Arbitration Clause in Standard Contracts: Supreme Court Ruling on Coal India Dispute

The Supreme Court of India recently ruled on a critical arbitration dispute involving Coal India Ltd. and a coal buyer, Giriraj Garg. The case revolved around whether an arbitration clause in a standard contract, the 2007 Scheme for coal distribution, could be incorporated by reference into subsequent sale orders. The judgment clarifies the principles governing incorporation by reference in arbitration agreements and has significant implications for business transactions across industries.

Background of the Case

The dispute arose when the appellant, Giriraj Garg, a registered coal buyer under the 2007 Scheme issued by Coal India Ltd., failed to lift the booked coal within the stipulated 45-day period. As per Clause 9.2 of the Scheme, the Earnest Money Deposit (EMD) was forfeited. The appellant invoked the arbitration clause under Clause 11.12 of the Scheme, which mandated that all disputes related to the Scheme be resolved through arbitration.

When the respondents failed to appoint an arbitrator, the appellant approached the Jharkhand High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an independent arbitrator. The High Court dismissed the application, ruling that the arbitration clause in the 2007 Scheme did not apply to individual sale orders since they did not explicitly incorporate it.

Key Issues Before the Supreme Court

• Whether the arbitration clause in the 2007 Scheme was incorporated by reference in individual sale orders.
• Whether the High Court erred in holding that the dispute was not arbitrable due to the absence of a direct reference in sale orders.
• What constitutes valid incorporation of an arbitration clause under Section 7(5) of the Arbitration and Conciliation Act, 1996?

Arguments by the Appellant

The appellant contended that:

• The sale orders issued by Coal India Ltd. explicitly stated that they were governed by the guidelines, circulars, notices, and instructions issued by Coal India Ltd., which included the 2007 Scheme.
• The arbitration clause in the 2007 Scheme applied to all transactions carried out under it, including the disputed sale orders.
• The High Court’s ruling was incorrect as it ignored established legal principles regarding incorporation by reference.

Arguments by the Respondents

Coal India Ltd. and other respondents argued that:

• The arbitration clause in the 2007 Scheme was not explicitly mentioned in the sale orders.
• The High Court was correct in holding that a general reference to guidelines and circulars was insufficient to incorporate an arbitration clause.
• Each sale order was a separate contract, and the absence of an arbitration clause in these orders meant that disputes should be resolved through regular legal channels.

Supreme Court’s Observations and Ruling

The Supreme Court examined the incorporation of arbitration clauses under Section 7(5) of the Arbitration and Conciliation Act, 1996, and reviewed international and Indian precedents.

The Court observed:

• “The principle of incorporation by reference of an arbitration clause from another document is well established in arbitration jurisprudence.”
• “The sale orders explicitly stated that they would be governed by guidelines, circulars, and notices issued by Coal India Ltd. This clearly indicates that the arbitration clause in the 2007 Scheme applied.”
• “General references to standard terms are sufficient for incorporating an arbitration clause, particularly in commercial transactions involving standard forms.”

The Court cited previous rulings, including M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd., which held that an arbitration clause in a general contract can be incorporated into subsequent contracts if they reference the general contract.

Final Verdict

The Supreme Court set aside the High Court’s ruling and held that the arbitration clause in the 2007 Scheme was incorporated by reference in the sale orders. The Court appointed retired Justice Pranab Kumar Chattopadhyay as the sole arbitrator to resolve the dispute.

Conclusion

This judgment reaffirms that arbitration clauses in standard contracts can be incorporated by reference into subsequent agreements. It provides clarity on how businesses should structure contracts to ensure that arbitration remains an available dispute resolution mechanism.

Petitioner Name: Giriraj Garg.
Respondent Name: Coal India Ltd. & Ors..
Judgment By: Justice Uday Umesh Lalit, Justice Indu Malhotra.
Place Of Incident: Jharkhand.
Judgment Date: 15-02-2019.

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