Arbitration Clause In The Original Agreement Would Not Survive When The Agreement Is Superseded By A Settlement Agreement Without An Arbitration Clause: Delhi High Court

The High Court of Delhi has held that an arbitration clause contained in the original agreement would fall if the agreement is superseded by a settlement agreement without an arbitration clause.

The bench of Justice Pratibha M. Singh held that if a mutual settlement supersedes the original contract, the original arbitration clause would not survive and if there is unilateral repudiation, then the arbitration clause may survive depending on the facts.

The Court held that if the arbitration clause in the original agreement is enforced, the sanctity of a settlement agreement, which completely settles the dispute between the parties, would be lost.

Facts

The Plaintiff was awarded a contract by the Defendant for executing Civil, Structural, and Internal Finishing works, along with External Development and Boundary wall works, for the "IREO Victory Valley" project. The Plaintiff completed the works on 31st March, 2018.

Despite completion, a substantial sum remained outstanding. The Plaintiff issued a demand notice on 11th January, 2019, claiming more than Rs. 107 crores from the Defendant. After negotiations, the parties entered into a Settlement Agreement on 18th January, 2020.

The terms of the Settlement Agreement included, (i) foreclosing the contracts and work orders, (ii) defendant would hand over five flats in the "IREO Victory Valley" project to the Plaintiff for approximately Rs.10.10 crores and (iii) defendant would issue post-dated cheques for the remaining outstanding amount of approximately Rs.8.65 crores within 30 days of the signing of the agreement.

However, the Defendant failed to honor the settlement terms. The Plaintiff sent two demand notices on 13th June, 2021, regarding the unpaid operational debt amounting to Rs. 18.76 crores, but the Defendant repudiated the same on 28th June, 2022.

Consequently, the plaintiff filed the suit before the High Court for seeking enforcement of the settlement agreement. It also filed an application under Order XIII A, CPC seeking summary judgment.

Submission by the Parties

The plaintiff made the following submissions:

• Despite the settlement agreement, the Defendant has failed to fulfil its obligations, including the transfer of flats and payment of the outstanding amount.
• Once the parties execute a settlement agreement and rescinds the original agreement, the arbitration clause contained therein also falls and the dispute becomes non-arbitrable.

The defendant made the following counter-submissions:

• The arbitration clause contained in the original agreement is still valid and mere execution of a settlement agreement would not make the dispute non-arbitrable.
• If the settlement is within the contract itself and not outside of it, the contract would not be rescinded and hence the Arbitration Clause would still be applicable.
• When the issue of supersession is itself disputed, the dispute should be referred to arbitration.

Analysis by the Court

The Court observed that the defendant neither filed any application under Section 8 of the A&C Act for seeking reference of the dispute to arbitration nor filed a response to application seeking summary judgment.

The Court noted that the defendant has not denied the existence or execution of the settlement agreement but has merely relied on an arbitration clause in the earlier agreement to seek reference to arbitration.

The Court held that if a mutual settlement supersedes the original contract, the arbitration clause in the original contract would not survive. It cited the case Union of India v. Kishorilal Gupta and Bros. 1959 SCC OnLine SC 6, where the Supreme Court held that once a settlement is arrived at and acted upon, the original claim would stand satisfied and would not survive.

The Court also relied upon the judgment in Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141 wherein the Apex Court held that upon a full and final settlement, the contract does not subsist which as a result perishes the arbitration clause as well.

The Court noted that the Settlement Agreement in this case was a subsequent agreement that constituted a full and final settlement, precluding any further claims under the original contract. Therefore, the arbitration clause contained in the original contracts would not be applicable to the present dispute.

It held that clauses D, E and F of the Settlement Agreement makes it abundantly clear that this is a foreclosure, a full and final settlement. It observed that the defendant has also acknowledged the agreement as final in several of its emails and also acknowledged its liability therein.

The Court held that alternate dispute resolution mechanisms are designed to expedite dispute resolution and not to reopen settled disputes. The Court held that there is no real prospect for the defendant to succeed in defending the claims.

Accordingly, the Court decreed the suit in favour of the plaintiff.

Case Title: Larsen & Turbo Ltd v. IREO Victory Valley Pvt Ltd

Citation: 2024 LiveLaw (Del) 509

Date: 24.04.2024

Counsel for the Plaintiff: Mr. Manu Seshadri, Mr. Aveak Ganguly & Mr. Sahil Manganani, Advs.

Counsel for the Defendant: Mr. Gagan Gandhi & Mr. Akshay Malik, Advocates

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