Arbitration Clause Does Not Cease With Contract Termination, It Is An Independent Agreement: Delhi High Court Allows S. 11 Application

Brief Facts:

M/s S.K Agencies (“Petitioner”) and M/s DFM Foods (“Respondent”) initially entered into an agreement, granting the Petitioner the right to operate a distribution outlet/sale depot of the Respondent in Kanpur, Uttar Pradesh. While the agreement was initially intended to last for three years, both parties extended it. The agreement continued to govern their relationship and dealings beyond the initial period, and the Respondent dispatched materials to the outlet until July 2019.

The Petitioner communicated its concerns about losses and requested a copy of the extension agreement, which the Respondent allegedly denied in a letter. Despite the purported termination, the Petitioner claimed the parties continued to work, and the previous agreement automatically renewed. The Petitioner urged for the initiation of arbitration proceedings, leading to a series of letters, invoking the arbitration clause. The Respondent rejected this request. Feeling aggrieved, the Petition filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in Delhi High Court (“High Court”) for appointment of a Sole Arbitrator to adjudicate the disputes.

The respondent opposed the petition on several grounds. Firstly, it argued that the petition, instituted by a sole proprietorship firm, was not maintainable, as a sole proprietorship lacked the right to sue. Secondly, it contended 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 The Respondent asserted that the Petitioner invoked the 2015 agreement, which was superseded by the 2018 agreement, and failed to specify the disputes and claims as required by the notice. Lastly, the Respondent argued that the disputes raised by the Petitioner fell outside the scope of the arbitration agreement, as the 2018 agreement expired on 23.07.2019, rendering any claims made thereafter non-referable to arbitration.

Observations by the High Court:

The High Court noted that the arbitral tribunal holds the primary authority to determine questions of non-arbitrability. It held that unless a dispute is manifestly or ex facie non-arbitrable, the general rule is to refer the dispute to arbitration, echoing the maxim "When in doubt, do refer".

The High Court highlighted that the dispute centered around the interpretation of clause 3 in the agreement, The Petitioner asserted that, based on contractual provisions and the conduct of the parties, there was no automatic termination of the agreements. Conversely, the Respondent contended that the agreement dated 22.12.2018 automatically expired on 24.07.2019 by virtue of clause 3, rendering the petitioner's subsequent claims outside the scope of the arbitration agreement. The High Court held that this should be adjudicated by a duly constituted arbitral tribunal, emphasizing that it was beyond the court's purview to interpret contractual provisions or delve into aspects influencing the merits of the parties' respective cases.

In addition, the High Court recognized the relevance of the conduct of the parties in determining whether the agreements were extended. It referred to the case of Reva Electric Car Co. (P) Ltd. v. Green Mobil, where the Supreme Court relied on correspondence between the parties to conclude that a Memorandum of Understanding (MoU) was extended, even after the initial period had expired.

Moreover, the High Court held that an arbitration agreement survives the termination of the main contract. It referred to Section 16(1)(a) of the Arbitration Act, emphasizing that the arbitration clause, as part of the contract, should be treated as an independent agreement. The High Court rejected the argument that the termination of the main contract automatically invalidated the arbitration clause.

Addressing the Respondent's contention that the invocation of arbitration through the notice was invalid, the High Court dismissed this argument. It acknowledged that the petitioner indeed sent a notice invoking arbitration, which was received and replied to by the Respondent. It emphasized that the absence of a classification of disputes or quantification of claims in the notice does not negate arbitration when the intent to refer the disputes to arbitration is evident from the notice itself.

Accordingly, Mr. Justice (Retd.) R. B. Misra, Former Judge of the Himachal Pradesh High Court, was appointed as the Sole Arbitrator for the resolution of the disputes between the parties.

Case Title: M/S S.K Agencies vs M/S DFM Foods

Citation: 2024 LiveLaw (Del) 180

Case Number: ARB.P. 1201/2022

Advocate for the Petitioner: Mr. Sushil Kr. Pandey

Advocate for the Respondent: Mr. Sidhant Kumar, Mr. Gurpreet Singh Bagga, Ms. ManyaaChandok. Mr Shivankar Rao, Ms. Muskaan Gopal and Ms. Harleen

ClickHere To Read/Download Order