IMPACT OF SUBSEQUENT MODIFICATION ON ARBITRATION CLAUSE

Abstract

The commercial sector increasingly prefers Alternative Dispute Resolution (ADR) mechanisms over lengthy litigation processes, with arbitration being a popular choice. This article explores the impact of subsequent oral modifications on arbitration clauses within contracts. Specifically, it examines the incorporation of arbitration clauses in written and oral modifications, the judicial approach in India, and relevant case law. Through analysis of landmark cases, this article outlines the conditions under which arbitration clauses remain operative or become inoperative due to oral modifications.

Introduction

Arbitration has become a favored method for resolving disputes in the commercial sector, offering a faster and more effective remedy compared to traditional litigation. Arbitration is a contractual process, and the powers of an arbitral tribunal are derived from the parties' express agreement, which must be in writing. However, issues arise when contracts with arbitration clauses are orally modified. This article examines the legal implications of oral modifications on arbitration clauses, particularly within the context of Indian law.

Problem Profile

Indian courts are still evolving in their approach to disputes involving oral modifications of contracts with arbitration clauses. Courts often rely on the parties' intent inferred through their conduct, issuing guidelines applied case-by-case.

Incorporation of Arbitration Clause in Written Modification

Under Section 7 of the Arbitration and Conciliation Act, 1996, an arbitration agreement can be incorporated by reference if the contract is in writing and the reference is explicit enough to make the arbitration clause part of the contract. The Supreme Court of India has interpreted this through various rulings:

M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd: The court differentiated between "reference to another document" and "incorporation of another document by reference," requiring a specific reference to the arbitration clause for incorporation.

M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd: The court introduced the concepts of ‘single contract’ and ‘two contract’ cases, determining that a general reference is insufficient in the latter scenario unless the referenced document is a standard form provided by a recognized body.

Incorporation of Arbitration Clause in Subsequent Oral Modification

The impact of oral modifications on arbitration clauses depends on whether the modification continues the previous contract or deviates from it:

Continuation of Previous Contract: If the modification is a continuation without creating new rights and liabilities, the arbitration clause remains operative (e.g., Chatterjee Petrochem Company v. Haldia Petrochemicals, Hema Khattar v. Shiv Khera).

Deviation from Previous Contract: If the modification creates new rights and liabilities, the arbitration clause may become inoperative (e.g., D. Muralidhar Rao v. Srinivasa Construction, BL Kashyap and Sons Ltd v. Mist Avenue Private Ltd).

Presence of No Oral Modification Clause

Courts have varied in their approach to No Oral Modification (NOM) clauses:

Aten Capital Case: The court upheld the NOM clause, denying the consideration of subsequent oral modifications.

John Distilleries Case: The court allowed for the possibility of overriding a NOM clause if the parties' conduct indicated mutual consent to the oral modification.

MWB Business Exchange Centres Ltd v. Rock Advertising Ltd: The court adopted a two-part test to determine if a NOM clause can be surpassed, requiring clear evidence of mutual agreement and something more than an informal promise.

Analysis

Courts have developed standards for incorporating arbitration clauses based on the document referred to rather than the parties' intent. Section 7(5) should be interpreted to focus on the reasonable business person's perspective. If a contract is novated, the arbitration clause stands inoperative unless explicitly reincorporated in the new contract.

Conclusion and Suggestions

Indian courts have created complex distinctions in incorporating arbitration clauses, often relying on technical interpretations. Future jurisprudence should simplify these standards, focusing on the intent of the parties. Contracts with NOM clauses require careful handling to ensure all relevant entities are parties to the arbitration agreement. Indian law should develop more robust guidelines regarding subsequent oral modifications to align with international practices.

References

Arbitration and Conciliation Act, 1996, India.

M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd.

M/S. Inox Winds Ltd. v. M/S. Thermocables Ltd.

Chatterjee Petrochem Company v. Haldia Petrochemicals.

Hema Khattar v. Shiv Khera.

D. Muralidhar Rao v. Srinivasa Construction.

BL Kashyap and Sons Ltd v. Mist Avenue Private Ltd.

Aten Capital Case.

John Distilleries Case.

MWB Business Exchange Centres Ltd v. Rock Advertising Ltd.

Indian Evidence Act, Section 92, Proviso 4.