Circumstances when the Arbitration Clause cannot survive

An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded/ novated by a later agreement

An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded/ novated by a later agreement 

Whether an arbitration clause in an agreement survives if the agreement containing arbitration clause gets superseded/ novated by a later agreement was the question that arose for consideration before the Apex Court.

It is an established position that an arbitration clause survives the contract; parties remain bound by the arbitration for dispute resolution. The question before the Supreme Court was whether the arbitration clause in a previous contract, pertaining to the same transaction survives, in the event of parties replacing the previous contract with a new one.

Novation can be understood to mean as an act whereby parties to contract mutually agrees to replace term (s) of obligation with a new set of term(s) or where contracting party (ies) are replaced with a new party (ies). The underlying principle of Novation is that it is an act done in mutual consonance of the parties’ concerned, including the new parties where new party has replaced the previous one.

The legal position, as affirmed by the Court in the instant matter, is that once new contract supersedes the former contract containing arbitration clause, the operative effect of said arbitration ends with the end of former agreement. The parties deciding to enter into a fresh contract and while doing so mutually agrees upon the mode and manner of settlement of dispute, if any arising in the future and there is no reference to previously executed contract vis-a-vis settlement of disputes arising therefrom, is clearly indicative of novation of contract.

M/s Young Achievers vs. IMS Learning Resources Pvt. Ltd.
[22.08.2013, SC]