The Delhi High Court bench comprising of Hon’ble Mr Justice Vibhu Bakhru and Hon’ble Mr Justice Amit Mahajan has affirmed that the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, or the referral of parties to arbitration under Section 8 of the Act, should only be declined in cases where it is evident that the arbitration agreement does not exist.
Brief Facts:
The owner of a property located in Neemrana, Rajasthan (hereinafter referred to as “the Demised Premises”) entered into a rent agreement with the Respondent. The rent agreement stated that the lease period would be one year, with the option for renewal. The respondent agreed to pay a security deposit of ₹28,64,043/-.
After the initial lease period, the Respondent remained in possession of the Demised Premises and paid rent as agreed. Upon vacating the premises, the Respondent requested the return of the security deposit, but the owner refused, claiming that the premises had been damaged. Consequently, the Respondent filed a lawsuit seeking the recovery of the security deposit along with interest. The owner requested arbitration based on the arbitration agreement stated in Clause 21 of the Rent Agreement.
The application filed by the Appellant to refer the parties to arbitration was rejected by the Commercial Court. It determined that since the Rent Agreement had expired on 31.07.2018 and the parties did not enter into a new written agreement or renew the previous one, the Appellant could not invoke the arbitration clause. The Commercial Court concluded that there was no ongoing arbitration agreement between the parties, and therefore, arbitration could not be pursued. Hence, the present appeal.
Observations of the Court:
The Court emphasised that if the parties had extended the agreement through written communications, the arbitration clause would have remained valid.
It was opined that when there was a significant dispute regarding whether the original contract, which contained the arbitration clause, had been replaced or superseded, it would be appropriate to refer the parties to the arbitration. The Court would only decline an application for the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 or for referring the parties to arbitration under Section 8 of the Act in cases where it was evident that the arbitration agreement did not exist.
It was acknowledged that if the original contract was replaced by a substitute, the arbitration clause in the original contract ceased to exist. However, it was important to determine whether the original contract had actually been substituted. Merely extending the contract term might not have amounted to a substitution with a new contract. Even in cases where the agreement was replaced by a written communication, it was necessary to examine whether the arbitration clause was incorporated by reference in the new contract.
In this case, the Delhi High Court noted that the dispute regarding the withholding or forfeiture of the security deposit by the appellant/defendant was directly related to the Rent Agreement, therefore the case could be referred to Arbitration.
The decision of the Court:
The Delhi High Court set aside the impugned order and referred the parties to arbitration, terminating the ongoing suit.
Case Title: Unique Decor (India) Pvt. Ltd v Synchronized Supply Systems Ltd.
Case No.: First Appeal from Commercial Order (FAO Comm) 69 of 2023
Coram: Hon’ble Mr Justice Vibhu Bakhru and Hon’ble Mr Justice Amit Mahajan
Advocates for Petitioner: Advs. Mr. Nishant Nigam & Mr. Aman Abbi
Advocates for Respondents: Adv. Mr. Sushil Shukla
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