Disputes Under Subsequent Agreement Without Arbitration Clause Not Arbitrable: Karnataka High Court

The Karnataka High Court on 2 April, held that an Arbitral Tribunal cannot decide disputes arising from a subsequent agreement that lacks an arbitration clause, nor can it rely on an earlier lapsed agreement whose arbitration clause has ceased to operate.

A Bench comprising Chief Justice Vibhu Bakhru and Justice C.M. Poonacha set aside an award that directed execution of a sale deed between M. Mallikarjuna and Smt. Rajeshwari Mallikarjuna (appellants) and S.P. Sridhara and S.P. Muralidhar (respondents).The Court noted:

“There was no arbitration agreement between the parties for referring disputes relating to a period prior to the constitution of the Firm under the partnership deed to arbitration.”

It added that the “parties entered into a fresh agreement, which constitutes a novation. The arbitration clause under the earlier agreement is therefore inapplicable. Unless the parties expressly agree otherwise, disputes arising from the novated agreement cannot be referred to arbitration under the earlier clause.”

Srishaila & Co., was originally operated by M. Mallikarjuna as a sole proprietorship. On 1 April 2012, the parties executed a partnership deed to carry on the business of trading in gunny and plastic bags. Clause 18 of this deed included an arbitration clause.

Disputes later emerged regarding certain immovable properties described as Schedule B properties. The properties were allegedly acquired using the firm's funds and dealt with in a settlement deed dated 10 September 2012. S.P. Sridhara and S.P. Muralidhar initiated arbitration proceedings seeking enforcement of their rights over these properties.

An Arbitral Tribunal, constituted on 10 April 2019, passed an award on 17 June 2022. It held that S.P. Sridhara was entitled to a half share in certain industrial plots and required M. Mallikarjuna to execute a sale deed after clearing loan liabilities.

The District Court upheld the award on 31 January 2025. M. Mallikarjuna then approached the High Court under Section 37 of the Arbitration and Conciliation Act, 1996.

M. Mallikarjuna argued that the disputed properties did not belong to the partnership firm and that the claims relied on the 10 September 2012 settlement deed, which contained no arbitration clause. He contended that the arbitration agreement covered only disputes arising under the partnership deed.

S.P. Sridhara maintained that the properties were acquired from the firm's business and that the settlement deed reflected the parties' understanding regarding ownership and division.

The Court observed that the partnership deed stated the firm commenced on 1 April 2012. Disputes over property acquired before this date fell outside Clause 18. The Bench further held that the September 2012 settlement deed was an independent agreement that superseded the original. Since it did not contain an arbitration clause, disputes arising from it could not go to arbitration.

Relying on settled principles of law and the concept of novation, the Bench held that when an earlier agreement is superseded, its arbitration clause also ceases to operate unless the parties expressly agree otherwise. It noted:

“It is well settled that if an agreement containing an arbitration clause is superseded by another, the arbitration clause in the earlier agreement stands terminated.”

Clarifying that disputes relating to prior or independent business arrangements do not fall within the arbitration clause of the 1 April 2012 partnership deed, the Bench held that the Arbitral Tribunal exceeded its jurisdiction.

Accordingly, the High Court allowed the appeal, set aside the arbitral award, and quashed the District Court's order affirming it.

Appearances for appellants (M. Mallikarjuna & Anr.): Advocate Lakamapurmath Chidanandayya.

Appearances for respondents (S.P. Sridhara & Ors.): Advocates Jayakumar S. Patil, Varaprasad K.