In the case between NBCC (India) vs Zillion Infra, which the latter lost, the Supreme Court of India has — in a significant judgment — clearly held that for a party to invoke arbitration, there should have been a conscious acceptance of the arbitration clause in the agreement. NBCC (India) was acting for the Damodar Valley Corporation.

At the heart of this case is Section 11(6) of the Arbitration Act, invoked by Zillion, when NBCC (India) failed to respond to Zillion’s request for NBCC’s consent to appoint a sole arbitrator. Under Sec 11(6) of the Act, a court may appoint an arbitrator. Accordingly, the Delhi High Court appointed a former judge as the sole arbitrator.

NBCC appealed this decision.

Gopal Sankaranarayanan, Senior Counsel appearing for NBCC, submitted that the High Court has grossly erred in invoking its power under Section 11(6) of the Arbitration Act. Though the Clause 2.0 of Damodar Valley Corporation’s (DVC) Letter of Intent (LOI) states that all terms and conditions as contained in the tender issued by the DVC to the NBCC shall apply mutatis mutandis (with the necessary changes), it also makes it clear that where the terms and conditions have been expressly modified by the NBCC, the same would not be applicable.

Sankaranarayanan also submitted that merely on account of reference in the LOI to the terms and conditions as contained in the tender issued by the DVC to the NBCC, Clause 3.34 of the Additional Terms and Conditions of Contract would not apply in view of specific modification as stated in Clause 2.0 of the LOI.

Relying on the judgment of this Court in the case of MR Engineers and Contractors Private Limited vs Som Datt Builders, he submitted that unless the LOI specifically provides for incorporation of the arbitration clause, a reference to the arbitration proceedings would not be permitted in view of the provisions of sub-section (5) of Section 7 of the Arbitration Act.

This argument was accepted by the apex court, which reiterated in the present case the principles governing Sub-section 5 of Section 7 of the Arbitration Act. These principles are as follows: (1) If a contract provides that the execution/performance of the contract would be as per another contract, then the terms of the referred contract will apply only for execution and not the arbitration clause in the referred contract, unless there is a specific reference in to the arbitration clause in the referred contract; (2) if the contract provides that the standard form of terms and conditions of an independent trade or professional institution will bind them, such standard form of terms and conditions including any provision for arbitration in it shall be deemed to be incorporated by reference; and (3) the Sub-section (5) of 7 of the Arbitration Act itself provides for a conscious acceptance by the parties of the arbitration clause from another document, before such arbitration clause could be read as a part of the contract between the parties.

Published on June 2, 2024