SUPREME COURT CLARIFIES ENFORCEMENT OF ARBITRATION CLAUSES IN CONTRACTUAL DISPUTES

The Supreme Court of India delivered a significant judgment in the case of NBCC (India) Limited vs. Zillion Infraprojects Pvt. Ltd. regarding the enforceability of arbitration clauses and their incorporation into contracts. This case arose from a dispute over a construction project awarded through a Letter of Intent (LOI) by NBCC to Zillion in 2006. The LOI referred to the terms of a tender document issued by Damodar Valley Corporation (DVC), which contained an arbitration clause.

The primary issue was whether the arbitration clause in the DVC tender was validly incorporated into the LOI, enabling the parties to resolve their disputes through arbitration. The Delhi High Court had previously appointed a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, relying on the arbitration clause in the DVC tender. NBCC contested this decision, asserting that the LOI did not explicitly incorporate the arbitration clause and that disputes were instead subject to the jurisdiction of Delhi civil courts, as stipulated in the LOI.

The Supreme Court revisited principles governing the incorporation of arbitration clauses, particularly in cases involving "two-contract" scenarios where one contract references terms from another. The Court emphasized the necessity of explicit and specific reference to arbitration clauses for their enforceability. A mere general reference to the terms of another document, without clarity on the arbitration clause, is insufficient.

The Court held that the LOI’s reference to the DVC tender terms was general and did not indicate a clear intent to adopt the arbitration clause. Consequently, the arbitration clause could not be enforced, and the appointment of an arbitrator by the High Court was deemed invalid. The ruling reaffirmed the importance of precise drafting and explicit agreements to arbitrate, ensuring the parties’ intentions are clearly documented.

Citation: Supreme Court of India, NBCC (India) Limited vs. Zillion Infraprojects Pvt. Ltd., Civil Appeal Nos. 6081-6082 of 2023.