NOVATION OF AGREEMENTS AND ARBITRATION CLAUSES

INTRODUCTION

The Hon’ble Supreme Court of India (“SC”) by its judgment in Young Achievers v. IMS Learning Resources Private Limited [2013 (10) SCALE 531] dated August 22, 2013 while dealing with the subject of "Novation and Arbitration Clauses" held as under:

“An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded / novated by a later agreement”.

BRIEF FACTS

IMS Learning Resources Private Limited (“IMS”) filed a Civil Suit in the High Court of Delhi at New Delhi for a permanent injunction restraining Young Achievers (“YA”) from infringing its registered trademark, copyright, passing off of damages, rendition of accounts of profits and also for other consequential reliefs.

YA preferred an Interim Application under Section 8, read with Section 5 of the Arbitration and Conciliation Act, 1996 (“the 1996 act”) for rejecting the plaint and referring the dispute to arbitration and also for other consequential reliefs.

IMS raised an objection to the said application stating that the suit is perfectly maintainable.

The High Court rejected YA’s application vide its order dated April 16, 2012 holding that the earlier agreements dated April 01, 2007 and April 01, 2010 which contained an arbitration clause stood superseded by a new contract dated February 01, 2011 arrived at between the parties by mutual consent.

YA being aggrieved by the said order preferred an appeal before the Division Bench of the Delhi High Court, which confirmed the order of the learned Single Judge and dismissed the appeal.

YA further preferred an appeal against the above order by special leave.

RELEVANT CLAUSES OF THE AGREEMENT

The agreement dated April 01, 2010 contained the following arbitration clause:

Clause 20 - Arbitration

All disputes and questions whatsoever which may arise, either during the substance of this agreement or afterwards, between the parties shall be referred to the arbitration of the managing director of IMS Learning Resources Pvt. Ltd. Or his nominee and such arbitration shall be in the English language at Mumbai.

The arbitration shall be governed by the provisions of the Arbitration and Conciliation Act, 1996 or any other statutory modification or reenactment thereof for the time being in force and award or awards of such arbitrator shall be binding on all the parties to the said dispute.

Relevant portion of the Exit paper are as follows:

With reference to your mail/letter dated 1st February, 2011 on closing the center, from the aforesaid date with mutual consent we have agreed on the following:

1. Enrolled students

All enrolled students of IMS with you will be serviced by you with respect to their classes, workshops and conduct of test series, GD/PI and any other servicing required as per the product manual.

2. Premises

IMS will reserve the first right of utilization to occupy the premises. In an eventuality of IMS exercising the right to use the premises, then IMS will reimburse the monthly rent for the corresponding months before changing the rental agreement onto IMS name.

3. Marketing

From the above-mentioned date you are not eligible to do any marketing and promotional activities in the name of IMS.

4. Brand

From the above-mentioned date you are not eligible to use IMS brand in any form.

5. Monthly claims

The partner abides to deposit all the course fees collected for any of IMS programs till now as per the deposit policy of IMS. All monthly claims will be settled till 31st January, 2011 and the claims would be - released after the date of termination of the partner agreement.

6. Security Deposit

The security deposit amount will be refunded back to you after the completion of servicing of all enrolled IMS students. In case of any due on partner to the company (unsettled fees, loan or advance for centre activities etc.), same amount will be deducted from the security deposit.

7. Non Compete Clause

The partner has averred that neither he, nor his family members are directly or indirectly interested in any business in direct competition with that of IMS and the partner agrees and undertakes to ensure that neither he nor his family members shall be involved in or connected to any business in direct competition with that of IMS at any time during the currency of this agreement and for a further period of six months therafter.

8. Full and final settlement

I/We accept all the above-mentioned points and confirm that upon receipt of the sum stated hereinafter in full and final settlement of all my/our claims, neither me/we nor any person claiming by or through me/us shall have any further claims against IMS whatsoever.

Any violation of points 1,3,4,5 & 7 from the partner’s end will attract legal course of action and penalties from IMS ranging from forfeiture of the security deposit & pending claims.

LEGAL ISSUES

While referring to and discussing various precedents cited by the parties the SC answered the following question:
  

      a) Whether the Arbitration Clause contained in the first agreement, being severable, survives for the purpose of resolution of disputes arising under or in connection with the agreement even if the performance of the agreement comes to an end on account of repudiation, frustration of breach of contract, in the light of a new agreement entered into between the parties which does not contain an arbitration clause?

ARGUMENTS ADVANCED

YA raised the following question of law:

 
a) Whether an arbitration clause is a collateral term in the contract, which relates to resolution of disputes, and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract?

      b) Whether the impugned judgment is contrary to the law settled by this Hon’ble Court in Branch Manager (Magma Leasing & Finance Limited) and another v. Potluri Madhavilata and another (2009) 10 SCC 103 and National Agricultural Cooperative Marketing Federation India Ltd. v. Gains Trading Ltd. (2007) 5 SCC 692?

      c) Whether the Hon’ble High Court is correct in holding that the law settled by this Hon’ble Court in the Branch Manager (Magma Leasing & Finance Limited) and another v. Potluri Madhavilata and another (2009) 10 SCC 103 and National Agricultural Cooperative Marketing Federation India Ltd. V. Gains Trading Ltd. (2007) 5 SCC 692 is applicable in case of unilateral termination of agreement by one of the parties and not in mutual termination for accord and satisfaction of the earlier contract?

YA submitted that arbitration clause is a collateral term in the contract, which relates to resolution of disputes and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.

YA submitted that the court has erroneously held that the case of the appellant is not a case involving the assertion by the respondent of accord and satisfaction in respect of earlier contracts, especially when the sole purpose of the Exit paper dated February 01, 2011 was to put an end to the contractual relationship between them under the aforesaid earlier contracts.

IMS placing reliance on the detailed counter affidavit filed on behalf of the respondent submitted that the arbitration clause in the agreements dated April 01, 2007 and April 01, 2010 cannot be invoked since both the above-mentioned agreements were superseded and abrogated by the new agreement dated February 01, 2011.

IMS submitted that in the new agreement it was mutually decided by the parties that any violation of the respondent’s trade mark IMS would entitle the respondent to take legal recourse against the appellant.

IMS submitted that the suit restraining YA from using its trademark and copyright was based on prior trade mark rights and not on the agreements dated April 01, 2007 and April 01, 2010.

Further IMS pointed out that the new agreement dated February 01, 2011 records the mutual agreement between the parties that the appellant shall not be eligible to use the trade mark IMS in any form and any breach thereof entitles respondent to seek legal recourse on violation of trade mark IMS.

ANALYSIS OF PAST PRECEDENT

Union of India v. Kishorilal Gupta and Bros. [AIR 1959 SC 1362].

Q)        The SC examined the question whether an arbitration clause can be invoked in the case of a dispute under a superseded contract.

Ans)    The SC said 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 intio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity.

DECISION OF THE COURT

Justice K.S. Radhakrishnan and Justice A.K. Sikri discussed the submission of the parties and held as under:

"We may indicate that so far as the present case is concerned, parties have entered into a fresh contract contained in the exit paper which does not even indicate any disputes arising under the original contract or about the settlement thereof, it is nothing but a pure and simple novation of the original contract by mutual consent".

An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded / novated by a later agreement.

CONCLUSION 

The judgment has brought about clarity on a fairly complex prospect of law and would ensure the rightful interpretation of Arbitration Clauses in an agreement and their applicability to later agreements entered into by the parties, which do not provide for a Arbitration clause.