Extension Of Period Of Agreement By Written Communications, No Novation, The Arbitration Clause Continues To Be Operative: Delhi High Court

The High Court of Delhi has held that if the parties have, by written communications, extended the period of agreement, the arbitration clause that was a part of the agreement continues to be operative.

The bench of Justices Vibhu Bakhru and Amit Mahajan has distinguished between the situations wherein an arbitration clause expires with the novation of the main agreement and when the arbitration clause continues to be operative when the original agreement is not superseded by any other agreement but extended by the parties through written communications.

The Court further held that the Court while exercising jurisdiction under Section 8 of the Act should refer the parties to arbitration where there is substantial dispute whether the original contract containing the arbitration clause has been novated or superseded as it would be outside the scope of interference permitted under the Section.

Facts

The parties entered into a Rent Agreement (agreement) dated 01.07.2017 by which the appellant leased out the subject premises to the respondent. The agreement contained an arbitration clause. The original period of the agreement was for one year.

On the expiry of the original period, the parties extended the agreement through written communications i.e., letter and emails, and the premised were vacated only in the month of March 2019. However, a dispute arose between the parties regarding the refund of the security deposit as the appellant refused to return the amount on the grounds that the amount would be needed for the repair of the premises as the occupation by the respondent caused damage to the property.

Aggrieved by the forfeiture of its security deposit, the respondent filed a suit for the recovery of the money. Before the commercial court, the appellant filed an application under Section 8 of the A&C Act for referring the dispute to arbitration.

The Ld. Commercial Court dismissed the application filed by the appellant on the ground that the agreement expired with efflux of time in the year 2018, therefore, there was no subsisting agreement and with the expiry of the main agreement, the arbitration clause also was not subsisting. Accordingly, the appellant filed the appeal under Section 37(1)(a) of the Act.

Grounds of Appeal

The appellant challenged the impugned order on the following grounds:

• Arbitration clause survives the termination of the main agreement.
• The main agreement got extended as the parties by their written communications and with their conduct continued with the agreement till March 2019.
• The relief that the respondent is claiming is also premised on the agreement, therefore, the arbitration clause contained in that agreement cannot be excluded.

Analysis by the Court

The Court observed that the original period of the agreement was only for 12 months that would expiry on 30.06.2018, however, the parties continued with the arrangement agreed under the agreement and in fact by their written communications extended the agreement till March 2019.

The Court observed that in a case where the agreement between the parties stands superseded by another agreement, the arbitration clause also falls with the agreement, however, where no new agreement is entered into between the parties and the original agreement is extended by written communications, the arbitration clause would continue to operate.

The Court further held that the Court while exercising jurisdiction under Section 8 of the Act should refer the parties to arbitration where there is substantial dispute whether the original contract containing the arbitration clause has been novated or superseded as it would be outside the scope of interference permitted under the Section.

The Court reiterated that the scope of interference under Section 8 and Section 11 stands on equal footing and it has to be on a prima facie threshold regarding the examination of the existence of the agreement.

Case Title: Unique Décor (India) Pvt. Ltd. v. Synchronized Supply Systems Ltd.

Citation: 2023 LiveLaw (Del) 492

Date: 30.05.2023

Counsel for the Appellant: Mr. Nishant Nigam and Mr. Aman Abbi

Counsel for the Respondent: Mr. Sushil Shukla

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