M/S. Inox Wind Ltd. vs M/S. Thermocables Ltd.
on 5 January, 2018
M/S. Inox Wind Ltd. vs M/S. Thermocables Ltd. on 5 January,
2018
Equivalent citations: AIR 2018 SUPREME COURT 349, 2018 (3) ALJ 44, AIR
2018 SC (CIVIL) 793, (2018) 1 PAT LJR 388, (2018) 2 RECCIVR 582, (2018) 1
RECCIVR 552, (2018) 3 MPLJ 490, (2018) 1 PUN LR 793, (2018) 2 MAD LJ 119,
(2018) 5 MAH LJ 14, (2018) 3 ALLMR 65 (DEL), (2018) 2 CURCC 319, (2018) 1
ARBILR 1, (2018) 182 ALLINDCAS 1 (SC), (2018) 127 ALL LR 200, (2018) 1
JLJR 254, (2018) 1 JCR 383 (SC), (2018) 2 DMC 1, 2018 (2) KCCR SN 154 (SC)
Author: L. Nageswara Rao
Bench: L. Nageswara Rao, S.A. Bobde
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 19 of 2018
(Arising out of SLP (Civil) No.31049 of 2016)
M/S. INOX WIND LTD.
.... Appellant
Versus
M/S THERMOCABLES LTD. .... Respondent
JUDGMENT
L. NAGESWARA RAO, J.
Leave granted.
2. This appeal is directed against the judgment of the High Court of Judicature at Allahabad
dismissing the application filed by the Appellant under Section 11 (6) of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as ‘the Act’).
3. The Appellant is a manufacturer of wind turbine generators (WTGs). The Respondent is engaged
in the business of manufacture of wind power cables and other types of cables. Two purchase orders
dated 13.12.2012 and 02.02.2013 were issued by the Appellant to the Respondent for supply of
cables for their WTGs. According to the Purchase Order, the supply was to be according to the terms
mentioned in the order and the Standard Terms and Conditions that were attached thereto. Apart
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from the
1|Page other conditions, the Standard Terms and Conditions contain a clause pertaining to dispute
resolution. The said clause provides for a dispute to be resolved by a sole arbitrator in accordance
with the provisions of the Arbitration and Conciliation Act, 1996. The material on record indicates
that the Respondent accepted all the terms and conditions mentioned in the Purchase Order except
the delivery period as is evident from a letter dated 15.12.2012.
4. The Respondent, pursuant to the Purchase Order, supplied wind power cables to the Appellant.
While laying the cables supplied by the Respondent-company, the Appellant discovered that the
outer sheaths of the cables of 150 sq. mm. were cracked. This forced them to stop the WTGs so as to
avert damage to expensive equipment. According to the Appellant, the Respondent-company did not
replace the cables. The Appellant, therefore, was constrained to issue a notice dated 30.10.2014
proposing the name of a sole arbitrator in terms of the Standard Terms and Conditions. In the
absence of any response, the Appellant moved the High Court of Judicature at Allahabad by filing an
application under Section 11 (6) of the Act.
5. The High Court dismissed the said application by holding that an arbitrator cannot be appointed
as the Appellant did not prove the existence of an arbitration agreement. The High Court relied
upon the judgment of this Court in M.R. Engineers and Contractors Private Limited v. Som Datt
Builders Limited, (2009) 7 SCC 696 to hold that there is no special reference to the arbitration
2|Page clause in the standard terms and conditions, so the arbitration clause cannot be said to have
been incorporated into the purchase order.
6. We have heard the counsel for the Appellant and Respondent. The judgment of this Court in M.R.
Engineers’ case (supra) was relied upon by both the parties. Before proceeding further, it would be
necessary to appreciate the ratio of the said judgment. A few facts necessary to understand the
dispute in the said case are that the Appellant therein was a sub-contractor of the Respondent. The
Appellant was entrusted a part of the work by the Respondent-contractor which pertained to
‘construction of project directorate building’. It was mentioned in the sub-contract that it shall be
carried out as per the terms and conditions applicable to the main contract. A dispute arose between
the parties which made the Appellant therein to approach the High Court for appointment of an
arbitrator under Section 11 (6) of the Arbitration and Conciliation Act, 1996. The High Court of
Kerala rejected the application on the ground that the arbitration clause in the main contract was
not incorporated by reference in the contract between the Appellant and Respondent therein. In the
appeal before this Court, the Appellant submitted that his case was squarely covered by Section 7 (5)
of the Act and that the arbitration clause from the main contract was incorporated by reference in
the sub contract between him and the Respondent.
7. This Court considered the scope of Section 7 (5) of the Act and held
3|Page that a conscious acceptance of the arbitration clause found in another document is necessary
for the purpose of incorporating it into the contract. It was further held that general rules of
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construction of contracts would have to be followed as there were no guidelines in Section 7(5)
regarding the conditions that need to be fulfilled before construing a reference to a portion of a
contract as a reference incorporating the whole of it along with the arbitration clause contained in it.
While distinguishing ‘reference’ to another document from ‘incorporation’, this Court observed that
the relevant factor was the intention of the parties either to adopt the document in its entirety or to
borrow specific portions of the said document. In this connection, the Court held as follows: (M.R.
Engineers’ case, para 17-19) “17. We will give a few instances of incorporation and mere reference to
explain the position (illustrative and not exhaustive). 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.
18. 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.
19. Sub-section (5) of Section 7 merely reiterates these well-settled principles of construction of
contracts. It makes it clear that where there is
4|Page 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.”
8. Relevant passages from Russell on Arbitration 23rd Edition (2007) which were relied upon by
this Court for interpretation of Section 7 (5) of the Arbitration and Conciliation Act, 1996 are as
under: (M.R. Engineers’ case, para 20-21) “20. The following passages from Russell on Arbitration
throw considerable light on the position while dealing with Section 6(2) of the (English) Arbitration
Act, 1996 corresponding to Section 7(5) of the Indian Act. (See pp. 52-55, 23rd Edn.):
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“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 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 Section 6 of the Arbitration Act,
1996, unless special circumstances exist. (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
5|Page familiar with those standard terms including the arbitration clause.” (Para
2.048)
21. 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 Management
Ltd.[1995 CILL 1026] , Trygg Hansa Insurance Co. Ltd. v. Equitas Ltd. [(1998) 2
Lloyds' Rep 439] and AIG Europe (UK) Ltd. v. Ethniki [(2000) 2 All ER 566 (CA)]
and Sea Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn. (Bermuda) Ltd.
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M/S. Inox Wind Ltd. vs M/S. Thermocables Ltd. on 5 January, 2018
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 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.”
9. This Court also discussed the scope of Section 7 (5) of the Act and summarised as follows: (M.R.
Engineers’ case, para 24) “24. The scope and intent of Section 7(5) of the Act may therefore be
summarised thus:
(i) An arbitration clause in another document, would get incorporated into a contract
by reference, if the following conditions are fulfilled:
(1) the contract should contain a clear reference to the documents containing
arbitration clause, (2) the reference to the other document should clearly indicate an
intention to incorporate the arbitration clause into the contract, (3) 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 and
conditions of a trade association or architects association) will bind them or apply to
the contract, such 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.
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(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 the Government is a
party), the arbitration clause
6|Page forming part of such general conditions of contract will apply to the contract
between the parties.”
10. It was ultimately found that the intention of the parties was not to incorporate the main contract
in its entirety into the sub-contract. Further, this Court held that the arbitration clause in the main
contract was inapplicable to the contract between the parties as the main contract was between the
Public Works Department, Government of Kerala and the contractor in which the arbitration clause
contemplated appointment of a committee of three arbitrators, with one each to be appointed by the
State of Kerala and the Respondent therein and the third to be nominated by the Director General
Road Development, Ministry of Surface Transport Roads in Government of India. Appointment of a
committee of arbitrators with representatives of State of Kerala and the Government of India was
totally irrelevant for the contract between the contractor and the sub-contractor.
11. Section 6 (2) of the Arbitration Act, 1996 which extends to England, Wales and Northern Ireland
is in pari materia with Section 7 (5) of the Arbitration and Conciliation Act, 1996 and it reads as
under:-
“6. Definition of arbitration agreement.
...
(2) The reference in an agreement to a written form of arbitration clause or to a
document containing an arbitration clause constitutes an arbitration agreement if the
reference is such as to make that clause part of the agreement.”
12. It will be useful to understand the interpretation of the incorporation issue in England. The
question whether the general words of incorporation are sufficient to incorporate an arbitration
agreement arose for consideration of the High Court of Justice, Queen’s Bench
7|Page Division, Commercial Court in Sea Trade Maritime Corporation v. Hellenic Mutual War
Risks Association (Bermuda) Limited, The Athena [2006] EWHC 2530 (Comm). In the said case the
difference between incorporation in a single contract case and a two contract case was recognized. If
there is a reference to a secondary document in a contract between two parties and that secondary
document is a contract to which at least one party is different from the parties to the contract in
question, it would be a two contract case. In other words, if the secondary document is between
other parties or if only one of the parties to the contract in dispute is party to an earlier contract to
which a reference is made, then it would be a two contract case. In such a contract general reference
to the earlier contract would not be sufficient to incorporate the arbitration clause. However, if the
reference is to standard terms in a contract that would be a case of ‘single contract’ and the use of
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general words to incorporate the arbitration agreement by a reference is permissible. As the
reference in that case was to a standard form of contract which was a single contract case, Justice
Langley held that the general words of incorporation were enough to incorporate an arbitration
clause.
13. The question of incorporation of the arbitration clause from an earlier contract by general
reference into a later contract came up for consideration before the Queen’s Bench Division again in
Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL [2010] EWHC 29 (Comm). The
contract in the said case
8|Page pertained to sale of 10,000 metric tons of steel scrap. There were several terms in the
contract under the headings material, quantity, price, shipment, discharge, rate, payment and final
weight. Apart from the said terms, the contract contained a clause which was in the following terms:
“All the rest will be same as our previous contracts.”
14. The dispute that arose in that case was whether general words mentioned above were capable of
incorporating an arbitration clause. The difference in approach between cases in which the parties
incorporate the terms of a contract between the other parties or between one of them with a third
party on the one hand and those in which they incorporate the standard terms on the other hand,
was noticed. The following broad categories in which the parties attempt to incorporate an
arbitration clause were recognized by the Court, which are as follows:
“(1) A and B make a contract in which they incorporate standard terms. These may be
the standard terms of one party set out on the back of an offer letter or an order, or
contained in another document to which reference is made; or terms embodied in the
rules of an organisation of which A or B or both are members; or they may be terms
standard in a particular trade or industry.
(2) A and B make a contract incorporating terms previously agreed between A and B
in another contract or contracts to which they were both parties (3) A and B make a
contract incorporating terms agreed between A (or B) and C. Common examples are
a bill of lading incorporating the terms of a charter to which A is a party; reinsurance
contracts incorporating the terms of an underlying insurance; excess insurance
contracts incorporating the terms of the primary layer of insurance; and building or
engineering sub contracts incorporating the terms of a main contract or sub-sub
contracts incorporating the terms of a sub contract.
(4) A and B make a contract incorporating terms agreed between C and D. Bills of
lading, reinsurance and insurance contracts and building contracts may fall into this
category.”
15. In Habas’s case (supra), Justice Christopher Clarke followed the
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9|Page ratio in the case of ‘the Athena’ (supra) and held that in single contract cases (categories 1
and 2), a general reference would be sufficient for incorporation of an arbitration clause from a
standard form of contract. In cases falling under categories 3 and 4 mentioned above which are two
contract cases, it was held that a stricter rule has to be followed by insisting on a specific reference to
the arbitration clause from an earlier contract. Reliance placed on the judgment of Sir John Megaw
in Aughton v MF Kent Services [1991] 31 Con L.R. 60 was repelled in the following terms:
“53 I do not regard myself as bound by the decisions of the Court of Appeal in
Aughton v Kent and The Ethniki to reach a different conclusion. Both were
two-contract cases. Further the judgments of Sir John Megaw and Lord Justice Ralph
Gibson are, in part in conflict so as to preclude either of them being binding authority
even in a two contract case. The agreement of Evans LJ with Sir John Megaw's “
analysis of the authorities with regard to arbitration clauses and specifically with
regard to the incorporation of charterparty arbitration clauses into bills of lading ”
was obiter.”
16. The point pertaining to the independent nature of an arbitration clause being determinative of
the dispute pertaining to incorporation was also dealt with in the said judgment as follows:
“51 Like Langley J, however, I do not accept that, in a single contract case, the
independent nature of the arbitration clause should determine whether it is to be
incorporated. A commercial lawyer would probably understand that an arbitration
clause is a separate contract collateral to another substantive contract and that the
expression “arbitration clause” is, on that account, something of a misnomer for “the
arbitration contract which is ancillary to the primary contract”. But a businessman
would have no difficulty in regarding the arbitration clause (as he would call it) as
part of a contract and as capable of incorporation, by appropriate wording, as any
other term of such a contract; and it is, as it seems to me to a businessman's
understanding that the court should be disposed to. give effect. A businessman who
had agreed with his counterparty a contract with 10 specific terms under various
headings and then agreed with the same counterparty terms 1-5 under the same
headings as before and, as to the rest, that all the terms of the previous contract
should apply, would, I think, be surprised to find that “all” should be interpreted so
as to mean “all but the arbitration clause”.
17. For a better understanding of the single and two contract cases and reference to standard form
terms it is relevant to examine Russell 10 | P a g e on Arbitration 24th Edition (2015) which is as
under: (See pp. 52-54, 24rd Edn.) “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. In
Sea Trade Maritime Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd, (The “Athena”)
No.2 the Court drew a distinction between what is described as a “two contract case”, that is where
the arbitration clause is contained in a secondary document which is a contract to which at least one
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party is different from the parties to the contract in question, and “a single contract case” where the
arbitration clause is in standard terms to be found in another document. Relying on dictum of
Bingham LJ in Federal Bulk Carries Inc v. C. Itoh & Co Ltd (The “Federal Bulker”), Langley J stated
that:
“In principle, English law accepts incorporation of standard terms by the use of
general words and, I would add, particularly so when the terms are readily available
and the question arises in the context of dealings between established players in a
well-known market. The principle, as the dictum makes clear, does not distinguish
between a term which is an arbitration clause and one which addresses other issues.
In contrast, and for the very reason that it concerns other parties, a “stricter rule” is
applied in charterparty/bills of lading cases. The reason given is that the other party
may have no knowledge nor ready means of knowledge of the relevant terms.
Further, as the authorities illustrate, the terms of an arbitration clause may require
adjustment if they are to be made to apply to the parties to a different contract.” The
Court therefore reinforced the distinction between incorporation by reference of
standard form terms and of the terms of a different contract, and concluded that in a
single contract case general words of incorporation are sufficient, whereas by its
nature a two contract case may require specific reference to the other contract, unless
the secondary document is stated to be based on standard form terms containing an
arbitration agreement. In that case, presumably specific reference to the arbitration
clause would not be needed. As discussed below, this approach has been endorsed in
subsequent cases, albeit drawing a slightly different but “material” distinction
between incorporation of the terms of a separate contract – standard or otherwise –
made between the same parties which are treated as “single contract” cases, even
where there is in fact more than one contract; and those where the terms to be
incorporated are contained in a contract between one or more different parties which
are treated as the “two contract” cases. (Para 2-049) Extension of the single contract
cases.
Recently, the courts appear to have extended the “single contract” principle
applicable to standard form contracts, where general words of incorporation will
suffice, to other types of contract where the same rationale can be said to apply. Thus,
if the document sought to be incorporated is a bespoke contract between the same
parties, the courts have accepted this as a “single contract” case where general words
of incorporation will suffice, even though the other contract is not on standard terms
and constitutes an entirely separate agreement. The rationale for this approach 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. Put another way, if general words of incorporation
are sufficient for the latter, they should be even more so for the former. The courts
also appear to have accepted as a “single contract” case a situation
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11 | P a g e where the contract referred to is between one of the parties to the original contract and a
third party, where the contracts as a whole “were entered into in the context of a single commercial
relationship”.(Para 2-050) [Emphasis Supplied]
18. This Court in M.R. Engineers’ case, which is discussed in detail supra, held the rule to be that an
arbitration clause in an earlier contract cannot be incorporated by a general reference. The
exception to the rule is a reference to a standard form of contract by a trade association or a
professional institution in which case a general reference would be sufficient for incorporation of an
arbitration clause. Reliance was placed by this Court on Russell on Arbitration 23rd Edition (2007).
The development of law regarding incorporation after the judgment in M.R. Engineers requires
careful consideration. It has been held in Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal
SAL [2010] EWHC 29 (Comm) that a standard form of one party is also recognized as a ‘single
contract’ case. In the said case, it was also held that in single contract cases general reference is
enough for incorporation of an arbitration clause from a standard form of contract. There is no
distinction that is drawn between standard forms by recognized trade associations or professional
institutions on one hand and standard terms of one party on the other. Russell on Arbitration 24th
Edition (2015) also takes note of the Habas’s case.
19. We are of the opinion that though general reference to an earlier contract is not sufficient for
incorporation of an arbitration clause in the later contract, a general reference to a standard form
would be 12 | P a g e enough for incorporation of the arbitration clause. In M.R. Engineers this Court
restricted the exceptions to standard form of contract of trade associations and professional
institutions. In view of the development of law after the judgment in M.R. Engineers’ case, we are of
the opinion that a general reference to a consensual standard form is sufficient for incorporation of
an arbitration clause. In other words, general reference to a standard form of contract of one party
will be enough for incorporation of arbitration clause. A perusal of the passage from Russell on
Arbitration 24th Edition (2015) would demonstrate the change in position of law pertaining to
incorporation when read in conjunction with the earlier edition relied upon by this Court in M.R.
Engineers’ case. We are in agreement with the judgment in M.R. Engineer’s case with a modification
that a general reference to a standard form of contract of one party along with those of trade
associations and professional bodies will be sufficient to incorporate the arbitration clause.
20. In the present case, the purchase order was issued by the Appellant in which it was categorically
mentioned that the supply would be as per the terms mentioned therein and in the attached
standard terms and conditions. The Respondent by his letter dated 15.12.2012 confirmed its
acceptance of the terms and conditions mentioned in the purchase order except delivery period. The
dispute arose after the delivery of the goods. No doubt, there is nothing forthcoming from the
pleadings or the submissions made by the parties that the standard form attached to the purchase
order is 13 | P a g e of a trade association or a professional body. However, the Respondent was
aware of the standard terms and conditions which were attached to the purchase order. The
purchase order is a single contract and general reference to the standard form even if it is not by a
trade association or a professional body is sufficient for incorporation of the arbitration clause.
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21. For the aforementioned reasons, the appeal is allowed and the judgment of the High Court is set
aside. Justice Sushil Harkauli is appointed as the Arbitrator to adjudicate the dispute between the
parties.
........................................J. [S.A. BOBDE] ..……................................J. [L. NAGESWARA RAO] New
Delhi;
January 05, 2018 14 | P a g e
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