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Judgment
K.B.K. Vasuki, J.—The First Defendant has come forward with this Application to refer the Suit for Arbitration in terms of Clause 23 of the
Development Agreement dated 27.3.2006. The parties herein are referred to as per their rank in the Suit.
The Defendants 1 & 2, who are the Applicants and 2nd Respondent herein are the owners of the suit property and they entered into joint
venture with the Plaintiff/First Respondent herein and the Terms and Conditions agreed to between the parties are reduced into a Joint
Development Agreement dated 27.3.2006. The dispute arose between the parties, in the course of carrying out the project, resulting in
Supplemental Agreement in respect of the same on 17.2.2009. Again misunderstanding and dispute arose between the parties resulting in
exchange of e-mails and legal notices, which led to the filing of the present Suit for recovery of amount and for enforcing performance of the
Agreement dated 27.3.2006 and Supplemental Agreement dated 17.2.2009 and for permanent injunction restraining the Defendants or their men
or agents or persons claiming through or under them from in any way interfering with the Plaintiffs possession and enjoyment of the suit property.
Pending Suit, the Plaintiff and the 2nd Defendant entered into memorandum of understanding on 8.9.2011 and he opted to withdraw himself from
the litigation and the litigation is continued by the Applicant/First Defendant, who has come forward with this Application, during 2011 for the relief
as stated above.
The Applicant/1st Defendant has sought to refer the Suit for Arbitration on the strength of Arbitration clause 23 of the Joint Agreement dated
27.3.2006 and specific clause of the Supplemental Agreement dated 17.2.2009. It is contended by the learned Senior Counsel for the
Applicant/First Defendant that any dispute arising between the owners and the developer from and out of the terms of this Agreement, as per the
terms of the Agreement dated 27.3.2006 which is duly incorporated in the Supplemental Agreement dated 17.2.2009 shall be resolved by
Arbitrator whose decision shall be binding and final on both parties, and in view of the Arbitration clause, the Civil Suit for the redressal of the
dispute if any, between the parties to Arbitration Agreement is not maintainable.
Whereas, the learned Counsel for the Respondent/Plaintiff would seriously oppose the relief sought for herein by denying the existence of any
Arbitration clause between the parties. It is argued by the learned Counsel for the Respondent/Plaintiff that the Arbitration clause contained in the
Agreement dated 27.3.2006 has been already exhausted by earlier talk of settlement and the same is deliberately not included in the Supplemental
Agreement, as such, there is no scope for further arbitration and no relief as sought for herein can be granted on the basis of earlier Arbitration
clause, which is already rescinded.
Heard the rival submissions made on both sides.
The facts remain undisputed are that there is an Arbitration clause in the Joint Development Agreement dated 27.3.2006 and the dispute arose
between the parties, in the course of carrying out the project and the same was settled through negotiation between the parties without intervention
of any Arbitrator, resulting in Supplemental Agreement dated 17.2.2009, having incorporated specific clause in respect of the dispute in question
and the additional clause incorporated in the Supplemental Agreement as clause 11 is to the effect that all other Terms and Conditions of the earlier
Agreement dated 27.3.2006 shall remain in force.
While according to the learned Counsel for the Applicant/First Defendant, the conjoint reading of Clause 23 of the Agreement dated 27.3.2006
and Clause 11 of the Supplemental Agreement dated 17.2.2009 would refer to incorporation of Arbitration clause to decide any dispute arising,
between the parties, out of the Agreement, the learned Counsel for the Respondent/Plaintiff would contend that the Arbitration Clause 23 under
Agreement dated 27.3.2006 is already exhausted as a result no specific Arbitration clause is introduced in the Supplemental Agreement dated
17.2.2009.
Thus, the short point that arises for consideration herein, is as to whether the Agreement Clause 23 in the earlier Agreement is incorporated in
the Supplemental Agreement dated 17.2.2009 or not.
It is not out of place to mention at this juncture, that the Agreement dated 17.2.2009 is only in continuation of earlier Agreement dated
27.3.2006 and is not a fresh and independent Agreement. The dispute arose between the parties in the course of carrying out the project, in
accordance with the terms and condition of Joint Agreement dated 27.3.2006 is only in respect of one of the issues relating to number of villas to
be allotted to the owners towards 60% share on account of shortage of land area and the negotiation held between the parties without any third
party Arbitrator is only in respect of that particular issue. The Supplemental Agreement came to be executed only in connection with the same
without touching upon other aspects covered in the first Agreement. The very nomenclature given to the 2nd Agreement (Supplemental
Agreement) speaks itself that it is in continuation of and is forming part of the main Agreement dated 27.3.2006.
Both the learned Counsel on record have submitted comparison charts regarding the clauses contained in both the Agreements dated
27.3.2006 and 17.2.2009 and the same would reveal that the parties entered into Supplemental Agreement based on the settlement arrived at in
respect of number of villas to be allotted to the owners and number of villas to be retained by the builders and there are some deletions, and
modification in respect of existing clauses and addition of new clauses. As per the Supplemental Agreement, default clause is introduced and time is
preponed for completion of the project from 17.9.2010 to 6.9.2009 and two new specifications are included. The Clauses 1 to 10 in
Supplemental Agreement are pertaining to deletions, additions and alterations. Whereas, Clause 11 of the Supplemental Agreement is general in
nature, in and under which parties agreed to have all other Terms and Conditions and specification of earlier Agreement incorporated in entirety in
the new Supplemental Agreement, and Arbitration clause survives for the purpose of resolving all disputes, different claims and questions arising
between the parties out of the Agreement or in any manner relating thereto.
The Supreme Court has in the judgment reported in M.R. Engineers and Contractors Pvt. Ltd. Vs. Som Datt Builders Ltd., , dealt with the
mode of incorporation of Arbitration clause contained in one document to be applicable to another document. For better appreciation Paras 7 to
11 & 13 of the Apex Court Judgment are extracted hereunder:
Section 7 of the Act defines ""Arbitration Agreement"". Sub-sections (1) & (5) of Section 7, relevant for our purpose, are extracted below:
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.
...
(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.
(emphasis supplied)
Having regard to Section 7(5) of the Act, even though the contract between the parties does not contain a provision for arbitration, an Arbitration
clause contained in an independent document will be imported and engrafted in the contract between the parties, by reference to such independent
document in the contract, if the reference is such as to make the Arbitration clause in such document, a part of the contract. 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: The reference in a contract to
a document containing an Arbitration clause constitutes an Arbitration Agreement if the contract is in writing."" 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.
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 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. We
will give a few instances of incorporation and mere reference to explain the position (illustrative and not exhaustive).
If a contract refers to a document and provides that the said document shall form part and parcel of the contract, or that all Terms and
Conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the
said document, or that the Terms and Conditions of the said document shall be incorporated into the contract, the Terms and Conditions of the
document in entirety will get bodily lifted and incorporated into the contract. When there is such incorporation of the Terms and Conditions of a
document, every term of such document (except to the extent it is inconsistent with any specific provision in the contract) will apply to the contract.
If the document so incorporated contains a provision for settlement of disputes by arbitration, the said Arbitration clause also will apply to the
contract.
On the other hand, where there is only a reference to a document in a contract in a particular context, the document will not get incorporated in
entirety into the contract. For example, if a contract provides that the specifications of the supplies will be as provided in an earlier contract or
another purchase order, then it will be necessary to look to that document only for the limited purpose of ascertainment of specifications of the
goods to be supplied. The referred document cannot be looked into for any other purpose, say price or payment of price. Similarly, if a contract
between X and Y provides that the terms of payment to Y will be as in the contract between X and Z, then only the terms of payment from the
contract between X and Z, will be read as part of the contract between X and Y. The other terms, say relating to quantity or delivery cannot be
looked into.
Sub-section (5) of Section 7 merely reiterates these well-settled Principles of Construction of Contracts. It makes it clear that where there is a
reference to a document in a contract, and the reference shows that the document was not intended to be incorporated in entirety, then the
reference will not make the Arbitration clause in the document, a part of the contract, unless there is a special reference to the Arbitration clause so
as to make it applicable.
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.
(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.
The facts of the present case if viewed in the light of the principle laid down by the Supreme Court in the judgment cited above would in my
considered view support the contention raised on the side of the First Defendant. The Clause 11 of the Supplemental Agreement to the effect that
all the other Terms and Conditions and specification of other document shall remain in force and this deed shall not affect the legality and
enforceability thereof, would amount to bodily lifting remaining Terms and Conditions of the document in entirety into the contract. If the document
so incorporated contains a provision for settlement of disputes by arbitration, the said Arbitration clause also will apply to the contract.
As such, this Court has no hesitation to hold that the denial of existence of Arbitration clause as contended on the side of the
Respondent/Plaintiff is contrary to the Agreement between the parties. The Plaintiff/Respondent as one of the parties to the Agreement, is bound
by the terms thereof, and cannot be permitted to wriggle out of the same.
Next aspect to be seen is as to whether the condition laid down u/s 8 of the Arbitration and Conciliation Act are duly satisfied herein. The
learned Counsel for the Applicant cited the following judgment of Supreme Court reported in The Branch Manager, Magma Leasing and Finance
Limited and Another Vs. Potluri Madhavilata and Another, wherein our Supreme Court has laid down the following conditions for invoking
Arbitration clauses:
(a) that there exists an Arbitration Agreement;
(b) that action has been brought to the Court by one party to the Arbitration Agreement against the other party;
(c) that the subject-matter of the Suit is same as the subject-matter of the Arbitration Agreement;
(d) that the other party before he submits his first statement of the substance of the dispute, moves the Court for referring the parties to arbitration;
and
(e) that along with the Application the other party tenders the original Arbitration Agreement or due certified copy thereof.
The conditions as stated above are undoubtedly applicable to the facts of the present case. In that event, this Court as observed by the
Supreme Court in para 18 of the Judgment is on fulfillment of the conditions of Section 8 which is more in the form of legislative command to the
Court, left with no option but to refer the parties for arbitration in terms of Clause 23 and Clause 11 of the Agreements respectively. In the result,
the Application is ordered as prayed for.