1

Reportable IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4150 OF 2009 (Arising out of SLP [C] No.11117 of 2006)

M.R. Engineers & Contractors Pvt. Ltd. … Appellant

Vs.

Som Datt Builders Ltd. ... Respondent

J U D G M E N T

R.V. RAVEENDRAN, J.

Leave  granted.  Heard  learned  counsel  for  both parties.  The matter  

relates to interpretation of sub-section (5) of section 7 of Arbitration and  

Conciliation Act, 1996 ('Act' for short) and the issue involved is whether an  

arbitration clause contained in a main contract,  would stand incorporated by  

reference, in a sub-contract, where the sub-contract provided that it “shall be  

carried out on the terms and conditions as applicable to the main contract.”

2. The Public Works Department, Government of Kerala, (in short ‘PW  

Department’)  entrusted  the  work  of  “Four  Laning  and  Strengthening  of  

Alwaye – Vyttila  and Aroor – Cherthala and Strengthening of Vyttila  to

2

Aroor Section of NH 47 – N2 & N3 packages” which included the work of  

“Construction of Project  Directorate Building for National Highway Four  

Laning Project  at  Edapally,  Cochin” to the respondent.  The said contract  

between  PW  Department  and  the  respondent  contained  a  provision  for  

arbitration, as per clause 67.3 of the General Conditions of Contract. The  

relevant portion of the said clause is extracted below:  

“Arbitration 67.3.  Any dispute in respect of which :  

(a) the decision, if any, of the Engineer has not become final and  binding pursuant to Sub-Clause 67.1, and  

(b) amicable  settlement  has  not  been reached within  the  period  stated in Sub-Clause 67.2.  

shall  be  referred  to  the  adjudication  of  a  Committee  of  three  arbitrators. The Committee shall be composed of one arbitrator to  be  nominated  by  the  Employer,  one  to  be  nominated  by  the  Contractor  and  the  third  who  will  act  as  the  Chairman  of  the  Committee, but not as umpire, to be nominated by the Director –  General  (Road  Development),  Ministry  of  Surface  Transport  (Roads Wing); Government of India. If either of the parties abstain  or fail to appoint his arbitrator, within sixty days after receipt of  notice for the appointment of such arbitrator,  then the Director- General  (Road  Development),  Ministry  of  Surface  Transport,  Government  of India,  himself shall  appoint  such arbitrator(s).  A  certified copy of the appointment  made by the Director-General  (Road  Development),  Ministry  of  Surface  Transport,  Govt.  of  India, shall be furnished to both parties.”  

x x x x x x x x x x

3. The  appellant  is  a  sub-contractor  of  the  respondent.  Respondent  

entrusted a part of the work entrusted to it by the PW Department namely  

“construction  of  Project  Directorate  building”  to  the  appellant  under  its

3

work order  dated  4.5.1994.  The  relevant  portions  of  the  work  order  are  

extracted below:  

“With reference to your offer and subsequent discussions, we are  pleased  to  accept  your  offer  for  the  construction  of  the  office  building  at  the  unit,  firm and fixed  price  of  Rs.3150/-  (Rupees  Three Thousand One Hundred Fifty Only) per square metre. The  construction shall  be carried out as per the tender specifications  and drawings issued for construction by the client.

The  square  metre  rate  includes  cost  of  all  materials,  labour,  equivalent etc., required for the completion of building work but  excludes the furniture required for the same. No escalation shall be  payable on the above contracted price. The work shall be carried  out as per the drawings furnished by the Department.  This sub- contract shall be carried out on the terms and conditions as  applicable to main contract unless otherwise mentioned in this  order letter.

In case there are any change in the foundation design from the  tender drawing, suitable variation claim shall be submitted to the  client by us and the amount approved and paid shall be payable to  you after deducting twenty percent amount.”

x x x x x x x x x x The approximate cost of this order comes to Rs.33,07,500/-

(emphasis supplied).    4. The appellant alleges that it informed the respondent that it executed  

certain extra items and excess quantities of agreed items on the instructions  

of the PW Department and requested the respondent to make a claim on the  

PW  Department  in  that  behalf;  that  the  respondent  accordingly  made  

necessary claims in that behalf on the PW Department; that the said claims,  

as also several other claims of the respondent against the PW Department  

were  referred  to  arbitration  and  the  arbitrator  made  an  award  dated

4

18.8.1999. According to appellant, the Arbitrator awarded certain amounts  

in  regard  to  its  claims  put  through  the  respondent  and  in  terms  of  the  

arrangement  between the  respondent  and the  appellant,  the  respondent  is  

liable to pay to the appellant,  eighty percent  of the amounts awarded for  

such claims, that is Rs.37,55,893/-, along with Rs.1,55,807/- towards pre-

reference interest upto 4.12.1996 and compensation at 18% per annum for  

non-payment of Rs.37,55,893/- from 5.12.1996. The appellant alleged that a  

sum of  Rs.1,76,936/-  was  also  due by  the  respondents  towards  unlawful  

deductions.  The appellant  therefore  lodged a  claim on the respondent  by  

letter dated 5.7.2000, for payment of Rs.65,11,341/-. As the claim was not  

settled, the appellant sent a letter dated 6.12.2000 seeking reference of the  

disputes by arbitration.  

5. As the respondent failed to comply, the appellant filed an application  

under section 11 of the Act.  According to the appellant clause 67.3 of the  

General Conditions of Contract forming part of the contract between the PW  

Department and the respondent, providing for arbitration, was imported into  

the sub-contract  between respondent and appellants.   The appellant relies  

upon the term in the work order dated 4.5.1994 that the “sub-contract shall  

be carried out on the terms and conditions as applicable to main contract” to

5

contend that the entire contract between the department and the respondent,  

including clause 67.3 relating to arbitration, became a part and parcel of the  

contract  between  the  parties.  The  appellant  also  contended  that  having  

regard  to  section  7(5)  of  the  Arbitration  &  Conciliation  Act,  1996,  the  

arbitration  clause  contained  in  the  main  contract  between  the  PW  

Department  and  the  respondent,  constituted  an  arbitration  agreement  

between  the  respondent  and  appellant  on  account  of  the  incorporation  

thereof by reference in the contract between the appellant and respondent.  

The respondent denied the said claim and contention.

6. The  designate  of  the  Learned  Chief  Justice  by  order  dated  31.1.2003  

rejected the said application on the ground that the arbitration clause (in  

the  contract  between  PW  Department  and  the  respondent)  was  not  

incorporated  by  reference  in  the  contract  between  the  respondent  and  

appellant. The said order is challenged in this appeal by special leave.  

The question that arises for consideration is whether the provision for  

arbitration contained in the contract between principal employer and the  

contractor, was incorporated by reference in the sub-contract between the  

contractor and sub-contractor.

6

7. Section 7 of the Act defines ‘arbitration agreement’. Sub-sections (1)  

and (5) of section 7, relevant for our purpose, are extracted below:

“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.

x x x x x

(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 Sec. 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

7

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.  

8. 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

8

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).

9. 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.

9

10. 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.  

11. 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.

10

12. The  following  passages  from  Russell  on  Arbitration  throws  

considerable  light  on  the  position  while  dealing  with  Section  6(2)  of  

(English) Arbitration Act, 1996 corresponding to Sec.7(5) of the Indian Act.  

(23rd Edition, see pages 52-55):

“Reference to another document.  The terms of a contract may  have to be ascertained by reference to more than one document.  Ascertaining  which  documents  constitute  the  contractual  documents  and in what,  if  any, order of priority they should be  read is a problem encountered in many commercial transactions,  particularly those involving shipping and construction. This issue  has  to  be  determined  by  applying  the  usual  principles  of  construction  and  attempting  to  infer  the  parties’  intentions  by  means of an objective assessment of the evidence. This may make  questions of incorporation irrelevant, if for example it is clear that  the contractual documents in question are entirely separate and no  intention  to  incorporate  the  terms  of  one  in  the  other  can  be  established.  However,  the  contractual  document  defining  and  imposing the performance obligations may be found to incorporate  another document which contains an arbitration agreement. If there  is a dispute about the performance obligations, that dispute may  need to be decided according to the arbitration provisions of that  other document.  This very commonly occurs when the principal  contractual document refers to standard form terms containing an  arbitration  agreement.  However  the standard  form wording may  not be apt for the contract in which the parties seek to incorporate  it, or the reference may be to another contract between parties at  least one of whom is different. In these circumstances it may be  possible to argue that the purported incorporation of the arbitration  agreement  is  ineffective.  The  draftsmen  of  the  Arbitration  Act  1996 were asked to provide specific guidance on the issue, but they  preferred to leave it to the court to decide whether there had been a  valid incorporation by reference. “

[Para : 2.044]

“Subject to drawing a distinction between incorporation of an  arbitration  agreement  contained  in  a  document  setting  out  standard form terms and one contained in some other contract

11

between  different  parties,  judicial  thinking  seems  to  have  favoured the approach of Sir John Megaw in Aughton, namely  that general words of incorporation are not sufficient. Rather,  particular reference to the arbitration clause needs to be made  to comply with s. 6 of the Arbitration Act 1996, unless special  circumstances exit.”

[Para : 2.047]

“Reference to standard form terms.  If the document sought to  be incorporated is a standard form set of terms and conditions the  courts are more likely to accept that general words of incorporation  will suffice. This is because the parties can be expected to be more  familiar  with  those  standard  terms  including  the  arbitration  clause.”

[Para : 2.048]

After referring to the view of Sir John Megaw, in Aughton Ltd. v. M.F. Kent  

Services  Ltd.  [1991  (57)  BLR  1]  that  specific  words  were  necessary  to  

incorporate an arbitration clause and that the reference in a sub-contract to  

another contract’s terms and conditions would not suffice to incorporate the  

arbitration  clause  into  the  sub-contract,  followed  in  Barrett  &  Son  

(Brickwork) Ltd. v.  Henry Boot Nanagement Ltd. [1995 CILL 1026,  Trygg  

Hansa Insurance Co. Ltd. v  Equitas Ltd. [1998 (2) Lloyds’ Rep.439) and  

Anonymous Greek Co of General Insurances (The “Ethniki”) v. AIG Europe  

(UK) [2002 (2)  All  ER 566]  and  Sea Trade Maritime  Corp.  v.  Hellenic  

Mutual  War  Risks  Association  (Bermuda)  Ltd.  (The  “Athena”)  No.2 –  

[2006] EWHC 2530, Russell concludes:

“The current position therefore seems to be that if the arbitration  agreement  is  incorporated  from  a  standard  form  a  general  reference to those terms is sufficient, but at least in the case of

12

reference  to  a  non-standard  form  contract  in  the  context  of  construction  and  reinsurance  contracts  and  bills  of  lading  a  specific reference to the arbitration agreement is necessary.”

A general reference to another contract will not be sufficient to incorporate  

the  arbitration  clause  from  the  referred  contract  into  the  contract  under  

consideration.  There  should  be  a  special  reference  indicating  a  mutual  

intention to incorporate the arbitration clause from another document into  

the contract.   

The exception to the requirement of special reference is where the referred  

document  is  not  another  contract,  but  a  Standard  form  of  terms  and  

conditions of a Trade Associations or Regulatory institutions which publish  

or circulate such standard terms & conditions for the benefit of the members  

or others who want to adopt the same.  The standard forms of terms and  

conditions of Trade Associations and Regulatory Institutions are crafted and  

chiselled  by  experience  gained  from  trade  practices  and  conventions,  

frequent areas of conflicts  and differences,  and dispute resolutions in the  

particular trade. They are also well known in trade circles and parties using  

such formats are usually well versed with the contents thereof including the  

arbitration  clause  therein.  Therefore,  even  a  general  reference  to  such

13

standard terms, without special reference to the arbitration clause therein, is  

sufficient to incorporate the arbitration clause into the contract.  

13. The  scope  and intent  of  section  7(5)  of  the  Act  may  therefore  be  

summarized thus:

(i) An arbitration clause in another document, would  get incorporated  into a contract by reference, if the following conditions are fulfilled : (i) The  contract  should  contain  a  clear  reference  to  the  documents  containing  arbitration clause,  (ii)  the reference to the other  document should clearly  indicate an intention to incorporate the arbitration clause into the contract,  (iii)  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  &  Conditions  of  a  Trade  Association  or  Architects  Association)  will  bind  them  or  apply  to  the  contract,  such

14

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 Government is a party), the arbitration clause forming  part  of  such  General  Conditions  of  contract  will  apply  to  the  contract  between the parties.

14. The Learned counsel for appellant relied on two decisions to contend  

that even a general reference to the main contract (between PW Department  

and the  respondent)  in  the  sub-contract  was  sufficient  to  incorporate  the  

arbitration clause in the main contract, into the sub-contract, even if there  

was  no special reference to the arbitration clause. We will refer to them  

briefly.  

14.1 The first case referred is Atlas Export Industries v. Kotak & Co. [1999  

(7) SCC 61].  In that case, the appellant had contracted to supply goods to a  

foreign  buyer  through  the  respondent.  The  contract  entered  among  them  

provided that  the terms and conditions of standard contract  No.15 of the  

Grain & Food Trade Association Ltd., London (for short GAFTA Contract  

15) would apply. The contract also confirmed that both buyers and sellers

15

were familiar with the text of GAFTA contract and agreed to be bound by its  

terms  and  conditions.   Clause  27  of  GAFTA  contract  15  provided  for  

settlement  of  disputes  by  Arbitration  in  London  in  accordance  with  the  

Arbitration Rules of GAFTA. This Court upheld the decision of the High  

Court  rejecting  the  appellant’s  objection  that  there  was  no  agreement  in  

writing between parties requiring the disputes being referred to arbitration in  

accordance with the arbitration rules of GAFTA, holding that the arbitration  

clause from GAFTA Contract 15, was incorporated by reference, into the  

contract.

14.2 The second case relied upon by the appellant is a decision rendered by  

a  designate  of  the  Learned  Chief  Justice  of  India  in  Groupe  Chimique  

Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd. - 2006 (5)  

SCC 275. In that  case a purchase order  placed by the respondent on the  

petitioner stated that “all other terms and conditions are as per FAI terms.  

(“FAI Terms” referred to the terms and conditions for sale and purchase of  

phosphoric acid of Fertilizer Association of India). Clause 15 of FAI terms  

provided for settlement of disputes by arbitration. Certain disputes having  

arisen, the petitioner appointed its arbitrator and called upon the respondent  

to appoint its arbitrator. When respondent failed to comply, the petitioner

16

filed a petition under Section 11 of the Act for appointment of the second  

Arbitrator.  In  the  counter  to  the  petition  under  Sec.  11  of  the  Act,  the  

respondent did not deny the fact that the purchase orders were placed with  

the petitioner nor denied the fact that the purchase orders were all placed  

subject to FAI terms and conditions, including clause 15 of FAI terms which  

provided for arbitration. This court held that the purchase orders placed by  

the respondents with the petitioner having been made subject to FAI terms  

which contained the arbitration clause, the arbitration clause contained in the  

FAI terms would constitute the arbitration agreement between the parties.  

14.3 Both the decisions are not  of any assistance to the appellant.  Both  

relate to reference to standard terms & conditions of Trade Associations. In  

both cases the parties  had agreed to be bound by the standard terms and  

conditions of the Trade Association thereby clearly showing an intention to  

subject themselves to the provision for arbitration contained in the standard  

terms of the Trade Association. The said two decisions therefore relate to  

cases referred to Para 13(iii) above, whereas the case on hand falls under  

para 13(ii) above.

17

15. The work order (sub-contract), relevant portions of which have been  

extracted in para 3 above, shows that the intention of the parties was not to  

incorporate the main contract (between the PW Department and respondent)  

in entirety into the sub contract.  The use of the words “This sub-contract  

shall  be  carried  out  on  the  terms  and  conditions  as  applicable  to  main  

contract” in the work order would indicate an intention that only the terms  

and conditions in the main contract relating to execution of the work, were  

adopted as a part of the sub-contract between respondent and appellant, and  

not the parts of the main contract which did not relate to execution of the  

work,  as  for  example  the  terms relating  to  payment  of  security  deposit,  

mobilization advance, the itemised rates for work done, payment, penalties  

for breach etc.,  or the provision for dispute resolution by arbitration.  An  

arbitration clause though an integral part of the contract,  is an agreement  

within an agreement. It is a collateral term of a contract, independent of and  

distinct from its substantive terms. It is not a term relating to ‘carrying out’  

of the contract.  In the absence of a clear or specific indication that the main  

contract in entirety including the arbitration agreement was intended to be  

made applicable to the sub-contract between the parties, and as the wording  

of the sub-contract discloses only an intention to incorporate by reference  

the terms of the main contract relating to execution of the work as contrasted

18

from dispute resolution, we are of the view that the arbitration clause in the  

main contract did not form part of the sub-contract between the parties. We  

are  fortified  in  this  view,  by  the  decision  in  Alimenta  SA. v.  National  

Agricultural Co-op. Marketing Federation of India Ltd. [1987 (1) SCC 615].  

The  NAFED  –  the  respondent  therein  entered  into  two  contracts  with  

Alimenta S.A. for the supply of certain goods referred to HPS. Clause 11 of  

the first contract stipulated that “other terms and conditions as per FOSFA-

20 contract terms”.  (FOSFA-20 being a standard form of contract of the  

Federation  of  Oils,  Seeds  and  Fats  Association  Ltd.  containing  an  

Arbitration clause). Clause 9 of the second contract provided that “all other  

terms  and  conditions  for  supply  not  specifically  shown  and  covered   

hereinabove shall be as per previous contract signed between us for earlier   

supplies of HPS”. The question before this court was 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. The following reasoning of the  

Court while dealing with the second contract is relevant for our purpose:

“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

19

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.”

“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 reference 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 the second 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)

16. Even assuming that the arbitration clause from the main contract had  

been incorporated into the sub-contract by reference, we are of the view that  

the appellant could not have claimed the benefit of the arbitration clause.  

This  is  in  view  of  the  principle  that  the  document  to  which  a  general

20

reference  is  made,  contains  an  arbitration  clause  whose  provisions  are  

clearly  inapt  or  inapplicable  with  reference  to  the  contract  between  the  

parties,  it  would  be  assumed  or  inferred  that  there  was  no  intention  to  

incorporate the arbitration clause from the referred document. In this case  

the wording of the arbitration clause in the main contract between the PW  

Department and 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  State  of  Kerala  to  act  as  Engineer  for  the  purpose  of  the  

contract between PW Department and the respondent) has not become final  

and  binding  pursuant  to  sub-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 sub-clause 67.2. Obviously neither  

67.1 nor 67.2 will apply as the question of ‘Engineer’ issuing any decision  

in a dispute between the contractor and sub-contractor, or any negotiations  

being held with the Engineer in regard to the disputes between the contract  

and  sub-contractor  does  not  arise.  The  position  would  have  been  quite  

different if the arbitration clause had used the words “all disputes arising

21

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, Govt.  of India.  There is no  

question of such nomination in the case of a dispute between the contractor  

and  sub-contractor.  It  is  thus  seen  that  the  entire  arbitration  agreement  

contained in the main contract between the employer and the contractor was  

tailor-made to meet the requirements of the contract between the employer  

and the contractor and is wholly inapt and inapplicable in the context of a  

dispute between the contractor and the sub-contractor. This makes it clear  

that the arbitration clause contained in the main contract would not apply to  

the disputes arising with reference to the sub-contract.

17. In view of our finding that there is no arbitration agreement between  

the parties, it  is unnecessary to examine the contention of the respondent  

that  no dispute  existed between the parties  in  view of  the  full  and final  

settlement receipt executed by the appellant.

22

18. We are therefore of the view that there is no error in the order of the  

High Court rejecting the application of the appellant on the ground that there  

is no arbitration agreement.

…………………………J. (R V Raveendran)

New Delhi; ………………………..J. July  7, 2009. (J M Panchal)

2 3