Arbitration Clause in Initial Agreement Not Applicable Where Subsequent Contract Overrides Dispute Settlement, Rules Delhi High Court

New Delhi: In a significant ruling concerning contract interpretation and the applicability of arbitration clauses, the High Court of Delhi has dismissed an application seeking to refer a property dispute to arbitration. The court held that an arbitration clause contained in an initial Flat Buyer's Agreement did not extend to claims arising from a subsequent 'Second Agreement' which specifically stated it would override the first agreement, including dispute settlement mechanisms.

Justice JasmeetSingh , presiding over the case of Deepa Chawla vs Raheja Developers Ltd (CS(OS)-416/2023) , found that where a later agreement explicitly supersedes an earlier one, and the subsequent agreement is silent on arbitration while containing an overriding clause covering dispute settlement, the arbitration clause from the initial contract cannot be invoked for disputes primarily governed by the later agreement.

The dispute originated from a Flat Buyer's Agreement dated December 3, 2015, for the purchase of a flat in Gurgaon for Rs. 2 crore. Parallel to this, a 'Second Agreement' was executed on the same date. While the Flat Buyer's Agreement had a standard arbitration clause (Clause 14.2) covering disputes "arising out or touching upon or relating to the terms of this Agreement," the Second Agreement did not.

Crucially, the Second Agreement stipulated specific obligations for the developer: to complete refurbishment and handover possession by December 2, 2016, or refund the entire Rs. 2 crore consideration. This agreement also contained an overriding clause (Clause 9) stating it "shall have an overall overriding effect over the Flat Buyer's Agreement including the settlement of any dispute."

According to the plaintiff, Deepa Chawla , the developer failed to deliver possession by the agreed date. Despite granting multiple extensions based on the developer's requests, and receiving cheques for assured returns and ultimately a post-dated cheque for the principal amount (which bounced), possession was never handed over. The plaintiff alleged the developer even attempted to sell the flat through e-bidding without proper communication regarding the final sale amount. Having received only a partial refund of Rs. 28 lakhs, the plaintiff filed the present suit seeking recovery of the balance principal amount, assured returns, and interest, totaling over Rs. 4.5 crore.

The defendant, Raheja Developers Ltd, filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, arguing that the suit was not maintainable as the dispute fell under the purview of the arbitration clause in the Flat Buyer's Agreement. Their counsel contended that the two agreements were "inextricably connected" and the arbitration clause in the initial agreement should govern all disputes.

However, the plaintiff's counsel countered that the relief sought was based on the Second Agreement, which contained the specific obligations regarding timely possession or refund, and importantly, lacked an arbitration clause while simultaneously overriding the dispute settlement mechanism of the first agreement.

Justice Singh , in his analysis, noted the distinct nature of the primary obligations in each agreement. While the Flat Buyer's Agreement dealt with the general terms of sale, the Second Agreement fixed the specific deadline for possession or refund – a key element underlying the plaintiff's claim for recovery.

Referencing the Supreme Court's judgment in NBCC (India) Limited vs Zillion Infraprojects Pvt. Ltd (2024 SCC OnLine SC 323) , the High Court reiterated that a general reference to another contract is insufficient to incorporate an arbitration clause from the referred document. A specific reference to the arbitration clause or a conscious acceptance under Section 7(5) of the Arbitration Act is required.

The court found that Clause 9 of the Second Agreement did not merely make a general reference but contained an express condition giving the Second Agreement "overall overriding effect over the Flat Buyer's Agreement, including the settlement of any dispute." The judgment stated, "meaning thereby that there is a specific exclusion of the arbitration clause for settlement of any dispute."

Distinguishing the present case from precedents cited by the defendant ( Olympus Superstructures Pvt. Ltd. vs Meena Vijay Khetan & Ors. and Amit Guglani & Anr. vs L&T Housing Finance Ltd & Anr. ), the court highlighted that those cases involved situations where both agreements contained arbitration clauses, requiring the court to harmonise them. Here, the Second Agreement had no arbitration clause, and its overriding effect specifically addressed dispute settlement. Similarly, defendant's reliance on Ameet Lalchand Shah & Ors vs Rishabh Enterprises & Anr. and Giriraj Garg v. Coal India Ltd. was found distinguishable due to the absence of an explicit overriding clause in those cases.

Consequently, the Delhi High Court concluded that the parties, by agreeing to the overriding effect of the Second Agreement, had implicitly waived the arbitration mechanism for disputes governed by the Second Agreement. The application seeking reference to arbitration was therefore dismissed.

The court directed the defendant to file their written statement in the suit within the statutory time period, listing the matter before the Joint Registrar for further proceedings on August 20, 2024. The ruling underscores the critical importance of clear and consistent dispute resolution clauses when multiple agreements govern a single transaction.