“Once Contracts Were Short Closed, Arbitration Clause Became Inoperative”: Delhi High Court Dismisses Arbitration Plea in Light of Standalone Settlement (MOM)
Sanchayita Lahkar
The Delhi High Court Single Bench of Justice Anish Dayal declined an application seeking referral of parties to arbitration under Section 45 of the Arbitration and Conciliation Act, 1996. The Court held that the arbitration clause embedded in the original contracts between the parties did not survive due to the execution of a subsequent and independent Minutes of Meeting (MOM), which formed a standalone agreement. The MOM, entered mutually by both parties, superseded the original contracts and outlined new terms for resolution, leaving no arbitrable disputes that could be referred to arbitration.
The suit was filed by a Chinese entity seeking recovery of USD 1,304,233 (equivalent to INR 88,844,351.96) from the defendants, who are engaged in the manufacture and sale of Optic Fiber Cables (OFC). The plaintiff alleged failure on the part of the defendants to supply agreed quantities and models of OFC as per Contract-I (dated 17th January 2017) and Contract-II (dated 5th April 2017). It was alleged that the defendants did not begin production within the stipulated 20 days, despite receiving a 20% advance payment.
The plaintiff also claimed that defective cables were supplied and that the issue remained unresolved. As a result, both parties signed a Minutes of Meeting on 25th June 2018, agreeing to short close the original contracts. According to the plaintiff, the MOM represented a fresh agreement that set out clear terms for refund of advances and compensation for defective OFC.
Clause 16 of Contract-I and Clause 18 of Contract-II contained arbitration clauses referring disputes to the Hong Kong International Arbitration Centre (HKIAC), stipulating bilingual proceedings in Chinese and English and applying laws of the People’s Republic of China.
The defendants, relying on Article 14.1 of the HKIAC Administered Arbitration Rules 2024, sought referral of the case to arbitration, stating that the MOM was a continuation of the original contracts. They submitted that Hong Kong was the agreed seat of arbitration and the dispute, being commercial in nature, fell under the scope of Section 45 read with Section 44 of the Act.
The plaintiff contested the arbitration referral on the basis that the MOM did not contain an arbitration clause and represented a novation of the original contracts. The MOM, the plaintiff argued, was a standalone settlement that extinguished prior contractual obligations, including the arbitration clause. Multiple communications and acknowledgments by the defendants were cited to support this position.
Key communications cited included:
- A letter dated 2nd August 2018 from the defendant outlining a refund plan and confirming the short closure of contracts.
- Letters dated 12th and 28th November 2018 to HDFC Bank reaffirming the agreement to refund the balance in three installments.
- Approval from the Reserve Bank of India on 24th December 2018 for the refund.
- Responses dated 2nd April and 7th May 2019 from the defendant, acknowledging the obligation to make payments as per the MOM.
The plaintiff relied on judicial precedents including Larsen & Toubro Ltd. v Ireo Victory Valley (P) Ltd. and B.L. Kashyap & Sons Ltd. v Mist Avenue (P) Ltd. to argue that once a contract is superseded by a settlement agreement, the arbitration clause ceases to exist.
Justice Anish Dayal observed that the key issue was whether the MOM of 25th June 2018 constituted a fresh agreement independent of the original contracts, thus rendering the arbitration clauses inoperative.
The Court stated: "The crux of the dispute relates to the scope of the MOM executed between the parties... While the defendant... claims that the MOM is essentially a continuation of the contracts... the plaintiff states that the MOM supersedes the prior agreement including that of arbitration, and amounts to a fresh agreement..."
The Court examined the contents of the MOM, including mutual agreement on refund terms, acknowledgment of defective OFC, and issuance of a bank guarantee. It further noted the consistent correspondence confirming the mutual intention to terminate the original contracts and follow the terms set in the MOM.
Justice Dayal recorded: "Consequently, the MOM, being a subsequent agreement will supersede the earlier contracts and will render the earlier contracts along with the arbitration clauses contained therein, ineffective and inoperative."
Citing Damodar Valley Corp. v KK Kar, Young Achievers v IMS Learning Resources (P) Ltd., and WAPCOS Ltd. v Salma Dam Joint Venture, the Court outlined principles governing novation of contracts and the survival of arbitration clauses. It held that mutual settlement extinguishes the arbitration clause unless explicitly preserved.
On the delay in invoking the arbitration clause, the Court noted: "The MOM was dated 25th June 2018 and the suit was filed in April 2022... the application under section 45... was moved more than two years later... this has been an afterthought, though not a determinative factor for the Court to reach this opinion."
The Court observed that allowing a commercial party to obscure what appeared to be a clear and categorical admission of liability and agreement regarding the mode of payment would affect the integrity of contractual obligations. It stated that referring the matter to arbitration would serve no purpose where no dispute exists. The Court recorded, “In the opinion of the Court, permitting a commercial party to spin a web around and obfuscate what seems to be a clear and categorical admission of liability and agreement to the modality of payment, would be diluting and eroding the sanctity of contracts. There would be no purpose served to refer the matter back to arbitration, where no dispute arises.”
It further held that the parties had decided to terminate the original contract and replace it with a new agreement to govern their future obligations. According to the judgment, “The parties have decided to put an end to the contract, and substitute a new contract to govern their future liabilities, and the original contract, including the arbitration agreement, would stand perished.”
The Court noted that the Memorandum of Mutual Settlement marked the conclusion of past obligations. It stated, “The axe fell when the MOM was executed, the past was severed from the future obligations that parties agreed to.”
In light of these findings, the Court dismissed the application filed by defendant no.1. It recorded, “In view of the above, the Court finds no merit in the application of defendant no.1, and therefore, the present application is dismissed.”
The matter was directed to be listed before the Joint Registrar (Judicial) on 8 May 2025 for further proceedings.
Advocates Representing the Parties:
For the Plaintiff: Ms. Gurmeet Bindra, Advocate with Ms. Manisha Singh
For the Defendants: Mr. Vikas Goel, Mr. Ritesh Sharma, Mr. Vivek Gupta, Mr. Harmanbir Singh Sandhu, Mr. Wanglen Ngangom
Case Title: Zhuhai Hansen Technology Co Ltd v Aksh Optifibre Limited and Ors
Neutral Citation: 2025: DHC:2490
Case Number: CS(COMM) 628/2022, I.A. 11827/2023, I.A. 13667/2023, I.A. 36412/2024
Bench: Justice Anish Dayal
[Read/Download order]
