Reference in a contract to a document containing an arbitration clause must be clear and unambiguous

Cause Title : Kobelco Construction Equipment India Private Limited vs. Lara Mining & Anr., AP 181 of 2023, Calcutta High Court

Date of Judgment/Order : 11.08.2023

Corum : Hon’ble Justice Moushumi Bhattacharya

Citied: 

1. Duro Felguera, S.A. vs. Gangavaram Port Limited; (2017) 9 SCC 729
2. Inox Wind Limited vs. Thermocables Limited; (2018) 2 SCC 519
3. M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited; (2009) 7 SCC 696
4. Sea Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd. No. 2; 2006 EWHC 2530
5. Chloro Controls India Private Limited v Severn Trent Water Purification Inc. ; (2013) 1 SCC 641
6. Ameet Lalchand Shah vs Rishabh Enterprises; (2018) 15 SCC 678
7. Tantia Constructions Limited vs. Mather and Platt Pumps Limited in AP No. 72 of 2023

Background

The Arbitration Petitions have been filed under section 9 of The Arbitration and Conciliation Act, 1996 by the petitioner seeks an injunction on the respondent no 1 from dealing with or disposing of the assets under a Master Facility Agreement dated 19th January, 2020 and a Settlement Agreement dated 17th July, 2021.

The Petitioner submitted that the respondent no. 1 is bound by the Master Facility Agreement dated 19th January, 2020 executed between SREI Equipment Finance Limited and the respondent no. 1 with regard to the financial assistance given by SREI to the respondent no. 1 of Rs. 6,72,60,000/-. The Master Facility Agreement was thereafter assigned by SREI to the petitioner in satisfaction of SREI’s dues of Rs. 70,97,70,999/- to the petitioner. The assignment was made in the form of a “Settlement Agreement” executed between SREI and the petitioner on 17th July, 2021.

The Respondent raised the issue of maintainability of the application on the ground that the respondent no. 1 is not a party to the Settlement Agreement between the petitioner and SREI and that the petitioner cannot hence seek to invoke both the arbitration clauses contained in the Master Facility Agreement and the Settlement Agreement. That there is no privity of contract between the petitioner and the respondent no. 1 and thus there cannot be a composite reference and that the petitioner has only been given the collection rights in respect of the receivables and disputes that the Master Facility Agreement had not been assigned in favour of the petitioner. It is further argued that the arbitration clause has to be specifically incorporated which has not been done in the present case. Counsel submits that a general reference to the Master Facility Agreement is not sufficient to incorporate the arbitration clause under section 7(5) of the 1996 Act.

Judgment

The High Court observed that the matter involves two agreements to which SREI is the common party but is not a party to the present application. Both agreements have independent arbitration clauses. The court held that there is no arbitration agreement between the petitioner and the respondent no. 1 which can form the basis of a section 9 application. The petitioner therefore seeks to make out a case for a composite reference on the strength of the two agreements being interlinked by reason of the petitioner stepping into the shoes of SREI in terms of the security and receivables forming the substance of the Master Facility Agreement executed between SREI and the respondent no. 1.

The court said that Section 7(5) of the Act lays down the statutory position with regard to incorporation of an arbitration clause by reference. Section 7(5) intends to link the contract without the arbitration clause to the document containing the arbitration clause subject to the contract being in writing and the reference in the contract to the arbitration clause in the document makes the arbitration clause a part of the contract. The idea is to incorporate the arbitration clause in the “document” to the “contract” by reference so that the arbitration clause is incorporated in the contract and becomes part thereof.

The above presumes that the reference to the contract is clear and reflects the intention of the parties to be bound by the arbitration clause which is to be incorporated into the contract. The incorporation of the arbitration clause into the contract (which does not contain the arbitration clause) would also have to be appropriate to the disputes under the contract to which the arbitration clause is incorporated and not result in repugnancy to the terms of the contract.

On a meaningful reading of sections 7(5), 2(1)(h) and 9(1) of the Act, only a party to the arbitration agreement, which clause was originally contained in the arbitration agreement or incorporated into a second document, can exercise the right to interim measures. This is in view of the fact that section 9 pre-supposes an underlying arbitration agreement and a party to that “arbitration agreement” applying to the Court for interim reliefs.

The court observed that while the Master facility Agreement allows SREI to transfer all or any of its rights, benefits or obligations under this Agreement to any person without notice or permission from the Borrower, the question is whether the settlement agreement is a proper deed of assignment. 

The court agreeing with the Respondents held that it is not so.  First unlike what was envisaged through the Section 7(5), both the Master and Settlement agreements had separate arbitration clauses making them separate and distinct documents and precluding the possibility of reading the arbitration clause of the Master Agreement into the Settlement Agreement. Further, a careful reading of the Settlement Agreement executed between the petitioner and SREI on 17th July, 2021 makes it clear that SREI gave the petitioner only the collection rights with respect to the receivables. The Settlement Agreement does not provide for assignment of the Master Facility Agreement of 19th January, 2020 or incorporation of the arbitration clause in the Master Facility Agreement to the Settlement Agreement by reference or otherwise or at all. To repeat, there is no special reference indicating a mutual intention on the part of the petitioner, SREI and the respondent no. 1 to incorporate the arbitration clause from the Master Facility Agreement to the Settlement Agreement. A general reference to the Master Facility Agreement is not sufficient to incorporate the arbitration clause.