On the termination of the agreement, the arbitration clause subsists?

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On the termination of the agreement, the arbitration clause subsists

An arbitration clause in a commercial contract is an agreement inside an agreement; the parties while making their commercial bargain in addition agree on a private tribunal to resolve any issues that may arise between them [Union of India V/s Mc Donnell Douglas Corporation, (1993) 2 Lloyd’s Rep. 48]. Doctrine of separability states that the arbitration agreement has a separate life from the contract for which it provides the means of resolving disputes; this enables the arbitration agreement to survive breach of the contract of which it is a clause [Russell on Arbitration, 21st Edition, Page 57]. With regard to termination of a contract by breach or frustration it was held in the matter of: Heyman V/s Darwins Ltd, (1942) A.C. 356, that termination of a contract by breach of performance obligations does not bring the contract’s dispute resolution procedure to an end, and is entirely within the scope of the arbitration agreement. Further, in the matter of:Astro VencedorCompaniaNaviera SAV/s Mabanaft GmbH, (1970) 2 Lloyd’s Rep. 267, it was observed that, the court should if the circumstances allow lean in favour of giving effect to the arbitration clause to which the parties have agreed.

According to the doctrine of separability an arbitration clause constitutes a self-contained contract collateral or ancillary to the main contract. However, according to the doctrine of implied terms, an arbitration agreement can continue to be implied as one of the terms of the relationship between the parties after the formal expiry of an agreement between them containing an arbitration clause; typically, this is found in leases and partnership deeds [M/s Roshin Lal Gupta & Sons (P) Ltd V/s Delhi Tourism & Transportation Development Corporation &Anr, FAO No. 356 of 2008, High Court of Delhi, Date of Decision: 06.03.2009, Coram: Sudershan Kumar Misra, J.]

Precedents:

  1. In the matter of: Mulheim Pipecoatings GmbH V/s Welspun Fintrade Ltd., 2013 SCC Online Bom 1048 it was observed that:
    1. The arbitration agreement constitutes a “collateral term” in the contract which relates to the resolution of disputes and not to the performance of the contract. Whereas the substantive terms of a contract define the rights and obligations of the parties, an arbitration agreement provides for modalities agreed upon by parties for the resolution of their disputes. Parties agree thereby to have their disputes resolved before an arbitral tribunal as distinct from the ordinary courts of law in the jurisdiction.
    2. Upon termination of the main contract, the arbitration agreement does not ipso facto or necessarily comes to an end.
    3. The issue as to whether the arbitration agreement survives or perishes along with the main contract would depend upon the nature of the controversy and its effect upon the existence or survival of the contract itself.
    4. If the nature of the controversy is such that the main contract would itself be treated as nonest in the sense that it never came into existence or was void, the arbitration clause cannot operate, for along with the original contract, the arbitration agreement is also void.
    5. Similarly, though the contract was validly executed, parties may put an end to it as if it had never existed and substitute a new contract solely governing their rights and liabilities thereunder. Even in such a case, since the original contract is extinguished or annihilated by another, the arbitration clause forming a part of the contract would perish with it.
    6. There may, however, be cases where it is the future performance of the contract that has come to an end. Such an eventuality may arise due to a number of circumstances, in which one or both the parties may be discharged from further performance. Termination of the contract by one party, repudiation of the contract by one party and its acceptance by the other and frustration of the contract are some of the circumstances. The controversy in such matters arises upon or in relation to or in connection with the contract. In all such cases, the contract is not put an end to for all purposes because there may be rights and obligations which had arisen earlier when it had not come to an end. The contract subsists for those purposes and the arbitration clause would operate for those purposes.
    7. Direct Impeachment of Arbitration Agreement V/s Parasitical Impeachment of Arbitration Agreement:
      1. The doctrine of separability requires, for the arbitration agreement to be null and void, inoperative or incapable of performance, a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement.In other words, arguments for impeaching the arbitration agreement must be based on facts which are specific to the arbitration agreement.
      2. There may, of course, be facts which are specific to both the main agreement and the arbitration agreement, but there may well be facts which are specific to the main agreement, but not to the arbitration agreement. In the former case, the arbitration clause would perish with the main contract while in the latter case, it would not.
      3. Another way of considering the matter is whether it is the further performance of the contract that is brought to end or it is the existence of the contract which is brought to end. In the former case, where the further performance of the contract has been brought to end, the arbitration clause would survive whereas when the existence of the contract itself brought to end, the arbitration clause would not survive.
  1. In the matter of: Union of India V/s Kishorilal Gupta & Bros, AIR 1959 SC 1362, it was observed that:
    1. If the contractis superseded by another, the arbitration clause being a component part of the earlier contract, falls with it.
    2. But, where the dispute is whether the said contract is void ab initio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity.
    3. If the dispute is whether the contract is wholly superseded or not by a new contract between the parties, such a dispute must fall outside the arbitration clause, for, if it is superseded, the arbitration clause falls with it.
  2. In the matter of: Young Achievers V/s IMS Learning Resources (P) Ltd, (2013) 10SCC535, it was observed that,where a contract containing an arbitration clause is substituted by another contract, the arbitration clause perishes with the original contract unless there is anything in the new contract to show that the parties intended the arbitration clause in the original contract to survive.
  3. In the matter of: Sreenivasa V/s Kuttukaran Machine Tools Ltd, 2007 (4) Arb. L.R. 445 (Kar), it was held that:

…But in a case where a contract is validly executed, which contains an arbitration clause, if such a contract comes to an end either by way of repudiation, frustration, breach or performance of the contract, though the contract comes to an end, the contract is still in existence, for certain purposes in respect of disputes arising under it or in connection with it. Therefore, the arbitration clause in such a contract does not perish. It continues to exist. Any dispute arising under the said contract is to be decided as stipulated in the arbitration clause. Whether the contract has come to an end in the manner stipulated in the contract itself is a dispute. Therefore, notwithstanding the contract coming to an end, the arbitration clause persists and even that dispute is to be resolved in terms of the arbitration clause contained in the agreement…

  1. In the matter of: Ashok Thapar V/s Tarang Exports (P) Ltd, 2018 SCC Online Bom 1489, it was observed that:

… The purpose of the Arbitration and Conciliation Act, 1996 is to minimize the burden of the Courts so also to expedite the matters. Once the parties have intended to refer their dispute to the Arbitrator in their Agreement, then any dispute pertaining to the contents of the Agreement or touched the subject matter of the Agreement is necessarily to be referred to the Arbitrator even though Arbitration Agreement is mutually terminated by both the parties…

  1. In the matter of: Manohar Reddy & Bros. V/s Maharashtra Krishna Valley Development Corporation, (2009) 2 SCC 494, it was held that:

… An arbitration clause, as is well known, is a part of the contract. It being a collateral term need not, in all situations, perish with coming to an end of the contract. It may survive. This concept of separability of the arbitration clause is now widely accepted…

  1. In the matter of: SMS Tea Estate (P) Ltd. V/s Chandmari Tea Company (P) Ltd., (2011) 14 SCC 66, it was held that:

… Even if a deed of transfer of immovable property is challenged as not valid or enforceable, the arbitration agreement would remain unaffected for the purpose of resolution of disputes arising with reference to the deed of transfer…

 

Excursus:

  1. The Hon’ble Supreme Court of India in the matter of Kishorilal Gupta (Supra) examined the question whether an arbitration clause can be invoked in the case of a dispute under a superseded contract. The principle laid down was that if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. But, where the dispute is whether such contract is void ab initio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity [Samyak Projects (P) Ltd V/s Ansal Housing & Construction Ltd, FAO (OS) No. 33 of 2019, High Court of Delhi, Date of Decision: 13.02.2019, Coram: Chief Justice & Justice V. Kameswar Rao].
  2. In Russell on Arbitration, 21st Edition, Page 32 it has been stated that:

“…it would be a bizarre outcome if the arbitration clause did not survive discharge of the contract by breach, as the arbitration clause was agreed by the parties for the very purpose of providing the means by which disputes about the contract, including breach, would be determined. The first part of the answer is that the arbitration clause is treated as a separate and independent agreement which generally survives the termination of the underlying contract. This is known as the doctrine of separability…”

  1. In Mustill& Boyd,Commercial Arbitration,Butterworths, 1982 (at Page 8), the doctrine of separability has been expressed thus:

…This doctrine treats the arbitration clause as having a life of its own, severable from the substantive contract, and capable of surviving it so as to give the arbitrator continuing jurisdiction not only over disputes arising from events happening whilst the contract was still in existence, but also upon whether the contract has come to an end, and if so with what consequences to the parties. Thus, an arbitrator can hold that the contract has been discharged by frustration or repudiation, or has been rescinded on the ground of misrepresentation or non-disclosure, without casting any doubt upon his own status as arbitrator…

  1. The arbitration agreement is severable from the main contract does not imply that it will survive the main contract in every case even if the main contract is at an end. Although in case of agreements which are void ab initio the ability of the arbitration clause to survive is doubtful, however, in voidable contracts, the arbitration clause would survive, while in the case of contracts which are stated to have become void later on, the arbitration clause survives.

Interestingly, in the matter of: Neyveli Lignite Corporation V/s Metro Machinery Traders &Ors, Writ Appeal Nos. 1488, 1502 and 1562 of 2007, High Court of Madras, Date of Decision: 01.04.2008, it was held that:

… an arbitration clause in an agreement shall be treated as an agreement independent of other terms of the contract and even if the Arbitral Tribunal were to hold that the contract is null and void, it shall not entail ipso jure the invalidity of the arbitration clause. In other words, even if the contract is held to be void, the clause regarding arbitration found in a void contract would not become void. It exists independently of the said contract and it could be enforced…

  1. The Arbitration & Conciliation Act, 1996 and the Delhi Rent Control Act, 1955: According to Section 3 (c) of the Delhi Rent Control Act, 1955 (hereinafter referred to as the DRCA), the provisions contained in the DRCA are not to apply to any premises, whether residential or not, whose monthly rent exceeds Rs. 3,500/-. According to the mandate contained in the report in the matter of: Booz Allen & Hamilton Inc V/s SBI Home Finance Ltd &Ors, (2011) 5 SCC 532, one of the well-recognized examples of “non-arbitrable” dispute is “… eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes…”. However, in the matter of:Himangni Enterprises V/s Kamaljeet Singh Ahluwalia, Civil Appeal No. 16850 of 2017, Supreme Court of India, Date of Decision: 12.10.2017, Coram: R.K. Agrawal & Abhay Manohar Sapre, JJ., in Paragraphs 25 and 26 it was held as follows:

… 25.Learned counsel for the appellant, however, argued that the provisions of the Delhi Rent Act, 1955 are not applicable to the premises by virtue of Section 3 (c) of the Act and hence the law laid down in the aforementioned two cases would not apply.We do not agree.

26.The Delhi Rent Act, which deals with the cases relating to rent and eviction of the premises, is a special Act.Though it contains a provision (Section 3) by virtue of it, the provisions of the Act do not apply to certain premises but that does not mean that the Arbitration Act, ipso facto, would be applicable to such premises conferring jurisdiction on the arbitrator to decide the eviction/rent disputes. In such a situation, the rights of the parties and the demised premises would be governed by the Transfer of Property Act and the civil suit would be triable by the Civil Court and not by the arbitrator.In other words, though by virtue of Section 3 of the Act, the provisions of the Act are not applicable to certain premises but no sooner the exemption is withdrawn or ceased to have its application to a particular-premises, the Act becomes applicable to such premises. In this view of the matter, it cannot be contended that the provisions of the Arbitration Act would, therefore, apply to such premises…

Thus, as per the report in the matter of: Himangni Enterprises (Supra), cases relating to rent and eviction of the premises are non-arbitrable disputes.

This content is contributed by Advocate Shivam Goel, Partner at Lex Unified Law Firm, Delhi

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