HC sheds light on the test of 'incorporation by reference' in an arbitration clause, Read Judgment

In a recent ruling, the Calcutta High Court determined whether references to arbitration in a contractual agreement were explicit and unambiguous enough to incorporate the arbitration clauses. The Court emphasized that the parties' intention to incorporate the arbitration clause was evident in their contractual agreement, thereby binding them to arbitration for dispute resolution.

• The first petition sought the appointment of a Sole Arbitrator to replace an arbitrator whose mandate had been terminated by the Commercial Court at Rajarhat on September 26, 2022. The petitioner requested that arbitration proceedings in this case to continue from the point where the previous arbitrator left off.
• In the second petition, the petitioner sought the fresh appointment of a Sole Arbitrator to address disputes that had arisen between the parties after the initiation of arbitration in the first petition. These disputes were primarily related to claims raised by the petitioner for services rendered under a Notice Inviting Tender (NIT) dated April 19, 2014, issued by the respondent, Bharat Heavy Electricals Limited (BHEL), along with the respondent's Letter of Intent (LOI) dated August 21, 2014, and the Work Order issued by the respondent to the petitioner on November 17, 2014.

• Petitioner's Arguments: The petitioner argued that the Contract Agreement dated October 15, 2015, properly incorporated the arbitration clauses by reference, and thus, the disputes were subject to arbitration. They contended that the Contract Agreement was sufficiently stamped and referred to the NIT and Work Order, which contained the arbitration clauses. The petitioner sought the appointment of a single arbitrator for both AP 444/2023 and AP 449/2023.
• Respondent's Arguments: The respondent raised two main objections. First, they claimed that the Contract Agreement did not adequately incorporate the arbitration clause by reference. BHEL argued that their tender contracts were not standard form, and thus, specific reference to the arbitration clause was necessary. Second, they argued that the arbitration agreement lacked sufficient stamping under the Indian Stamp Act, 1899, as certain documents, such as the NIT and Work Order, were not properly stamped.

Incorporation by Reference: The High Court considered the legal framework for incorporation by reference, particularly under Section 7 of The Arbitration and Conciliation Act, 1996 (The Act). It noted that Section 7(5) of the Act requires that the later contract must refer to the document containing an arbitration clause, incorporating it as part of the contract. The Court emphasized the importance of the parties' intentions to incorporate the arbitration clause in the later contract, as indicated in the Supreme Court's position in M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited^[1].

Stamping and Incorporation: Regarding the stamping issue, the Court examined Section 4 and proviso (c) of Section 35 of the Indian Stamp Act. These provisions require instruments to be sufficiently stamped for admissibility in evidence. The Court noted that proviso (c) to Section 35, similar to Section 7(5) of the Act, saves duly stamped agreements even when other related documents might be unstamped.

The Court rejected BHEL's objections. It found that the Contract Agreement properly incorporated the arbitration clauses by reference from the NIT and Work Order. Additionally, the Court ruled that the Contract Agreement was sufficiently stamped. Consequently, it appointed a Sole Arbitrator, former Chief Justice S. Muralidhar, to decide the disputes in both arbitration petitions, thereby avoiding potential conflicting decisions and resource wastage.