Transferability of Arbitration Clauses: Comment On SC Decision in Giriraj Garg v. Coal India Limited

Transferability of Arbitration Clauses: Comment On SC Decision in Giriraj Garg v. Coal India Limited

Abstract

Arbitration, as an alternative model of dispute resolution, was founded upon the plinth of effective, fastidious, and straightforward conflict settlement in the arena of commercial horn locking, so that the procedural claptraps of classical courtroom litigation could be circumvented and conservation both in terms of time and money could be encouraged. However, in a country such as India that has mostly been the seat of ad-hoc arbitrations instead of institutional ones, interference from the Courts seem to be rather difficult to avoid altogether, given the concentric nature of disputes within disputes that arise even to reach a consensus regarding the appropriate methodology of resolution, owing to such wide purview attributed to the principle of party autonomy. Frequently, the Courts have to be called upon so as to interpret the statutory or contractual provisions governing the arbitration mechanism and the working of its elementals. One such element is the transportable nature of arbitration clauses, and the procedure of their incorporation in case of multiple, separate yet kindred contracts. When such contracts echo with a tenor of interconnectivity, with one arising out of the other especially on the basis of standard form terms, it sometimes becomes convenient to overlook the particulars of the succeeding contract that might as well be circumstantially significant. Eclipsing such particulars by eventually attaching a mischievous arbitration clause, even when it is to the detriment of the contract as a whole, is in no way justified. In this comment, the author peruses the ruling of the Supreme Court in a recent case deciding on the extension of an arbitration clause by means of referenced incorporation, and points out as to why such measure might, on certain occasions, demand the due exercise of caution lest it gets exposed to the threats of bias and redundancy.

  1. INTRODUCTION

Chapter II of the Arbitration and Conciliation Act, 1996
[1] deals with arbitration agreements and the provisions related thereto. Section 7(5) of the Act reads as under:

"7. Arbitration agreement. — * * *
(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."

In other words, it lays down that arbitration clauses extend to contracts and agreements in a conjunctive manner despite their separateness, given there exists the intention to incorporate the same within the scope of such contracts. It can also be understood to mean that mere non-inclusion of an arbitration clause in a latter contract shall not render an arbitration arrangement as non-existent, in the face of the fact that such reference aims to amalgamate the clause into the essence of the said contract. Thus, it is safe to state in this context that certain contracts act as good conductors of authoritative arbitrational safeguards, which commute from one agreement to the other despite their unique features and technicalities, via a connective nexus established on the basis of unambiguous intent. Thus, "offshoot" contracts born out of and as extensions of a parent contract, united in terms of overall theme and substance, can be said as conducive to the subsequent importation of an arbitration clause that vests in the latter. In
National Aluminium Company Ltd. v. The Doaba Industrial & Trading Co. (P) Ltd.
,
[2] the plaintiff was awarded with a security contract as an extension of a foregoing C & F (Cost and Freight) contract, which contained an arbitration clause. It was held that as the execution of the latter security contract was in connection with the execution of the former C & F contract, the said arbitration clause was liable to be imported to the subsequent security contract, notwithstanding the fact that there was no mention of any arbitrational security whatsoever in it. Again, in
Groupe Chimique Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd.
,[3] the purchase orders, as contracted between the petitioner and the respondent, was placed as subject to the "Fertiliser Association of India Terms and Conditions for Sale and Purchase of Phosphoric Acid", i.e., the FAI. The Supreme Court held that as the FAI terms contained an arbitration clause, the same would apply to the said contract between the parties as it was in accordance with the FAI terms.

Therefore, it has been well-established over time that a transferable quality can be imparted to arbitration clauses, especially when they have an overarching nature and impact on multiple contracts that exist separately yet in a cognate fashion, deriving their agency on a conjunctive basis. The case at hand that is to be examined in this comment has a similar factual backdrop, against which the Apex Court ruled once again in favour of the transferability of arbitration clauses, on such occasions where they travel from a parent agreement towards an offshoot one subject to a spirit of mutuality and affiliative understanding.

  1. FACTS OF THE CASE AND ISSUE RAISED

In the instant case
[4] the principal respondent issued a 2007 Scheme, in the nature of a standard form document, as per which coal distributions would be conducted through e-auctions with the objective to lend access to coal buyers who had been unable to procure coal from the available institutional mechanisms. Therefore, this system opted to provide equal opportunities to coal buyers to purchase coal via a single-window service, and also facilitate the booking of coal online on a pan-India basis by utilising such a simple, transparent apparatus.

Clause 11.12 of the said 2007 Scheme contained an arbitration clause, which read as under:

"11.12. In the event of any dispute, bidder/buyer is necessarily required to represent in writing to the General Manager (Sales and Marketing) of the coal company concerned, who would deal with the same in a period of 1 month from such representation … … … All disputes arising out of this Scheme or in relation thereto in any form whatsoever shall be dealt exclusively by way of arbitration in terms of the Arbitration and Conciliation Act, 1996 …"

From 2012 to 2015, the appellant being a registered buyer as per the terms and conditions of the 2007 Scheme, partook in the e-auctions for purchase of coal for several sale orders issued under the 2007 Scheme.

The appellant respondent was declared successful with respect to the various coal orders, and sale orders were issued in favour of the appellant. Pursuant to such orders, the appellant made a deposit of earnest money and the coal value as per Clauses 2.5 and 5.2 respectively of the 2007 Scheme. It is pertinent to note in this context that Clause 7 of the terms and conditions stated that –

"7. The sale order will be governed by guidelines, circulars, office orders, notices, instructions, relevant law, etc. issued from time to time by Coal India Ltd., Bharat Coking Coal Ltd., State Govts., Central Govt. and other statutory bodies…"

Clause 7.2 of the 2007 Scheme provided for a 45-day allowance for the appellant to lift the quantity of coal so booked, from the date of issue of the delivery order. The inability of the appellant to lift the coal within such stipulated time-frame was considered as a breach of terms and conditions under the 2007 Scheme by the principal respondent, who then went on to forfeit the earnest money deposited by the appellant by virtue of Clause 9.2 of the Scheme. Consequently, disputes arose between the parties and the appellant served a notice upon the respondents, dated 21.03.2016, thereby invoking the arbitration clause under Clause 11.2 of the Scheme. On the respondent's failure to duly appoint an arbitrator, the appellant filed an application under Section 11 of the Act before the Jharkhand High Court for the appointment of an independent arbitrator.

The Ld. Single Judge dismissed the application vide impugned order dated 18.05.2018/21.05.2018, on the ground that the disputes relate to different transactions entered into by the parties under the 2007 Scheme. It was held that as the individual sale orders were devoid of an arbitration clause as such, the arbitration clause contained in the 2007 Scheme could not be incorporated into them by means of a reference.

Aggrieved by the abovementioned order, the appellant approached the Supreme Court and appealed against the same, thereby contesting its validity. In other words, the focal issue at the heart of this matter can be framed as:

Whether the arbitration clause contained in the 2007 Scheme could be incorporated in each of the individual sale orders by means of reference?

  1. LEGAL RATIONALE APPLIED IN
    GIRIRAJ GARG

The Apex Court, while adjudicating the matter at hand, relied heavily on the dictum pronounced in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL
[5] and on Russell's arbitration commentary.[6] In Habas, a clear distinction was drawn between a "single contract" and a "two contract" case. A single-contract case is one where an arbitration clause is contained in a standard form contract, and a general reference to the same exists in the corresponding contract that the parties eventually enter into. On the other hand, a two-contract case is one where the arbitration clause is contained in a previous, disjoined contract and a specific reference is required to be made so as to incorporate such arbitration clause in a latter contract entered into by the parties. To elucidate the single-contract position further, which is specifically relevant to the present case:

Extension of the Single-Contract Doctrine

To put it simply, if an arbitration clause primarily dwells within a standard form contract or document in a cohesive manner, and a general reference to such an existing clause is made in a subsequent contract that arises in relation to the foregoing standard form one, then such event shall be treated holistically in the form of a single, operative contract. Russell in his commentary explained that:

"Reference to standard form terms, single and two contract cases. 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…"
[7]

He observed further that the courts have recently adopted the practice of extending the single-contract doctrine as applicable to contracts of a standard form nature, wherein general words indicating the incorporation of such clauses shall be deemed sufficient. The rationale for this approach, as explained by him, is that
"the parties have already contracted on the terms said to be incorporated and are therefore even more likely to be familiar with the term relied on than a party resisting incorporation of a standard term".
[8] Similarly, the Courts have also come to consider such situations as within the gamut of a single-contract case, in which a succeeding contract is entered into by one of the parties to the original contract and a third party, in the spirit and "
in the context of a single commercial relationship.
"[9]

The Court then went on to rely on a few other precedents, mainly M. R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd.
[10] and Inox Wind Ltd. v. Thermocables Ltd.[11] It was held in the former that where a contract provides that the standard form of terms and conditions of an independent trade or professional institution will bind them or apply to the contract, then such standard form of terms and conditions, including any form of arbitration in such standard form of terms and conditions, shall be deemed as incorporated by means of reference. In the latter, it was held that a general reference made to a standard form contract of one party including an arbitration clause would suffice, so as to incorporate such clause subsequently.

In conclusion, the Supreme Court ruled that as the individual sale orders "emanate out of the 2007 Scheme" and they explicitly state that they will be "governed by guidelines, circulars, office orders, notices, instructions, relevant law, etc. issued from time to time by Coal India Ltd., Bharat Coking Coal Ltd.",
[12] the arbitration clause enshrined in Clause 11.12 of the 2007 Scheme, with the latter existing in the format of a standard form document, would stand as incorporated by means of reference. The Court further ruled that the instant case falls well within the ambit of a single-contract scenario as discussed above, pursuant to which the practice of referenced incorporation of the arbitration clause should follow suit.

  1. COMMENTS

Although the Apex Court was correct in its finding that the present case is covered within the scope and extent of the single-contract doctrine, the same cannot adopt a modus operandi of ill-considered application in each and every case that involves the operation of multiple and interlinked contracts. Due caution is required to be exercised on behalf of the adjudicating authorities so as to conclusively determine the nature and character of the agreements at play, as well as the pith and core of their contemporaneous existence. The following checks, if implemented, might reduce the chances of redundancy in the cases that observe subsequent importation of arbitration clauses:

Perusal of Characteristic Differentia

The single-contract doctrine must not be extended obtusely without having due regard for the characteristic differentia, if any, embodied in the persona of each such contracts associated either on a primary-secondary basis or otherwise. The Supreme Court, while observing the scope and intent of Section 7(5) of the Act in M. R. Engineers
[13]
, specifically stated that the application of an arbitration clause shall not be such that it renders itself inappropriate or causes any repugnancy to the existing terms of the contract in which it is sought to be incorporated. Despite the wide amplitude that maybe afforded to the expressions "arising out of", "in connection with", etc.,[14] the doctrinal technicalities of the single-contract principle must not be so construed as devised to undermine the individuality and self-capacity of contracts, especially in the face of any repugnancy that is likely to be caused. Therefore, before a case is determinedly adjudicated as a single-contract one, it should be thoroughly scrutinized that whether the specific terms and conditions of the latter contract, albeit subservient to a standard form one and yet tailor-made to secure a certain end, are hampered or made redundant by the incorporation of the arbitration clause.

Test against Unconscionability

Another very important aspect to be kept in mind is the presence of unconscionable elements in the parent contract, by the force of which asymmetrical bargaining powers are flexed and arbitration clauses are manipulated so as to deviously keep the reins in the hands of the party who are the superior negotiators in the deal. In Heller v. Uber Technologies Inc.
,
[15] Nordheimer J. A warned against an arbitration clause that operates "to defeat the very claims it purports to resolve"[16] and is unconscionable in nature, born out of contracts of adhesion and standard form contracts where the unequal distribution of bargaining facilities operates to frustrate the philosophy of contractual integrity. With "inequality of bargaining power" and "unfairness" being the two most fundamental elements that constitute the test against unconscionability, as was primarily set out in
Titus v. William F. Cooke Enterprises Inc.
[17] and then later applied in Morrison v. Coast Finance Ltd.[18] and also by the dissenting judges in Douez v. Facebook, Inc.[19], it must not be forgotten that the arbitration mechanism was essentially formulated to introduce party autonomy, procedural convenience and overall fairness in the field of dispute resolution. In this light, it must also be kept in mind that arbitration clauses must be immunized against the forces of underhand engineering that are likely to abuse the pedestal of superiority afforded to the stronger party by virtue of standard form contracts. Exploiting the weak disposition of the other party by fettering them to an arbitration clause fashioned to overpower and exhaust their combatting resources is never desirable, so vigilance must prevail so as to watch out for the tendencies of one party to arm-twist the other into committing to an arbitration arrangement that is barely inclined to maintain procedural impartiality. The goal, after all, is not to preclude arbitration altogether but to have due regard for the default frailty of the weaker party who is subject to a standard form contract. There might be situations where the compulsoriness of arbitrational requirements would pose as unconscionable encumbrances on the weaker party, wherewith going through an arbitration would be manifestly inconvenient and cause a great deal of strain; financial, logistical, or otherwise. Therefore, just because the single-contract doctrine applies and a generally worded reference is made to incorporate an arbitration clause in a contract branching from a standard form one, it must not be so done especially if it causes grave repugnancy by subverting the specifics of the subsequent contract, ones that are instrumental to the overall honouring of the transaction entered into. Similarly, reductionist arbitration clauses with unconscionable bearings and implications that exploit the vulnerability of weak bargainers are, as was held in Heller, both bad in law and substantially unmaintainable.

"Bootstrapping" Vices

Firms and institutions have recently picked up the practice of "bootstrapping" arbitration clauses into their contracts. In other words, it is the insertion of unconscionable preconditions embedded within an arbitration arrangement that are crafted to cause prejudice to the inferior contracting party in a standard form contract. Such bootstrapped clauses inherently harbour anti-consumer and anti-employee sentiments, often requiring them to commit to class action waivers and settle for downsized damages. The weaker parties are offered rather constrained roles in the name of party autonomy, as they have very little say in terms of choice of venue, choice of arbitrator, etc. Heedless extension of such malicious clauses that lead to one-sided dispute resolution, merely on account of the fact that the weaker party had knowingly consented to such standard form terms that govern the said commercial relationship, is nothing but taking undue advantage of their circumstantial defencelessness that stands testament to the fact of contractual bulldozing on behalf of the dominant party. Therefore, it would not be imprudent to conclude that the process of importing arbitration clauses contained in standard form contracts and contracts of adhesion cannot be allowed to acquire a uniform quality that would invariably result in frivolity, repugnancy, and deliberate contempt of the characteristic uniqueness that each contract renders, varying from situation to situation. In a time where the market giants are increasingly widening the scope of public participation in trade and allowing more ingress by the opening up of electronic means of interaction, the need for wariness against lopsided arbitration contraptions that have a manacling effect on the smaller participants is now more than ever. Although in Giriraj the arbitration clause sought to be incorporated did not pose any threat of debilitation as such, the rationale should cease to enjoy a status of universality and must not be appropriated without the application of mind. It is in the greater interest of consumer-friendliness that the facets of elasticity, transparency, and probity are infused within the ethos of arbitration so as to prevent the patronization of parties who are tethered to them, particularly by a force that has the potential to erode their sovereignty of choice and convenience.



(The author is a 5th year, B.A LL.B. student of, South Calcutta Law College. Views are personal)

[1] Hereinafter "the Act".

[2] AIR 2008 Ori 12.

[3] AIR 2006 SC 2422.

[4] (2019) 2 SCC (Civ) 744.

[5] Bus LR 880 : 2010 EWHC 29 (Comm).

[6] Russell on Arbitration (24th Edn., 2015, Sweet & Maxwell) pp. 52-54, Paras 2-049, 2-050.

[7] Supra note 5.

[8] Ibid., para 2-050.

[9] Ibid.

[10] (2009) 7 SCC 696.

[11] (2018) 2 SCC 519.

[12] Supra, p. 3.

[13] Supra note 9.

[14] Renusagar Power Co. Ltd. v. General Electric Company and Anr., (1985) 1SCR432.

[15] 2019 ONCA 1.

[16] Ibid., para 70.

[17] 2007 ONCA 573, 284 D.L.R. (4th) 734, para 38.

[18] (1965), 55 D.L.R. (2d) 710 (B.C. C.A).

[19] 2017 SCC 33, (2017) 1 S.C.R. 751, para 145.