6 February, 2014
Legal News & Analysis – Asia Pacific – India – Dispute Resolution
Three recent decisions have considered the doctrine of separability and whether an arbitration agreement stands or falls with the agreement in which it is included.
In Young Achievers v IMS the Supreme Court held that where a contract containing an arbitration clause is superseded by another contract, the arbitration clause, being a component part of the first contract, falls with that contract.
In a contrasting decision, Chatterjee Petrochem v Haldia Petrochemicals Ltd the Supreme Court held, on the facts of that case, that the original agreement between the parties had not been superseded by their subsequent conduct, and that the arbitration clause continued to be valid and binding. Similarly, in Mulheim Pipe Coatings GmbH v Welspun Fintrade Ltd the Bombay High Court concluded that an arbitration clause in a share purchase agreement could survive the annulment of that share purchase agreement.
Supreme Court Decisions In Young Achievers v IMS And Chatterjee Petrochem v Haldia Petrochemicals Limited
In Young Achievers, the respondent (IMS) raised various intellectual property and related claims in the Delhi High Court against the appellant (Young Achievers), who sought to have the dispute referred to arbitration. IMS contended that the arbitration clauses were not operative, as they were contained in contracts entered into in 2007 and 2010, which had been superseded by a new agreement entered into in 2011.
Young Achievers contended that the arbitration clauses were collateral terms in the contracts, such that even if those contracts came to an end by repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.
The court considered that the question of whether the arbitration clause was surviving had to be examined in light of the terms of the later agreement. The court said that an arbitration clause in an agreement cannot survive if the agreement containing the arbitration clause has been superseded or novated by a later agreement. The 2011 agreement did not contain an arbitration clause. The arbitration clause, which was a component part of the earlier contract, fell with that contract when it was superseded by the 2011 agreement.
The Supreme Court considered a similar issue in its recent decision in Chatterjee. In that case, the parties had entered into an original agreement on 12 January 2002 providing for the transfer of shares to one entity in the Chatterjee Group, and containing an arbitration clause. Less than two months later, a subsequent agreement was entered into which provided that the relevant shares should be transferred to a different entity in the Chatterjee Group (and provided that the courts of Calcutta would have jurisdiction in respect of any disputes). On the facts, the Court held that the new agreement did not amount to a novation of the original agreement and therefore the arbitration clause in the original agreement was valid and binding on the parties to it.
Mulheim Pipe Coatings GmbH v Welspun Fintrade Ltd
This dispute related to a share purchase agreement (“SPA“) entered into by the parties on 10 December 2004, which contained an arbitration clause. Following a dispute relating to the transfer of the subject shares, the parties entered into a Memorandum of Understanding (“MOU“) on 17 March 2010. That MOU provided new substantive terms that related to some, but not all, of the subject matter of the SPA, and provided that, upon signing of the MOU, the SPA would “stand null and void”.
The parties continued to be in dispute, and the Appellant sought a reference to arbitration under clause 11.13 of the SPA. The appellant invoked Section 45 of the Arbitration and Conciliation Act 1996, which provides that when parties have made an arbitration agreement a judicial authority seized of an action in a matter covered by that agreement shall upon a request being made refer the parties to arbitration, unless the judicial authority finds that the said agreement is null and void, inoperative or incapable of being performed.
The court held that under Section 45 it was called upon to decide not whether the main contract has been discharged, terminated or extinguished but whether the arbitration agreement has been rendered null and void, inoperative or incapable of performance. The grounds of challenge therefore had to be directed at the arbitration agreement itself. By entering into the MOU the parties provided for substituted performance of the remaining obligation under the SPA. The original substantive obligations were extinguished and replaced. However, in entering into the MOU the parties did not do anything which rendered the arbitration agreement null and void.
Comment
Whilst there is some tension between the above decisions, the message appears to be that when parties enter into a number of agreements over time that address the same subject matter, and only the older agreement contains an arbitration clause, the parties will be able to rely on that clause unless it can be shown that their subsequent dealings were intended to lay to rest not only their previous substantive obligations, but also their arbitration agreement. In the absence of an unequivocal line of authorities on this issue, parties would be well advised to make clear whether they intend to preserve their previous dispute resolution arrangements or bring them to an end.
For further information, please contact:
Nicholas Peacock, Partner, Herbert Smith Freehills
Alastair Henderson, Partner, Herbert Smith Freehills