corporate laws = National Highway Authority of India -vs -M/s. T.K. Toll Road Pvt. Ltd. = since there was no arbitration agreement between the parties, the petition under Section 9 of the Act was not maintainable.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2439 OF 2018

(ARISING OUT OF SLP (CIVIL) NO. 29519 OF 2015)

M/S. ELITE ENGINEERING AND

CONSTRUCTION (HYD.) PRIVATE LIMITED

REP. BY ITS MANAGING DIRECTOR …..APPELLANT(S)

VERSUS

M/S. TECHTRANS CONSTRUCTION INDIA

PRIVATE LIMITED REP. BY ITS MANAGING

DIRECTOR …..RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

Leave granted.

2) National Highway Authority of India (NHAI) had entered into

agreement dated July 19, 2007 (hereinafter referred to as the

‘Concession Agreement’) whereby it had awarded a contract to

M/s. T.K. Toll Road Pvt. Ltd. (hereinafter referred to as the

‘Concessionaire’) for undertaking, inter alia, the design,

engineering, financing, procurement, construction, operation and

Civil Appeal No. 2439 of 2018 Page 1 of 18

(arising out of SLP(C) No. 29519 of 2015)

maintenance of the Project Highway on Build Operate and

Transfer (BOT) basis on the National Highway 67 connecting

Coimbatore and Nagapattinam. The Concessionaire vide EPC

agreement (Engineering, Procurement and Construction

Agreement) dated January 31, 2008 awarded the said work on a

fixed lump sum turnkey basis to M/s. Utility Energytech and

Engineers Private Limited (hereinafter referred to as the ‘EPC

Contractor’). EPC Contractor, in turn, executed a Construction

Agreement dated March 14, 2008 with the respondent herein

(M/s. Techtrans Construction India Pvt. Ltd.) to execute the works

as per terms and conditions entailed in that agreement. Clause 8

of that agreement permitted the respondent to sub-contract the

structural work. Pursuant thereto, the respondent floated a

tender for sub-contracting their work in which the appellant also

submitted its bid and was ultimately awarded the said work by the

respondent vide agreement dated July 29, 2009.

3) Some disputes arose between the appellant and the respondent

in connection with the execution of the said work and the

appellant vide its letter dated March 25, 2013 raised certain

claims against the respondent. The appellant also filed Original

Petition under Section 9 of the Arbitration and Conciliation Act,

1996 (hereinafter referred to as the ‘Act’) on the file of Principal

Civil Appeal No. 2439 of 2018 Page 2 of 18

(arising out of SLP(C) No. 29519 of 2015)

Judge, Karur. This petition was contested by the respondent who

in its reply denied all the allegations raised by the appellant and

also submitted that since there was no arbitration agreement

between the parties, the petition under Section 9 of the Act was

not maintainable. While this was pending, the appellant moved

application under Section 11(3) and (5) of the Act for appointment

of an arbitrator in the High Court of Judicature at Madras on

January 28, 2014. Notice in this petition was issued by the High

Court. In the meantime, on June 30, 2014, the Principal Judge,

Karur allowed the petition of the appellant under Section 9 of the

Act, but left open the issue of existence of arbitration agreement.

4) Insofar as the appellant’s petition under Section 11 of the Act is

concerned, it was contested by the respondent taking the

objection to the maintainability of the petition on the ground of

absence of any agreement. The High Court has vide impugned

orders dated September 18, 2015 dismissed the said petition of

the appellant upholding the contention of the respondent that

there is no arbitration agreement between the parties and,

therefore, remedy under the Act for appointment of arbitrator or

constitution of Arbitral Tribunal is not available.

5) It may be clarified at this juncture that Agreement dated July 29,

Civil Appeal No. 2439 of 2018 Page 3 of 18

(arising out of SLP(C) No. 29519 of 2015)

2009 entered into between the appellant and the respondent

does not contain any arbitration clause. There is no independent

arbitration agreement between the parties either. However, case

set up by the appellant was that this Agreement dated July 29,

2009 entered into between the parties, by implication,

incorporates the arbitration agreement that is contained in the

Agreement dated March 14, 2008 that was entered into between

the EPC Contractor and the respondent.

6) Indubitably, clause 45 of the Agreement dated March 14, 2008

between EPC Contractor and the respondent contains procedure

for resolution of disputes and sub-clause (3) thereof refers to

arbitration procedure. In case of any dispute, as per clause 45.1,

first attempt is for ‘amicable resolution’. Thereafter, under clause

45.2, process of ‘mediation’ is to be resorted to and if that also

fails then the ‘arbitration procedure’ is provided. Clause 45.3 and

clause 45.4 read as under:

“45.3.Arbitration Procedure:

Subject to the provisions of Article 45.1 and 45.2, any

dispute, which is not resolved by amicable resolution

between the parties or by a reference to mediation,

shall be finally settled by binding arbitration under the

Arbitration and Conciliation Act, 1996. The arbitration

shall be by a panel of three arbitrators, one to be

appointed by each Party and the third to be appointed

by the two arbitrators appointed by the Parties. The

Party requiring arbitration shall appoint an arbitrator in

Civil Appeal No. 2439 of 2018 Page 4 of 18

(arising out of SLP(C) No. 29519 of 2015)

writing, inform the other party about such appointment

and call upon the other party to appoint its arbitrator. If

within 15 days of receipt of such intimation the other

party fails to appoint its arbitrator, the Party seeking

appointment of arbitrator may take further steps in

accordance with Arbitration Act.

45.4. Place of Arbitration:

The place of arbitration shall be Mumbai for all

Disputes.”

7) According to the appellant, this clause gets incorporated in the

Agreement dated July 29, 2009 that was entered into between

the respondent and the appellant, by virtue of following clauses in

the said agreement:

“’2.Subcontractor hereby agrees, undertakes to execute

the said value of work, and is responsible for the

efficient and successful execution of the work and is to

be completed as per the contract period specified in the

contract document.

a……..

b……..

All the conditions and special conditions of contract,

specifications (general and additional clauses relating

to the works and quality specified in the relevant

agreement between the Construction Contractor and

the Employer are binding on the Subcontractor.”

Annexure-I specifying the ‘Terms and Conditions’ Annexed

thereto inter alia provides Clause – 9.10 as under:

“9.10. For items which are not mentioned in this

Agreement Clauses, terms and conditions of

Agreement between Contractor and EPC

Concessionaire will be applicable.”

Civil Appeal No. 2439 of 2018 Page 5 of 18

(arising out of SLP(C) No. 29519 of 2015)

8) It is, thus, argued by the learned counsel for the appellant that as

per the aforesaid clause, when the appellant had agreed and

undertaken to execute the work as per contract specified in the

contract document and the said clause also specifically provided

that all the special conditions of the contract, specifications etc.

relating to the works and qualities specified in the relevant

agreement between the construction contractor and the employer

are binding on the respondent, the clause relating to arbitration

agreement i.e. 45 entered into between EPC Contractor and the

respondent also became applicable by incorporation. It was

submitted that the aforesaid clause read with clause 9.10 of

Annexure 1 which categorically mentions that in respect of items

which are not mentioned in the Agreement clauses, terms and

conditions of the Agreement between the Contractor and EPC

Concessionaire will be applicable, would also lead to same result.

9) These very arguments were raised before the High Court. The

appellant had also referred to certain communications addressed

by it to the respondent before invoking legal remedy wherein it

has stated that the parties had agreed for settlement of disputes

in accordance with clause 45.3. The respondent, on the other

hand, had drawn attention of the High Court to paragraph 23 of

Civil Appeal No. 2439 of 2018 Page 6 of 18

(arising out of SLP(C) No. 29519 of 2015)

the petition filed by the appellant under Section 9 of the Act

wherein it had categorically stated that the appellant would be

constrained to initiate legal proceedings against the respondent

for recovery of amount by approaching the competent civil court.

The High Court, thus, opined that from the communications only,

it could not be said that parties had agreed for arbitration and, in

fact, the appellant in his petition filed under Section 9 of the Act

had professed ignorance of the agreement between the

respondent and the employer. As it had gone to the extent of

making an averment to the effect that ‘the petitioner is totally kept

in dark about the terms and conditions of the agreement till now’.

The High Court thereafter construed clauses 2 and 9.10 of the

Agreement that was entered into between the appellant and the

respondent and came to the conclusion that those clauses never

meant to incorporate arbitration agreement into the Agreement

dated July 29, 2009 executed between the parties. On this

aspect, discussion goes as follows:

“18. On a careful perusal of the pleadings and

documents as also submissions of the learned counsel

for the parties, more specifically the reading of the

clauses, this court is of the view that part of clause-2 of

the agreement dated 29.07.2009 extracted aforesaid

refers to only ”works and quality specified in the

relevant agreement between the construction

contractor and the employer”. All the conditions and

the sub-conditions of contract are binding on the sub

Civil Appeal No. 2439 of 2018 Page 7 of 18

(arising out of SLP(C) No. 29519 of 2015)

contractor/petitioner, but the unambiguous reference is

only to ”work and quality specified” without any refence

to the arbitration clause. It is not a case of only

absence of a reference to arbitration clause, but the

reference being specific to the ”work and quality

specified.” An expanded meaning cannot be given to

this Clause. It is in this context that Clause-9.10 of

Annexure-I specifying the terms and conditions has to

be read. Once again, it refers to ”Items” which are not

mentioned in the agreement clauses where conditions

of the earlier agreement would be applicable. Thus,

this would refers to the items to be used.

10) The High Court also drew distinction between the reference to the

another document and incorporation of another document in a

contract by reference, which has been explained by this Court in

M.R. Engineers and Contractors Private Limited v. Som Datt

Builders Ltd.1

and held that, in the instant case, there was only a

reference to another document with no intention to incorporate

the arbitration clause thereof in a contract between the parties.

11) Questioning the aforesaid approach of the High Court, learned

counsel for the appellant submitted that when the appellant was

required to execute the work on the terms and conditions

contained in the principal agreement, it was clear intention to

incorporate all the terms including clause 45.3. Additionally, he

referred to clause 8.7 of the agreement between the parties which

stipulates as under:

1 (2009) 7 SCC 696

Civil Appeal No. 2439 of 2018 Page 8 of 18

(arising out of SLP(C) No. 29519 of 2015)

“8.7 Other terms related to Termination of work will be

same as Agreement between EPC, Concessionaire and

Construction contractor.”

12) His submission was that when the terms related to termination of

work contained in the Agreement between EPC, Concessionaire

and the respondent were to govern their agreement as well, these

would include settlement of disputes on termination of work

through arbitration which was the term provided in the contract

between the employer and the respondent. Relying upon the

judgment in the case of Groupe Chimique Tunisien SA v.

Southern Petrochemicals Industries Corpn. Ltd.2

, he

submitted that mere fact that appellant had mentioned about filing

suit against the respondent in his petition under Section 9 of the

Act would not enure to the benefit of the respondent who said so

on account of mistaken understanding of law. Para 9 reads as

under:

“9. It is true that the petitioner had contended before the

Jordanian court that there was no arbitration agreement

between the parties. But the said contention was not

accepted and the suit filed by the petitioner has been

dismissed on the ground of want of jurisdiction.

Thereafter, on reconsidering the matter and taking legal

advice, with reference to the contentions of the

respondent, the petitioner has now proceeded on the

basis that an arbitration agreement exists between the

parties. If, on account of mistake or wrong

understanding of law, a party takes a particular stand

(that is, there is no arbitration agreement), he is not

2 (2006) 5 SCC 275

Civil Appeal No. 2439 of 2018 Page 9 of 18

(arising out of SLP(C) No. 29519 of 2015)

barred from changing his stand subsequently or

estopped from seeking arbitration. [See U.P. Rajkiya

Nirman Nigam Ltd. v. Indure (P) Ltd. [(1996) 2 SCC

667] where the contention based on estoppel was

negatived while considering a reserve (sic reverse)

situation [Ed.: Para 12] .]”

13) Mr. Ganguli, the learned senior counsel appearing for the

respondent, on the other hand, submitted that clause 2 of the

Agreement entered into between the appellant and the

respondent clearly evinced that there was only a qualified

incorporation of those terms and conditions of the contract

between the employer and the respondent which related to the

works and the quality. Insofar as clause 45 is concerned, there

was no conscious acceptance thereof between the parties and

that was the reason that even the respondent had no knowledge

about the said clause and, therefore, he did not mention so even

in his petition filed under Section 9 of the Act. He, therefore,

submitted that the High Court has rightly relied upon M.R.

Engineers and Contractors Private Limited case in dismissing

the petition of the petitioner. He also placed reliance upon the

judgments of this Court in Larsen & Toubro Limited v. Mohan

Lal Harbans Lal Bhayana3

and Sharma and Associates

Contractors Private Limited v. Progressive Constructions

3 (2015) 2 SCC 461

Civil Appeal No. 2439 of 2018 Page 10 of 18

(arising out of SLP(C) No. 29519 of 2015)

Limited4

.

14) After considering the respective submissions, we are inclined to

agree with the respondent and, therefore, do not find any fault

with the impugned judgment of the High Court.

15) In M.R. Engineers and Contractors Private Limited case, this

Court considered the true intent and scope of Section 7 of the Act

which deals with ‘arbitration agreement’. Relevant portion of

Section 7 reads as under:

“7. Arbitration agreement.—(1) In this Part, ‘arbitration

agreement’ means an agreement by the parties to

submit to arbitration all or certain disputes which have

arisen or which may arise between them in respect of a

defined legal relationship, whether contractual or not.

xxx xxx xxx

(5) The reference in a contract to a document containing

an arbitration clause constitutes an arbitration

agreement if the contract is in writing and the reference

is such as to make that arbitration clause part of the

contract.”

16) As per sub-section (5), an arbitration clause contained in an

independent document can also be imported and engrafted in the

contract between the parties, by reference to such independent

document in the contract, even if there is no specific provision for

arbitration. However, the Court noted that such a recourse can

4 (2017) 5 SCC 743

Civil Appeal No. 2439 of 2018 Page 11 of 18

(arising out of SLP(C) No. 29519 of 2015)

be adopted only ‘if the reference is such as to make the

arbitration clause in such document, a part of the contract.’ This

interpretation to sub-section (5) of Section 7 was elaborated in

the following manner:

“14. The wording of Section 7(5) of the Act makes it

clear that a mere reference to a document would not

have the effect of making an arbitration clause from that

document, a part of the contract. The reference to the

document in the contract should be such that shows the

intention to incorporate the arbitration clause contained

in the document, into the contract. If the legislative

intent was to import an arbitration clause from another

document, merely on reference to such document in

the contract, sub-section (5) would not contain the

significant later part which reads: “and the reference is

such as to make that arbitration clause part of the

contract”, but would have stopped with the first part

which reads:

“7. (5) The reference in a contract to a

document containing an arbitration clause

constitutes an arbitration agreement if the

contract is in writing….”

15. Section 7(5) therefore requires

a conscious acceptance of the arbitration clause from

another document, by the parties, as a part of their

contract, before such arbitration clause could be read

as a part of the contract between the parties. But the

Act does not contain any indication or guidelines as to

the conditions to be fulfilled before a reference to a

document in a contract can be construed as a

reference incorporating an arbitration clause contained

in such document into the contract. In the absence of

such statutory guidelines, the normal rules of

construction of contracts will have to be followed.

16. There is a difference between reference to another

document in a contract and incorporation of another

document in a contract, by reference. In the first case,

the parties intend to adopt only specific portions or part

of the referred document for the purposes of the

Civil Appeal No. 2439 of 2018 Page 12 of 18

(arising out of SLP(C) No. 29519 of 2015)

contract. In the second case, the parties intend to

incorporate the referred document in entirety, into the

contract. Therefore when there is a reference to a

document in a contract, the court has to consider

whether the reference to the document is with the

intention of incorporating the contents of that document

in entirety into the contract, or with the intention of

adopting or borrowing specific portions of the said

document for application to the contract.”

17) After some further discussion on this aspect with reference to the

existing case law as well as extracts from Russell on arbitration,

the Court summed up the position as under:

“24. The scope and intent of Section 7(5) of the Act may

therefore be summarised thus:

(i) An arbitration clause in another document, would get

incorporated into a contract by reference, if the

following conditions are fulfilled:

(1)the contract should contain a clear reference to the

documents containing arbitration clause,

(2)the reference to the other document should clearly

indicate an intention to incorporate the arbitration

clause into the contract,

(3)the arbitration clause should be appropriate, that is

capable of application in respect of disputes under

the contract and should not be repugnant to any term

of the contract.

(ii) When the parties enter into a contract, making a

general reference to another contract, such general

reference would not have the effect of incorporating the

arbitration clause from the referred document into the

contract between the parties. The arbitration clause

from another contract can be incorporated into the

contract (where such reference is made), only by a

specific reference to arbitration clause.

Civil Appeal No. 2439 of 2018 Page 13 of 18

(arising out of SLP(C) No. 29519 of 2015)

(iii) Where a contract between the parties provides that

the execution or performance of that contract shall be in

terms of another contract (which contains the terms and

conditions relating to performance and a provision for

settlement of disputes by arbitration), then, the terms of

the referred contract in regard to

execution/performance alone will apply, and not the

arbitration agreement in the referred contract, unless

there is special reference to the arbitration clause also.

(iv) Where the contract provides that the standard form

of terms and conditions of an independent trade or

professional institution (as for example the standard

terms and conditions of a trade association or

architects association) will bind them or apply to the

contract, such standard form of terms and conditions

including any provision for arbitration in such standard

terms and conditions, shall be deemed to be

incorporated by reference. Sometimes the contract may

also say that the parties are familiar with those terms

and conditions or that the parties have read and

understood the said terms and conditions.

(v) Where the contract between the parties

stipulates that the conditions of contract of one of

the parties to the contract shall form a part of their

contract (as for example the general conditions of

contract of the Government where the Government

is a party), the arbitration clause forming part of

such general conditions of contract will apply to the

contract between the parties.”

18) When we apply the aforesaid ratio, we find that the High Court

has correctly held that, in the instant case, it was not intended to

make the arbitration clause as a part of the contract between the

appellant and the respondent. Clause 2 and clause 9.10 are

given correct interpretation by the High Court and discussion in

this behalf has already been extracted above. By these clauses,

Civil Appeal No. 2439 of 2018 Page 14 of 18

(arising out of SLP(C) No. 29519 of 2015)

only those conditions and sub-conditions of the contract,

specification etc. which relate to the works and quality are

incorporated. Clause 9.10 only talks of ‘items’ which are not

mentioned in the contract and terms and conditions relating to the

execution of those items are to be taken from the main contracts.

Reference to clause 8.7 is also inconsequential. By this clause

only, those terms contained in the main agreement which relate to

‘terms of work’ are incorporated. Procedure relating to

‘termination’ is altogether different from resolution of disputes.

Dispute may arise even de hors the termination of the contract

and is an altogether different aspect, not necessarily connected

with the termination of work.

19) In Alimenta S.A. v. National Agricultural Coop. Mktg.

Federation of India Ltd.5

, the question was as to whether the

arbitration clause in Fosfa-20 was incorporated in the first

contract by way of clause 11 and in the second contract by virtue

of clause 9. The Court held that while the arbitration clause was

incorporated in the first contract, the same was not incorporated

in the second contract. How the matter has to be looked into, for

determining the same, was discussed in the following manner:

5 (1987) 1 SCC 615

Civil Appeal No. 2439 of 2018 Page 15 of 18

(arising out of SLP(C) No. 29519 of 2015)

“13. … There is a good deal of difference between

Clause 9 of this contract and Clause 11 of the first

contract. Clause 11 has been couched in general

words, but Clause 9 refers to all other terms and

conditions for supply. The High Court has taken the

view that by Clause 9 the terms and conditions of the

first contract which had bearing on the supply of HPS

were incorporated into the second contract, and

the term about arbitration not being incidental to supply

of goods, could not be held to have been lifted as well

from the first contract into the second one.

14. It is, however, contended on behalf of the appellant

that the High Court was wrong in its view that a term

about arbitration is not a term of supply of goods. We

do not think that the contention is sound. It has been

rightly pointed out by the High Court that the normal

incidents of terms and conditions of supply are those

which are connected with supply, such as, its mode and

process, time factor, inspection and approval, if any,

reliability for transit, incidental expenses, etc. We are

unable to accept the contention of the appellant that an

arbitration clause is a term of supply. There is no

proposition of law that when a contract is entered into

for supply of goods, the arbitration clause must form

part of such a contract. The parties may choose some

other method for the purpose of resolving any dispute

that may arise between them. But in such a contract the

incidents of supply generally form part of the terms and

conditions of the contract. The first contract includes the

terms and conditions of supply and as Clause 9 refers

to these terms and conditions of supply, it is difficult to

hold that the arbitration clause is also referred to and,

as such, incorporated into the second contract. When

the incorporation clause refers to certain particular

terms and conditions, only those terms and conditions

are incorporated and not the arbitration clause. In the

present case, Clause 9 specifically refers to the terms

and conditions of supply of the first contract and,

accordingly, only those terms and conditions are

incorporated into the second contract and not the

arbitration clause. The High Court has taken the correct

view in respect of the second contract also.”

(emphasis supplied)

Civil Appeal No. 2439 of 2018 Page 16 of 18

(arising out of SLP(C) No. 29519 of 2015)

20) This judgment is noted in M.R. Engineers and Contractors

Private Limited case as well and in the facts of M.R. Engineers

and Contractors Private Limited, the Court held that there was

no incorporation of arbitration clause. Following discussion

throws light to decide the issue in this case as well:

“37. In the present case the wording of the arbitration

clause in the main contract between the PW

Department and the contractor makes it clear that it

cannot be applied to the sub-contract between the

contractor and the sub-contractor. The arbitration

clause in the main contract states that the disputes

which are to be referred to the committee of three

arbitrators under Clause 67.3 are disputes in regard to

which the decision of the Engineer (“Engineer” refers to

person appointed by the State of Kerala to act as

Engineer for the purpose of the contract between the

PW Department and the respondent) has not become

final and binding pursuant to Clause 67.1 or disputes in

regard to which amicable settlement has not been

reached between the State of Kerala and the

respondent within the period stated in Clause 67.2.

Obviously neither Clause 67.1 nor 67.2 will apply as the

question of “Engineer” issuing any decision in a dispute

between the contractor and the sub-contractor, or any

negotiations being held with the Engineer in regard to

the disputes between the contractor and the subcontractor

does not arise. The position would have

been quite different if the arbitration clause had

used the words “all disputes arising between the

parties” or “all disputes arising under this

contract”. Secondly, the arbitration clause

contemplates a committee of three arbitrators, one

each to be appointed by the State of Kerala and the

respondent and the third (Chairman) to be

nominated by the Director General, Road

Development, Ministry of Surface Transport, Roads

Wing, Government of India. There is no question of

such nomination in the case of a dispute between

the contractor and the sub-contractor.”

Civil Appeal No. 2439 of 2018 Page 17 of 18

(arising out of SLP(C) No. 29519 of 2015)

21) In view of the aforesaid, the appeal stands dismissed.

………………………………………J.

(A.K. SIKRI)

………………………………………J.

(ASHOK BHUSHAN)

NEW DELHI;

FEBRUARY 23, 2018.

Civil Appeal No. 2439 of 2018 Page 18 of 18

(arising out of SLP(C) No. 29519 of 2015)