Clearing the Air on Bilateral Termination of a Contract Incorporating an Arbitration Clause

[Ankitesh Ojha is a 4^th Year B.A., LL.B. (Hons.) student at Hidayatullah National Law University, Raipur]

Introduction

It is a settled principle in arbitration that the agreement to arbitrate contained in an arbitration clause is viewed as a separate agreement from the rest of the contract. The fate of an arbitration agreement is not decided by the sustainability of the contract incorporating it. Russell says that “[a]n arbitration clause in a commercial contract … is an agreement inside an agreement. The parties make their commercial bargain … but in addition agree on a private tribunal to resolve any issues that may arise between them.”  This view of Russell on the doctrine of severability has got due recognition by Supreme Court of India in the case of A. Ayyasamy v. A. Paramasivam & Ors (2016) 10 SCC 386 which has discussed this doctrine.

This post aims to address the confusion regarding the applicability of this principle in the cases of mutual termination of a contract. When two parties are mutually terminating a contract in toto, it can be logically inferred that they are also terminating the arbitration clause within the contract. The severability doctrine has been duly acknowledged by the Indian courts and there have been many instances where the courts have held that the termination of contract does not affect the arbitration clause. Most of such cases have dealt with unilateral termination of a contract and hence the applicability of this doctrine was not very clear in the cases of bilateral termination.  The view of Delhi High Court in this regard created some confusion, which now appears to be cleared by Bombay High Court on 13 July 2018 in Ashok Thapar v. Tarang Exports 2018 SCC OnLine Bom 1489. This judgment could be of great help in cases where one party tries to oust the jurisdiction of an arbitral tribunal by resorting to the plea of mutual termination of the arbitration agreement along with the main contract.

Facts of Ashok Thapar

A Licence Agreement dated 3 July 2012 was executed between the Applicant and the Respondent. As per the provisions of the agreement, the Respondent (Tarang Exports) was allowed to use and occupy the premises on a leave and licence basis. The agreement had an arbitration clause incorporated in it. Later on, the agreement was mutually terminated by both the parties in the month of October 2012. Thereafter, the Respondent had filed the suit for recovery of the security deposit and other claims based on the provisions of the Licence Agreement. The Applicant (Ashok Thapar) sought that the Civil Court has no jurisdiction to entertain the suit. This plea was dismissed by the Trial Court and it was held that the Civil Court has jurisdiction to try and entertain the suit.

In this civil revision application filed in the Bombay High Court, it was argued on behalf of the Respondent that the agreement was terminated and the termination was accepted by the Applicant by sending an e-mail and, once such a contract is cancelled, it is not correct to approach the arbitrator on the basis on an extinguished arbitration clause. The question which came up for consideration before the High Court was whether the arbitration clause survives separately even when there is a mutual termination of the contract containing an arbitration clause.

Ratio

The Bombay High Court held that even when the contract is mutually terminated by the parties, the arbitration clause in it will survive separately. The Court, in order to answer this question, referred to SMS Tea Estate (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (2011) 14 SCC 66 where the Supreme Court held that “[e]ven if a deed of transfer of immovable property is challenged as not valid or enforceable, the arbitration agreement would remain unaffected for the purpose of resolution of disputes arising with reference to the deed of transfer.”  The Court finally, after relying on this Supreme Court case and considering the purpose of the Arbitration and Conciliation Act, 1996, held:“Once the parties have intended to refer their dispute to the Arbitrator in their Agreement, then any dispute pertaining to the contents of the Agreement or touched the subject matter of the Agreement is necessarily to be referred to the Arbitrator even though Arbitration Agreement is mutually terminated by both the parties.”

Different views on mutual termination

The Delhi High Court’s opinion on this issue is different from that of the Bombay High Court to a certain extent. In the case of Young Achievers v. IMS Learning Resources Pvt. Ltd. ILR (2012) 5 Del 462 an agreement pertaining to the dispute which incorporated an arbitration clause was mutually terminated prematurely in terms of a document called Exit Paper.

The Delhi High Court noted that there is no dispute on the proposition of doctrine of severability but it cannot be applied in cases where the termination has taken place by mutual consent and a particular termination document has been drafted in order to give effect to such termination. The Court held that “it is not a case of unilateral termination by one of the parties which has occurred. Mutually, a fresh document has been drawn called the Exit Paper, an agreement containing comprehensive terms & conditions on which the parties continued with their association. Despite this Exit Paper setting out all the terms & conditions, the allegation of the respondent is that the appellant continued to infringe the trademark of the respondent by using the same, contrary to the said agreement. This Exit Paper undisputedly does not contain an arbitration clause.”

In this case, the Court, after taking into account the common intention of both the parties to terminate the agreement and execution of a fresh exit agreement between both the parties, came to the conclusion that the matter cannot be resolved by the way of arbitration as the same has been terminated and not mentioned anywhere in the fresh agreement.

The opinion of Bombay High Court in Mulheim Pipecoatings Gmbh v. Welspun Fintrade Limited & Anr. (2014) 2 AIR Bom R 196 can be said to be in concurrence with that of the Delhi High Court. In this case also, the Court considered the situation where both the parties may terminate the original contract and enter into a new one.  The Court in this case held: “Even in such a case, since the original contract is extinguished or annihilated by another, the arbitration clause forming a part of the contract would perish with it.”

Considering the facts of above two cases, it cannot be said that the Ashok Thapar case is exactly on the same lines, but all three of them deal with the important question of bilateral termination of the contract incorporating an arbitration agreement. The Delhi High Court decision tried to make an attempt to differentiate the repercussions of mutual termination on an arbitration agreement from that of unilateral termination. It has to be considered that the decision of Delhi High Court was largely based on the terms and conditions of the “fresh exit paper” which was prepared by the parties in order to give an effect to the termination of the contract. The Bombay High Court, too, in the Mulheim case referred to annihilation of the main contract by another. In Ashok Thapar case, no such fresh contract was entered into by the parties after the termination of original contract and hence the court had to refer the parties to arbitration to resolve the dispute by relying on the provisions of the mutually terminated contract.

Current position

The confusion introduced by marking a difference between mutual and unilateral termination by the cases of Young Achievers and Mulheim has been done away with after the Bombay High court came up with a decision that an arbitration agreement survives separately even in cases of mutual termination. After going through the discussed cases it can be said that an arbitration agreement can be said to be terminated only when a new agreement giving effect to termination of the contract comes into the picture. The dispute resolution will then take place as per the relevant provisions of the exit agreement. In a case where no such agreement is entered into by the parties, the arbitration clause, in the mutually terminated contract shall be given effect to. Hence, an arbitration agreement does not come to an end simply because the termination of the main contract is mutual.

– Ankitesh Ojha