Delhi High Court: Arbitration Clause to Be Treated as Independent Agreement, Valid Even After Contract Termination

Delhi High Court: Arbitration Clause to Be Treated as Independent Agreement, Valid Even After Contract Termination

Justice Sachin Datta confirmed the position that the arbitration clause remains valid even after the termination of the contract. The court underscored the autonomy of the arbitration clause, emphasizing that it should be considered a distinct and independent agreement, separate from the overall contract.

The petitioner, M/s S.K. Agencies, and the respondent, M/s DFM Foods, entered into an agreement that authorized the petitioner to manage a distribution outlet or sale depot for the respondent in Kanpur and Uttar Pradesh. Although the initial duration of the agreement was set for three years, both parties mutually agreed to extend its term. Subsequently, the agreement persisted as the guiding framework for their association and transactions beyond the initial three-year period.

The Petitioner expressed concerns about losses and requested a copy of the extension agreement, which the Respondent allegedly denied in a letter. Despite the claimed termination, the parties continued to work, and the previous agreement was asserted to have automatically renewed. The Petitioner advocated for the commencement of arbitration proceedings, initiating a series of letters invoking the arbitration clause. The Respondent rejected this request. Feeling aggrieved, the Petitioner filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) in the Delhi High Court seeking the appointment of a Sole Arbitrator to adjudicate the disputes.

The respondent opposed the petition on the following grounds:

a) The respondent contends that the petition, filed by a sole proprietorship firm, is not maintainable as a sole proprietorship does not possess the legal capacity to initiate legal proceedings.

b) The respondent argues that the letter does not validly invoke arbitration under Section 21 of the Arbitration Act. The respondent asserted that the petitioner invoked the 2015 agreement, which was superseded by the 2018 agreement, and failed to specify the disputes and claims as required by the notice.

c) Finally, the respondent contends that the disputes raised by the petitioner do not fall within the scope of the arbitration agreement. They argue that the agreement dated 22.12.2018 expired on 23.07.2019, extinguishing the arbitration agreement. Therefore, any claims made thereafter are not subject to arbitration. They assert that claims for damages after the expiry of the agreement cannot be subject to the arbitration agreement.

The High Court observed that the arbitral tribunal possesses the primary authority to decide on matters of arbitrability. It emphasized that unless a dispute is manifestly or ex facie non-arbitrable, the usual practice is to refer the dispute to arbitration, echoing the principle of "When in doubt, refer."

The court observed that the dispute between the parties, specifically concerning the interpretation of the agreements and the operating term, should be decided by a properly constituted arbitral tribunal. It emphasizes that it is not within the scope of the court's jurisdiction in such proceedings to interpret contractual provisions or to address aspects that impact the merits of the parties' respective cases. Therefore, the court deferred the resolution of the dispute to the arbitral tribunal, indicating that such matters are more appropriately handled through arbitration.

In its deliberation, the High Court duly acknowledged the significance of the conduct exhibited by the parties in determining whether the agreements in question had been extended. It cited the precedent established in the case of Reva Electric Car Co. (P) Ltd. v. Green Mobil, where the Supreme Court, drawing upon correspondence exchanged between the parties, arrived at the conclusion that a Memorandum of Understanding (MoU) had been effectively extended, despite the lapse of the initial period stipulated therein.

The High Court affirmed that even after the termination of the main contract, an arbitration agreement remains in effect. It cited Section 16(1)(a) of the Arbitration Act, underscoring that the arbitration clause, being an integral part of the contract, should be regarded as a separate and independent agreement. The High Court dismissed the contention that the termination of the main contract automatically nullified the arbitration clause.

Dismissing the respondent's claim regarding the invalidity of the arbitration invocation through the notice, the court acknowledged that the petitioner had indeed sent a notice invoking arbitration, which the respondent received and responded to. The court emphasized that the absence of a categorization of disputes or quantification of claims in the notice does not invalidate arbitration, as long as the intention to refer the disputes to arbitration is evident from the notice itself.

Accordingly, R. B. Misra, a former judge of the Himachal Pradesh High Court, was appointed as the sole arbitrator to adjudicate the disputes between the parties.