Even If The Principal Agreement Is Non-Existent, The Arbitration Clause Would Still Apply: Delhi High Court

The Single Bench of Justice V. Kameswar Rao observed that since the issue of limitation and arbitrability was not conclusive against the party, the issue was amenable to the jurisdiction of the Arbitral Tribunal.

The petitioner National Research Development Corporation and the respondent Mak Controls and Systems Private Limited entered into a 'Programme Aimed at Technological Self Reliance' Scheme (PATSER Agreement), for development of a GPS. Under the said PATSER Agreement, the respondent was provided financial assistance for the development of the GPS. In terms of the PATSER Agreement, a Royalty Agreement was also entered into between the parties, which provided for details regarding the payment obligations of the respondent. The respondent was required to pay a specified amount as Royalty to the petitioner every year in respect of the product manufactured and sold by the respondent. The liability of the respondent to pay Royalty under the Royalty Agreement was to accrue upon start of commercial sale of the product by the respondent, which was to continue for a minimum period of 5 years from the date of commencement of the commercial sale of the product.

After the respondent failed to pay Royalty, the petitioners invoked the arbitration clause contained in the PATSER Agreement by issuing a legal notice to the respondent. The respondent, in its reply to the legal notice, denied its liability to pay Royalty on the ground that there was no commercial production of the product by the respondent. Thereafter, the petitioner filed a petition under Section 11 (6) of the Arbitration & Conciliation Act, 1996 (A&C Act) before the Delhi High Court for appointing a Sole Arbitrator.

The respondent Mak Controls and Systems submitted before the High Court that since there was no commercial production and/ or sale of the said product, hence, there was no obligation on the part of the respondent to pay any Royalty.

The respondent averred that since the PATSER Agreement had expired in 2014, the claim for payment of Royalty as stipulated under the agreement had also expired in 2014. Thus, the respondent contended that there was no subsisting dispute between the parties which required arbitration.

The respondent contended that if the principal agreement is non-existent, the arbitration clause contained therein would also not apply.

The respondent submitted that the petitioners had not taken any action since 2014 and that they had issued a legal notice only in 2019. The respondent added that there is no provision in the A&C Act that specifies the period of limitation for filing an application under Section 11 of the A&C Act. Hence, the respondent averred that Section 43 of the Limitation Act, 1963 would apply and therefore, the petition filed by the petitioners was clearly barred by limitation.

The petitioner National Research Development Corporation contended that even after the expiry of the PATSER Agreement, the obligation of the respondent to pay Royalty, in the manner as provided under the Royalty Agreement, would not come to an end.

The Court observed that the Supreme Court in the case of Everest Holding Limited v. Shyam Kumar Shrivastava and Ors. (2008) had rejected the plea that since the joint venture agreement, which contained an arbitration agreement, had been terminated and cancelled, the disputes could not be referred to arbitration.

The Court further noted that in the case of Reva Electric Car Company P. Ltd. v. Green Mobil (2011), the Supreme Court had observed that in view of the provisions of Section 16(1)(a) of the A&C Act, even on the termination of the agreement or the contract, the arbitration agreement contained therein would still survive. The Supreme Court had held that accepting the contention that the arbitration clause, as contained in the MoU, would come to an end when the said MOU came to an end by efflux of time, would lead to a very uncertain state of affairs and destroy the very efficacy of Section 16(1) of the A&C Act.

The Court thus rejected the contention of the respondent that since the principal agreement, i.e., the PATSER Agreement, is non-existent, the arbitration clause contained therein would also not apply.

The Court observed that the petitioners had claimed that their right to receive Royalty would continue even after the expiry of the PATSER agreement. The Court noted that the petitioners had averred that after the said product was manufactured and commercially sold in the market, the respondent was required to pay Royalty for a minimum period of five years.

The Court further noted that the respondent had contested the claims of the petitioner by averring that since the respondent had not commercially sold the product in the market, it had no liability to pay the Royalty.

The Court held that the said aspects need to be ascertained, which is only possible before the Arbitrator, after the parties have produced evidence. Hence, the Court ruled that the issue of limitation and arbitrability was not conclusive against the petitioners.

The Court added that the provisions of the PATSER Agreement need to be considered and decided, which must be delved into by the Arbitrator itself.

The Court observed that in the case of National Research Development Corporation & Anr. versus M/s SMS Pharmaceuticals Ltd. (2022), a similar plea was raised before the Delhi High Court that since the agreement between the parties had expired and the claim, if any, was barred by limitation, hence, the parties could not be referred to arbitration. The Court observed that the Delhi High Court had ruled that the dispute with regard to lack of cause of action and limitation was amenable to the jurisdiction of Arbitral Tribunal, since the objections regarding limitation were not ex-facie made out from the records of the case. The High Court had held that since the questions raised were mixed questions of fact and law, they must be considered by the Arbitral Tribunal itself. The Court had thus, referred the parties to arbitration.

Hence, the Court allowed the petition, appointed a Sole Arbitrator and referred the parties to arbitration.

Case Title: National Research Development Corporation and Anr. versus Mak Controls and Systems Private Limited

Citation: 2022 LiveLaw (Del) 647

Dated: 05.07.2022 (Delhi High Court)

Counsel for the Petitioners: Mr. Joydeep Sarma, Adv

Counsel for the Respondent: Mr. M. Yogesh Kanna, Mr. Raja Rajeshwaran and Mr. Gangadarsana P.G., Advs.

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