Holding

An arbitration clause in an earlier contract can be incorporated into a later contract by reference provided it is not inconsistent or unintelligible, and such incorporation does not occur when the reference is limited to specific supply terms, leading to the dismissal of both appeals.

Summary

Alimenta S.A. and the National Agricultural Co-operative Marketing Federation of India Ltd (NAFED) entered into two supply contracts for groundnut kernels, each referring to the terms of a standard FOSFA-20 contract that contained an arbitration clause. Disputes arose and Alimenta sought arbitration, while NAFED filed a petition under section 33 of the Arbitration Act, 1940, claiming no valid arbitration agreement existed. The Delhi High Court held that the arbitration clause was incorporated into the first contract but not into the second, allowing the petition for the second contract and rejecting it for the first. On appeal, the Supreme Court affirmed that an arbitration clause can be incorporated by reference if it is not inconsistent or unintelligible, and that such incorporation does not occur when the reference is limited to specific supply terms. Consequently, the Court dismissed both appeals, upholding the High Court's decision.

Issues considered

Whether the arbitration clause in the FOSFA-20 contract was incorporated into the first contract by reference.
Whether the arbitration clause was incorporated into the second contract by reference to the first contract.
Whether an arbitration clause is a term of supply of goods and must form part of a supply contract.
Whether incorporation of an arbitration clause is barred when the subject matters of the contracts differ or when the clause would be insensible or unintelligible.
Whether parties may choose a dispute‑resolution method other than arbitration for a supply contract.

Legislation cited

Arbitration Act, 1940s. 2, s. 33

Subjects

arbitration clauseincorporation by referencesupply contractcontract interpretationsection 33 Arbitration ActFOSFA contractarbitration not a term of supply

Judgment

ALIMENTA S.A. ETC.
A
v.
rtJ7 l'<ATIONAL AGRICULTURAL CO-OPERATIVE
MARKETING FEDERATION OF INDIA LTD.
AND ANOTHER

JANUARY 9, 1987 B

IRANGANATH MISRA AND MURARI MOHON DUTT, JJ.]

Arbitration Act, 1940, s.2-Arbitration Agreement-Construction
of-Contract for supply of goods-Whether arbitration clause must
-y form part of such contract-Parties entitled to choose other method for
resolving dispute-When incorporation clause refers to certain particu- c
far terms and conditions pnly those to be incorporated-Not arbitration
,...
. clause .

The appellant and the respondent entered into two contracts on
two different dates for supply of HPS groundnut Kernels jaras. After D
the usual terms as to quality, quantity, price etc., the first contract
provided in clause II thereof "that 0th.er terms and conditions as per
FOSF A-20 contract terms." However, clause 9 of the second contract
did not make any mention of FOSFA-20 contract and all that was
stated was that all other terms and conditions for supply not specifically
shown and covered therein should be as per previous contract signed E
between the parties for similar supply of HPS'groundnut. Tbe 'FOSFA-
20 contract' contained an arbitration clause to the effect that any
dispute arising out of this contract, including any question of law aris-

- ing in connection therewith, shall be refered to arbitration and neither
party, hereto, nor any persons claiming under either of them sball
bring any action or other legal proceedings against the other in respect F

\ of any such dispute until such dispute shall first have been heard and
determined by the arbitrators.

Disputes and differences arose between the parties. The appellant
in Civil Appeal No. I755/I982 alleged that the respondent therein com:
milted breach of their obligations under both the contracts and sought G
to commence arbitration proceedings. The respondent on the other
hand filed a petition in the High Court under s.33 of the Arbitration
Act, I 940 alleging that there was no valid arbitration agreement bet-
~. ween the parties and contended that when it agreed in clause I I of the
first contract that the parties would be governed by the terms and
conditions of 'FOSFA-20 contract', it only had in mind such terms and H

957
958 SUPREME COURT REPORTS [ 1987] I S.C.R.

A conditions as would govern the relationship between the parties and the
fact that there was an arbitration clause in FOSF A-20 contract came as
a complete surprise to the respondent. This petition was opposed by the
appellant.

A Single Judge of the High Court held that in view of the fact that
B the respondent had been nominated the canalising agent for export of
UPS groundnut, it would not be unjustified to assume that the respon-
dent was well aware of the foreign trade in groundnut and the implica-
tions of reference to 'FOSFA-20 contract' when he put his signatures to
the contract in question; that the arbitration clause in FOSFA-20 cGn-
tracl was incorporated into the first contract by virtue of clause I I
·y-
C providing 'other terms and conditions as per FOSFA-20 contract
terms'. With regard to the second contract it was held that it did not
make any mention of FOSFA-20 contract and all that was stated in
clause-9 thereof was that all terms and conditions for supply not specifi-
cally shown and covered therein should be as the previous contract
signed between the parties for similar supply of HPS.
D
It was accordingly held that there existed no arbitration agree-
ment between the parties and, as such, none of them was entitled to seek
reference to arbitration; ;llld that a term about . arbitration was not
incidental to supply of goods and it was difficult to re..d from the
provisions of clause 9 of the contract that the arbitration clause was .
E lifted from there and made a part of the same.

The applications under s.33 of the Arbitration Act was allowed in
so far as it related to the second contract, and disallowed so far as the
first contract was concerned. Both parties filed appeals to this Court.

F Dismissing the appeals,

HELD: l(i) The arbitration clause of an earlier contract can, by
reference, be incorporated into a later contract provided however, it is
not repugnant to or inconsistent with the terms of the contract in which
it is incorporated. [962F-G]

I (ii) Where the parties are aware of the arbitration clause of an
earlier contract, the subject-matter of which is different from the con-
tract which is being entered into hy them, incorporating the terms of
the earlier contract by reference by using general words, there would be
no bar to such incorporation merely because the subject-matters of the
H two contracts are different, unless however, the incorporation of the
ALIMENTA S.A. v. AGRICULTURAL FEDERATION 959

arbitration clause will be insensible or unintelligible. [965G-H; 966A)
A
I (iii) There is no proposition of law that when a contract is en-
tered into for supply of goods, the arbitration clause must form part of
such a contract. The parties may choose some other method for the
purpose of resolving any dispute that may arise between them. But in
such a contract the incidents of supply generally form part of the terms B
and conditions of the contract. [966F-G)

I (iv) When the incorporation clause refers to certain particular
terms and conditions, only those terms and conditions are incorporated
and not the arbitration clause. [967A)

2. The normal incidents of terms and conditions of supply are c
those which are connected with supply, such as, its mode and process,
time factor, inspection and approval, if any, reliability for transit, inci-
dental expenses etc. An arbitration clause is not a term of supply. [966E-F]

In the instant case, there is a good deal of difference between D
clause 9 of the second contract and clause 11 of the first contract.
Clause 11 has .been couched in general words, but clause 9 refers to all
other terms and conditions for supply. The first contract includes the
terms and conditions of supply and as clause 9 refers to these· terms and
conditiom of supply, it is dil6cuJt to bold that the arbitration clause is also
referred to and, as such, incorporated into the second contract. [966C-D) E

..... Dwarkadas & Co. v. Daluram Gaganmull, AIR 1951Cal10 F.B.,
approved.

Hamilton & Co. v. Mackie & Sons, (1889) S TLR 677 (C.A.),The
Annefie/d, (1971] 1 All. E.R. 394 & The Njegos, (1935) All ER Rep. F
,
. 863, held inapplicable •
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1755
.& 1756 of 1982 ·
·From the Judgment and Order dated. I J.12.1981 of the Delhi
High Court in. C.M.P.No. 41to1981. G

P.R. Andhyarjina, D.N. Misra and M.P. Baroocha for the
Appellant.

G. Ramaswamy, Additional Solicitor General, V.P. Singh and
Miss Sushma Relan for the Respondents. 1-1
960 SUPREME COURT REPORTS [ 1987] 1 S.C.R.

The Judgment of the Court was delivered by
A
DUTT, J. These two appeals by special leave-one preferred by
the National Agricultural Co-operative Marketing Federation of India
Ltd (for short 'NAFFD') and the other by Alimenta S.A. {for short
'Alimenta'), a Swiss Company-are both directed against the judg-
B ment of the Delhi High Court dated December 11, 198 l whereby the ~
application of NAFFD under section 33 of the Arbitration Act, 1940,
has been allowed in part.

A contract dated January 12, 1980 was entered into by and bet-
ween the parties, namely, NAFED and Alimenta for the sale and
y .-
C supply of 5,000/8,000 M.T. of HPS groundnut kernels Jaras. After the
usual terms as to quality, quantity, price, etc., the contract provided in ·~
clause 11 thereof as follows:- '

"Other terms and conditions as per FOSFA-20 contract
terms.''
D
The expression 'FOSFA' means the Federation of Oils, Seeds and Fats
Association Ltd. Subsequently, another contract dated April 3, 1980
was entered into between the parties in respect of 4,000 metric tonnes
of groundnut kernels. Clause 9 of this contract provided as follows:- ~

E "All other terms and conditions for supply not specifically
shown and covered hereinabove shall be as per previous
contract signed between us for earlier supplies of H.P.S."

The FOSFA-20 contract contains an arbitration clause which is
as follows:-
-
F
"ARBITRATION: Any dispute arising cut of this con-
tract, including any question of law arising in connection
therewith, shall be referred to arbitration in London (or
elsewhere if so agreed) in accordance with the Rules of
Arbitration and Appeal of the Federation of Oils, Seeds
G and Fats Association Limited, in force at the date of this
contract and of which both the parties hereto shall be
deemed to be cognizant.

Neither party hereto, nor any persons claiming under
either of them shall bring any action or other legal proceed-
H ings against the other of them in respect of any such dispute
ALIMENTA S.A. v. AGRICULTURAL FEDERATION [DUTT, J.] 961

until such dispute shall first have been heard and deter-
mined by the arbitrators, umpire or Board of Appeal (as A
the case may be) in accordance with the Rules of Arbitra-
tion and Appeal of the Federation, and it is hereby expre-
ssly agreed and declared that the obtaining of an Award
from the arbitrators, umpire, or Board of Appeal (as the
case may be), shall be a condition precedent to the right of
either party hereto or of any person claiming under either B
of them to bring any action or other legal proceedings
against the other of them in respect of any such dispute."

Disputes and differences arose between the parties. Alimenta
alleged that NAFED committed breach of their obligations under both
the contracts and sought to commence arbitration proceedings. On the c
other hand, on March 19, 198.1, NAFED filed a petition in the Delhi
High Court under section 33 of the Arbitration Act, 1940 alleging,
inter a/ia, that there was no valid arbitration agreement between the
parties. It was contended by NAFED that when it agreed in clause 11
of the first contract that the parties would be governed by the terms
and conditions of FOSFA-20 contract, it only had in mind such terms D
and conditions as would govern the relationship between the parties.
Further, the fact that there was an arbitration clause in FOSFA-20
contract came as a complete surprise to NAFED. In other words, it
was sought to be contended that NAFED was not at all aware of any
arbitration clause in FOSFA-20 contract and, accordingly, it could not
agree to incorporate any such arbitration clause in the contracts in E
question. The said petition under section 33 of the Arbitration Act was
opposed by Alimenta.

A learned Single Judge of the High Court came to the finding
that in view of the fact that NAFED had been nominated as the cana-
lising agent for export of HPS groundnut under the provisions of the F
Export Control Order by the Central Government, it would not be
unjustified to assume that the Senior Manager of NAFED was well
aware of the foreign trade in groundnut and the implications of refer-
ence to FOSFA-20 contract when he put his signature to the contract
in question. The learned Judge could not believe that the Manager of
NAFED was not aware of the terms of FOSFA-20 contract. Accord- G
ingly, the plea of NAFED that it was not aware of the existence of an
arbitration clause in FOSFA-20 contract was overruled. The learned
Judge held that the arbitration clause in FOSFA-20 contract was
incorporated into the first contract dated January 12, 1980 by virtue of
clause 11 thereof providing "other terms and conditions as per
FOSFA-20 contract terms". H
962 SUPREME COURT REPORTS [1987] 1 S.C.R.
_..
A So far as the second contract dated April 3, 1980 is concerned, it
was pointed out by the learned Judge that it did not make any mention
of FOSFA-20 contract and all that was stated in clause 9 thereof was
that all other terms and conditions for supply not specifically shown
and covered therein should be as per previous contract signed between
the parties for similar supply of HPS. The learned Judge took the view ')-
R that only those terms and conditions which were referred to or con-
nected with and germane to the supply, )lad been made applicable
. from the earlier contract that is to say, the first contract dated January
12, 1980. Further, it was observed that a term about arbitration was
not incidental to supply of goods and it was difficult to read from the
provisions of clause 9 of the second contract that the arbitration clause
was lifted from there and made a part of the same. Upon the said
y -
c findings, the learned Judge allowed the petition under section 33 j-
of the Arbitration Act in so far as it related to the second contract
dated April 13, 1980. It was held that no arbitration agreement existed ·
between the parties and, as such, none of them was entitled to seek
reference to arbitration with regard to the first contract, and that the
D same was governed by the arbitration clause as having been incor-
porated therein from the fOSFA-20 contract. The petition under sec-
tion 33 was disallowed so far as the first contract was concerned.
Hence, these two appeals-one by NAFED against the judgment of
the learned Judge disallowing the petition under section 33 in respect .4
of the first contract and the other by Alimenta in so far as it allowed
E the petition relating to the second contract.

We may at first deal with the appeal preferred by the appellant-
NAFED relating to the first contract. The question is whether by
clause 11 in the first contract, the arbitration clause in FOSFA-20 \ '
contract can be said to have been incorporated into the contract. It is i(
F now well established that the arbitration clause of an earlier contract
can, by reference, be incorporated into a later contract provided, how-
ever, it is not repugnant to or inconsistent with the terms of the con-
~
tract in which it is incorporated. Mr. G. Ramaswamy, learned Addi-
tional Solicitor General appearing on behalf of the appellant, has
strenuously urged that the High Court was wrong in holding that the
G arbitration clause in the FOSFA-20 contract was incorporated into the
first contract by virtue of the incorporation clause. He has drawn our )
attention to the second illustration at page 46 of Russell on Arbitra-
lion, Twentieth Edition. The illustration refers to the decision of Lord
Esher M.R. in Hamilton & 'Co. v. Mackie & Sons, [1889] 5 TLR 677
(C.A.). We have looked into that decision as much reliance has been
H placed thereon on behalf of NAFED. In that case a bill of lading
AL!MENTA S.A. v. AGRICULTURAL FEDERATION [DUTT, J.l 963

contained the words "all other terms and conditions as per charter- A
party". The charterparty contained an arbitration clause. It was con-
tended on behalf of the ship-owners that the arbitration clause in the
charterparty was incorporated into the bill of lading. In overruling the
said contention Lord Esher M. R. Observed:-

"Where there was in a bill of lading such a condition as B
this, 'all other conditions as per charterparty', it had been
decided that the conditions of the charterparty must be
read verbatim into the bill of lading as though they were
there printed in extenso. Then if it was found that any of
the conditions of the charterparty on being so read were
inconsistent with the bill of lading they were insensible, and
must be disregarded. The bill of lading referred to the
c
charterparty, and therefore, when the condition was read
in, 'All disputes under this charter shall be referred to
arbitration,' it was clear that that condition did not refer to
disputes arising under the bill of lading, but to disputes
arising under the charterparty. The condition therefore was D
insensible, and had no application to the present dispute,
which arose under the bill of lading."

According to Lord Esher M. R., the arbitration clause in
charterparty "all disputes under this charter shall be referred to arbit-
ration", if incorporated into the bill of lading would be quite insensible E
because of the words "under this charter". The arbitration clause was,
therefore, meant only for the charterparty and not for the bill of
lading.

In a Full Bench decision of the Calcutta High Court in Dwarka-
das & Co. v. Da/uram Gaganmull, AIR 1951 Cal 10 F.B., the said F
observation of Lord Esher M.R. was considered by Harries, CJ. The
learned Chief Justice also took the view that if the arbitration clause in
the charterparty was imported into the bill of lading it would be quite
meaningless because no dispute under the charter could arise in the
contract evidenced by the bill of lading. According to the learned
Chief Justice, if the words of the arbitration clause in the charterparty G
had read "all disputes under this contract shall be referred to arbitra-
tion", then if that term was transported into the bill of lading, it would
be a perfectly sensible and reasonable term, for, once it had imported
the phrase "all disputes under this CClJltract", it would refer to all
disputes arising under the bill of lading. There would, therefore, be
nothihg inconsistent between such a term and the terms of the bill of H .
964 SUPREME COURT REPORTS [1987) 1 S.C.R.

~
A lading and that being so, cases similar to the case of Hamilton & Co. v.
Mackie & Sons (supra) would have no application to the case. This
view was also taken by the other learned Judges of the Full Bench.

In our opinion, Harries, CJ, had taken a very reasonable and
sensible view. It is true, as pointed out by Lord Esher M.R., that the
B expression "all disputes under this charter", if incorporated into the ')-·
bill of lading, would be quite insensible. But if, the clause had been
"any dispute under this contract", then after incorporation into the

i -
bill of lading the words "this contract" would only mean the bill of
lading into which it had been incorporated. In the instant case, as has
been already noticed, the arbitration clause in the FOSFA-20 contract
c provides "any dispute arising out of this contract" and, as such, there
is no difficulty in the incorporation of the arbitration clause into the
first IDntract, for, the words "this contract" would mean the first
+
contract into which it has been incorporated. Such incorporation
would be quite intelligible and not inconsistent with the terms of the
first contract. There is, therefore, no substance in the contention made
D on behalf of the appellant on the basis of the decision in Hamilton &
Co. v. Mackie & Sons, (supra).

It is next contended by the learned Additional Solicitor General
that the arbitration clause in FOSFA-20 contract not being germane to
~
the subject-matter of the first contract, it cannot be said to have been
E incorporated therein. It is pointed by him that the FOSFA-20 contract
is a CIF contract relating to cost, insurance and freight, while the first
contract is a f.o. b. contract. It is, accordingly, submitted by the learned
~

Counsel tha, the arbitration clause is not germane to the subject-
matter of the first contract. In support of his contention he has placed
much reliance upon the decision of the Court of Appeal in the case of
F The Annefie/d, [1971] 1 All.E.R. 394. In that case the question was
y
whether the arbitration clause in the charterparty was incorporated (
into the bill of lading by. virtue of the incorporation clause. Clause 39,
which was the arbitration clause, contained the words "All disputes
from time to time arising out of this contract". In considering the
question Lord Denning M.R., referred to the decision in The Njegos,
G [935) All.E.R. Rep. 863, where in the course of the discussion, it
transpired that these clauses in the charterparty and bill of lading had
been in existence since 1914 and, it had always be.en held that the
arbitration clause was ·not incorporated in the bill of lading. On behalf
of the shipowners in that c&se it was argued that if the arbitration
clause 39 was incorporated into the bill of lading, the expression "this
H contract" in clause 39 would then be the contract evidenced by the bill
ALIMENTA S.A. v. AGRICULTURAL FEDERATION [DUTT, J.] 965

of lading. In other words, the arbitration clause must be read in its bill
A
of lading context. This contention was made on the basis of the obser-
vation made by Lord Esher M.R., as extracted above. The contention
also finds support from the observation of Harries, CJ, in Dwarka
Das's case (supra). Lord Denning M.R. took the view that a clause
which is directly germane to the subject-matter of the bill ·of lading,.
that is, to the shipment, carriage and delivery of goods, could and B
should be incorporated into the bill of lading contract, even though it
might involve a degree of manipulation of the words in order to fit
exatcly the bill of lading. But, if the clause was one which was not thus
directly germane, it should not be incorporated into the bill of lading
contract unless it was done explicitly in clear w<>rds either in the bill of
lading or in the charterparty. It was, however, held by Lord Denning
M.R. that an arbitration clause was not directly germane to the ship- c
ment, carriage and delivery of goods. So, it was not incorporated by
general words in the bill of lading.

Relying upon the decision in The Annefield, it is submitted on
behalf of the appellant that the arbitration clause in FOSFA-20 con- D
tract is not germane to the subject-matter of the first contract and,
accordingly, it was not incorporated into the first contract. We are
unable to accept the contention. It has already been noticed earlier
that there has been a long continued practice in England that the
arbitration clause is not incorporated into the bill of lading by general
words, unless it is explicitly done in clear words either in the bill of E
lading or in the charterparty. In the instant case, we are not, however,
concerned with a charterparty and a i>ill of lading contract. Even
assuming that the subject-matters of FOSFA-20 contract and the f.o.b.

c
contract are different, we do not think that any question as to the
germaneness of the arbitration clause to the subject-matter would be
relevant. It has been found by the learned Judge of the High Court F
} that the Manager of NAFED, who had signed the first contract, was
aware of the terms of the FOSFA-20 contract including the arbitration
clause contained therein. It is, therefore, manifestly clear that by the
incorporation of clause 11 in the first contract, the appellant intended
to incorporate into it the arbitration clause of FOSFA-20 contract.
Thus where, as in the instant case, the parties are aware of the arbitra- G
lion clause of an earlier contract, the subject-matter of which is diffe-
rent from the contract which is being entered into by them, incorpo-
rates the terms of the earlier contract by reference by using general
words, we do not think there would be any bar to such incorporation
merely because the subject-matters of the two contracts are different,
unless, however, the incorporation of the. arbitration clause will be H
966 SUPREME COURT REPORTS (1987] 1 S.C.R.

A insensible or unintelligible, as was in Hamilton & Co. v. Mackie & .A
Sons, (supra). In the instant case, the arbitration clause in FOSFA-20
contract will fit in the first contract. In other words, it will not be either
insensible or,unintelligible. In our opinion, therefore, the High Court
was right in holding that the arbitration clause in FOSFA-20 contract
was incorporated into the first contract.
B
In the other appeal which has1been preferred by Alimenta, it has
been held by the High Court that there has been no incorporation of
the arbitration clause into the second contract. In the second contract,
clause 9 provides "all other terms and conditions for supply not specifi-·
cally shown and covered hereinabove shall be as per previous contract
c signed between us for earlier supplies of HPS". There is a good deal of
-
difference between clause 9 of this contract and clause 11 of the first
contract. Clause 11 has been couched in general words, but clause 9
refers to all other terms and conditions for supply. The High Court has
taken the view that by clause 9 the terms and conditions of the first
contract which had bearing on the supply of HPS were incorporated
D into the second contract, and the term about arbitration not being
incidental to supply of goods, could not be held to have been lifted as
well from the first contract into the second one.

It is, however, contended on behalf of the appellant that the
High Court was wrong in its view that a term about arbitration is not a
E term of supply of goods. We do not think that the contention is sound.
It has been rightly pointed out by the High Court that the normal
incidents of terms and conditions of supply are those which are con-
nected with supply, such as, its mode and process, time factor, inspec-
tion and approval, if any, reliability for transit, incidental expenses
etc. We are unable to accept the contention of the appellant that an
F arbitration clause is a term of supply. There is no proposition of law
that when a contract is entered into for supply of goods, the arbitration
clause must form part of such a contract. The parties may choose some
other method for the purpose of resolving any dispute that may arise
between them. But in such a contract. the incidents of supply generally
form part of the terms and condition\of the contract. The first con-
G tract includes the terms and conditions of supply arid as clause 9 refers
to these terms and conditions of supply, it is difficult to hold that the
arbitration clause is also referred to and, as such, incorporated into the
second contract. When the incorporation cla11se refers to certain
particular terms and conditions, only those terms and conditions are
incorporated and not the arbitration clause. In the present case, clause
H 9 specifically refers to the teqns and conditions of supply of the first
ALIMENTA S.A. v. AGRICULTURAL FEDERATION IQUTI. J.] 967

contract and, accordingly, only those terms and conditions are incor- A
porated into the second contract and not the arbitration clause. The
High Court has taken the correct view in respect of the second cbntract
also.

In the result, the judgment of the High Court is affirmed and B
both these appeals are dismissed. There will, however, be no orders as
to costs.

M.L.A Appeals dismissed.