an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”
The Court explained that while referring to M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited, Section 7(5) of the Arbitration Act requires a conscious acceptance of the arbitration clause from another document by the parties as a part of their contract, before such an arbitration clause could be read to be a part of the contract between those parties. Furthermore, it was observed that the Arbitration Act does not contain any indication or guidelines as to the conditions to be fulfilled before reference to a document in a contract can be construed as a reference incorporating an arbitration clause contained in such document into the contract, and, therefore, in the absence of such statutory guidelines, the normal rules of construction of a contract would have to be followed.
The court noted that the instant case is not a case of mere reference to an earlier document containing an arbitration clause. The later Permanent Alternate Accommodation Agreements entered into by the appellant with the respondent members unequivocally recorded in Clause 14 thereof that all the terms and conditions of the Development Agreement shall be construed to form part of the said agreements and all clauses of the same shall be binding on the parties to those later agreements. There could be no clearer indication of the intention of the parties to incorporate and assimilate the Development Agreement in its entirety into the later Permanent Alternate Accommodation Agreements.
Consequently, while holding that the High Court had erred in its understanding of Section 7(5) of the Arbitration Act, the Apex Court set aside the impugned order, allowed the appeals, and appointed Advocate Vishal Kanade as the sole arbitrator to adjudicate the disputes between the parties.
Case Title: Hirani Developers Vs. Nehru Nagar Samruddhi CHS Ltd. and another Etc.
Coram: Hon'ble Mr. Justice Sanjay Kumar, Hon'ble Mr. Justice K Vinod Chandran
Case No.: SLP (C) Nos. 38407-38411 of 2025
Citation: 2026 Latest Caselaw 383 SC
Advocates for the Petitioners: Sr. Adv. Sameer Jayant Chitnis, AOR Suchitra Atul Chitale, Adv. Atul Chitale, Adv. Koninica Bose
Advocates for the Respondent: AOR Surbhi Kapoor, AOR Sujeeta Srivastava, Adv. Abhay Anil Anturkar, Adv. Dhruv Tank, Adv. Sarthak Mehrotra, Adv. Subhi Pastor, Adv. Uday Gautam, Adv. Aradhya Srivastava
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