Does an Extension Agreement Need a Specific Arbitration Clause?

[This guest post is authored by Suvanwesh Das. He is a 3rd year B.B.A., LL.B. student at National Law University Odisha]

Arbitration agreements, like any other contract, can be overridden by another agreement between the Parties. If the original contract is terminated in its whole, the arbitration agreements contained in such contract may also deemed to have come to an end. That said, the fate of an arbitration agreement is not entirely clear where the original contract is not completely terminated or discharged but only extended by a later contract.

In Sukumar Ray v. M/s Indo-Industrial Services and Ors[1], the Calcutta High Court found that if the second agreement includes a particular reference to the previous agreement and solely prolongs the existence of the original agreement, it does not need to include a new arbitration clause, and the original agreement’s arbitration clause can be used to invoke arbitration.

Background

Sukumar Ray (Petitioner) and M/s Indo-Industrial Servicesand others (Respondents) entered an agreement for financial accommodation. Briefly put, the petitioner lent and advanced a sum of INR 10,00,000 to the respondents (Original Agreement). The Original Agreement contained an arbitration clause.

Later, the Parties had entered another agreement to extend the time for repayment of the loan amount by a year (Extension Agreement). The Extension Agreement did not have an arbitration clause.

When the Respondents allegedly defaulted on their repayment obligations, the Petitioner filed an application before the Calcutta High Court for appointment of an arbitrator in accordance with the Original Agreement.

The Respondent resisted this application on grounds that there was no valid and binding arbitration agreement between the parties; on grounds that it had expired due to efflux of time. It was also submitted that the Extension Agreement neither contains an arbitration agreement, nor specifically adopts the arbitration clause contained in the Original Agreement.

High Court’s decision

The High Court opined that the Extension Agreement merely extended the validity of the Original Agreement. It was specifically agreed that all other terms and conditions of the Original Agreement will remain the same.

The Court went on to discuss and distinguish the dispute at hand from that in M.R. Engineers & Contractors Pvt. Ltd. v. Som Datt Builders Ltd.[2] where the Supreme Court held that a specific reference to and incorporation of the arbitration clause was necessary in subsequent contracts. The Court looked into the relevant clauses and pointed out that the parties did not intend to enter into a new agreement for any specific purpose other than the extension of validity. There was a mutual intention to continue with the arbitration clause in the Original Agreement. Therefore, the Extension Agreement did not need an express arbitration clause.

Accordingly, the Court allowed the Section 11 Application and appointed a sole arbitrator.

Comment

The Calcutta High Court’s decision clarifies that at the end of the day, the Court must look into the parties’ intent while deciding the fate of their arbitration agreement. The extension agreement said nothing to indicate that the original agreement had come to an end. The arbitration agreement, therefore, remained in force.

That said, Indian courts have previously held that where a contract is terminated or novated, the arbitration clause contained in the replaced contract also collapses. In Union of India v. Kishorilal Gupta and Bros.[3], the Supreme Court had to determine if an arbitration clause was novated by the parties’ subsequent agreement. The Apex Court held that “if the dispute is whether the contract is wholly superseded or not by a new contract between the parties, such a dispute must fall outside the arbitration clause, for, if it is superseded, the arbitration clause falls with it.

Where the subsequent agreement creates separate rights and obligations, the arbitration clause in a previous agreement will continue only if it is specifically adopted in such subsequent agreement. The latter requirement, as discussed above, was discussed and propounded by the Supreme Court in MR Engineers. A general or non-contextual reference to the previous agreement will not suffice.

On the other hand, in Chatterjee Petrochem Co. & Anr v Haldia Petrochemicals Ltd.[4], the respondents contended that the principal agreement containing the arbitration clause was novated by the subsequent agreements. Rejecting this contention, the Supreme Court found that there was no substantial change in the parties’ legal rights and responsibilities in the subsequent agreements that would result in novation of the contract. There was no mention that the old agreement was completely extinguished into nullity. Therefore, the arbitration clause of the original agreement was valid and could be invoked.

That said, Indian Courts have also held that if there is no fundamental change in the original contract and the subsequent agreement only plays a limited role (for example, extending the validity) without altering the scope of the contract, then the arbitration clause of the original contract can be used to invoke arbitration. The Calcutta High Court’s decision in Sukumar Ray is therefore in line with previous decisions of Indian Courts. Specifically, it also does not fall foul of the Supreme Court’s decision in MR Engineers.

Who decides?

Recently, in Sanjiv Prakash v. Seema Kukreja[5], the Supreme Court considered whether it is the court or arbitrator who is to decide whether an agreement or arbitration clause has been novated or terminated. It was found that a determination on whether an agreement has been novated requires a detailed consideration of the clauses of the two agreements in question, along with the surrounding circumstances in which the agreements were entered into. Further, it will also require a full consideration of the applicable law on the subject. The Supreme Court held that “…none of this can be done given the limited jurisdiction of a court under Section 11 of the 1996 Act”.

Relying on its earlier decision in Vidya Drolia, the Supreme Court observed that issues surrounding the novation of an agreement cannot possibly be decided in a limited, prima facie review allowed by Section 11 of the Arbitration Act. This is more so since, in that case, the underlying dispute did not call for a total ouster of arbitration altogether. There was also nothing vexatious or frivolous in the plea taken by the Section 11 application. On the contrary, it was held that under Section 11 Court must appoint an arbitrator when “…the Parties contentions relating to non-arbitrability are plainly arguable, or when facts are contested”. The Court could not, in a Section 11 application, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the arbitral tribunal.

Given the Supreme Court’s decisions in Sanjiv Prakash and Vidya Drolia, was it right on the Calcutta High Court’s part to decide questions of novation or survival of contract? Perhaps yes. The Supreme Court in Sanjiv Prakash had cautiously stopped short of being too prescriptive. A court may for legitimate reasons, to prevent wastage of private and public resources, exercise its discretion to make a prima facie decision of the arbitration procedure. The idea is to assist the arbitration procedure and not usurp jurisdiction of the Arbitral Tribunal. When courts are too reluctant to intervene, the effectiveness of both arbitral and judicial processes, is undermined.

In this backdrop, the Calcutta High Court’s decision, which was based on the parties’ clear intent, which decision need not have been deferred only or the tribunal to decide. Therefore, the scope of judicial intervention in the matter was justified.

Conclusion

If a contract is superseded by another, the arbitration clause in the earlier contract superseded as well. However, the Calcutta High Court’s decision in Sukumar Ray rightly found that if the fundamental nature of the original contract is not changed and all other terms of the original contract remain the same, the arbitration clause in the earlier agreement remains existent.

 

 


[1] 2022 SCC OnLine Cal 845

[2] (2009) 7 SCC 696

[3] 1960 SCR (1) 493

[4] (2014) 14 SCC 574

[5] (2021) 9 SCC 732

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