Delhi High Court: For An Arbitration Clause To Be Enforceable In Subsequent Agreements, It Must Be Explicitly Referenced Within Those Agreements

Delhi High Court: For An Arbitration Clause To Be Enforceable In Subsequent Agreements, It Must Be Explicitly Referenced Within Those Agreements

Justice Jasmeet Singh of the Delhi High Court has observed that for an arbitration clause to be enforceable in subsequent agreements, it must be explicitly referenced within those agreements.

The bench noted that the subsequent agreement in the dispute contained a specific exclusion of the arbitration clause.

The case revolves around an application filed by the defendant under section 8 of the Arbitration and Conciliation Act, 1996 seeking reference of the parties to arbitration in terms of Clause 14.2 of the Flat Buyer’s Agreement.

Brief Facts

A suit was filed by the Petitioner for recovery of an amount of Rs. 4,55,45,182/- arising from a sequence of events linked to agreements with Raheja Developers Ltd (the Defendant). Initially, the Plaintiff agreed to purchase a flat in Gurgaon for Rs. 2 crores under the Flat Buyer's Agreement. This agreement was supplemented by a Second Agreement wherein the Defendant committed to completing refurbishments on the flat. Despite extensions granted by the Plaintiff, the Defendant failed to fulfil these obligations.

Subsequently, the Defendant invoked Section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer the dispute to arbitration based on Clause 14.2 of the Flat Buyer's Agreement. The Plaintiff argued against arbitration, asserting that the suit aimed to recover Rs. 4,55,45,182/- comprising principal, interest, and assured returns. She contended that the dispute primarily concerned breaches under the Second Agreement, which did not include an arbitration clause. Therefore, she maintained that the relief sought was more appropriately addressed through litigation rather than arbitration stipulated solely in the Flat Buyer's Agreement.

Observations by the High Court

The High Court observed that there were two agreements between the parties: the Flat Buyer's Agreement and the Second Agreement governing the refurbishment and possession of the flat. The Flat Buyer's Agreement outlined the terms of sale but did not include provisions for refunding the sale amount or specify deadlines for possession. On the other hand, the Second Agreement required the Defendant to deliver possession by 02.12.2016 or refund Rs. 2 crores.

Recognizing the distinct purposes of each agreement, the High Court concluded that the provisions for refund in the Second Agreement were not encompassed by the arbitration clause in the Flat Buyer's Agreement. Citing the Supreme Court's decision in NBCC (India) Limited vs Zillion Infraprojects Pvt. Ltd., the High Court emphasized that arbitration clauses must explicitly extend to subsequent agreements. It specifically noted that Clause 9 of the Second Agreement expressly excluded arbitration for disputes arising from its terms.

The Court further observed, “A perusal of sub-section (5) of Section 7 of the Arbitration Act itself would reveal that it provides for a conscious acceptance of the arbitration clause from another document, by the parties, as a part of their contract, before such arbitration clause could be read as a part of the contract between the parties. It is thus clear that a reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document into the contract.”

It was further held that even though the Second Agreement contemplated that both the agreements are to be read together, the Second Agreement which contemplates the plaintiff to be entitled to refund of the amount of Rs. 2 crores, in case the flat is not ready to be delivered to the plaintiff on or before 02.12.2016.

According to the court, the two agreements operated in their own distinct and separate fields and the Flat Buyer’s Agreement could not be interpreted to include the claims made by the plaintiff in the present suit.

The bench held, “Both the parties have agreed to the said clause and therefore cannot at this stage seek a remedy that they have waived of by way of this express condition in the Second Agreement.”

The bench held, “In addition, Clause 9 of the Second Agreement clearly contemplates the Second Agreement to have overall overriding effect over the Flat Buyer’s Agreement.”

The Court finally concluded by stating that the express exclusion of the arbitration clause is evident from the terms agreed to by the parties in the Second Agreement and therefore the parties cannot be referred to arbitration in these circumstances.

Therefore, the High Court held that the Defendant's application lacked merit. The application was thus dismissed.