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Young Achievers v. Ims Learning Resources Private Limited .
Factual and Procedural Background
IMS Learning Resources (P) Ltd. (“respondent”) instituted CS (OS) No. 2316 of 2011 before the Delhi High Court seeking a permanent injunction against trade-mark infringement, copyright infringement, passing-off, damages and ancillary reliefs. The present appellant, arrayed as defendant in that suit, invoked Section 8 of the Arbitration and Conciliation Act, 1996 by filing IA No. 18 of 2012, asserting that earlier franchise agreements dated 1-4-2007 and 1-4-2010 contained an arbitration clause and that, therefore, the dispute should be referred to arbitration.
The learned Single Judge rejected that application on 16-4-2012, holding that a subsequent “Exit Paper” dated 1-2-2011—executed by mutual consent—had superseded the earlier agreements and contained no arbitration clause. The Division Bench (FAO (OS) No. 290 of 2012, reported in (2012) 191 DLT 378) affirmed the order. The defendant thereafter approached the Supreme Court by way of special leave, leading to the present decision.
Legal Issues Presented
- Whether an arbitration clause survives for resolution of disputes when the contract containing that clause has ended owing to repudiation, frustration or breach.
- Whether the High Court’s judgment is contrary to the principles laid down by the Supreme Court in Magma Leasing & Finance Ltd. v. Potluri Madhavilata (2009) 10 SCC 103 and National Agricultural Coop. Mktg. Federation India Ltd. v. Gains Trading Ltd. (2007) 5 SCC 692.
- Whether the aforesaid precedents apply only to unilateral termination and not to a mutual novation evidenced by the Exit Paper dated 1-2-2011.
Arguments of the Parties
Appellant's Arguments
- The arbitration clause is a collateral term which survives even if the primary contract’s performance ends; hence the dispute must be referred to arbitration.
- The High Court erred in distinguishing Supreme Court precedents (Magma Leasing, NAFED) that recognise the survival of arbitration agreements after termination.
- The Exit Paper amounted merely to the termination of the earlier contracts and did not extinguish the arbitration agreement.
- Relied on Nolde Bros. Inc. v. Bakery Workers, 430 US 243 (1977), to support survival of arbitration clauses.
Respondent's Arguments
- The agreements dated 1-4-2007 and 1-4-2010, including their arbitration clauses, were expressly superseded by the comprehensive Exit Paper of 1-2-2011, which contains no arbitration clause.
- The Exit Paper records mutual consent that any breach of the IMS trade mark would entitle the respondent to take “legal recourse,” not arbitral recourse.
- The suit is based on the respondent’s prior statutory trade-mark rights, not on the earlier agreements; therefore Section 8 is inapplicable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362 | If a contract is novated/superseded, the arbitration clause embedded in the earlier contract perishes with it. | Relied upon to hold that the arbitration clauses in the 2007 and 2010 agreements did not survive the Exit Paper. |
| Heyman v. Darwins Ltd., 1942 AC 356 (HL) | Arbitration clause is part of the contract and falls when the contract is superseded. | Cited as supporting authority for the principle adopted from Kishorilal Gupta. |
| Magma Leasing & Finance Ltd. v. Potluri Madhavilata, (2009) 10 SCC 103 | Recognises survival of arbitration clause despite termination in certain contexts. | Invoked by appellant; court distinguished it, finding it inapplicable where a fresh contract (Exit Paper) constitutes novation. |
| National Agricultural Coop. Mktg. Federation India Ltd. v. Gains Trading Ltd., (2007) 5 SCC 692 | Similar to Magma Leasing on survival of arbitration clauses. | Raised by appellant; court held the precedent did not govern a situation of mutual novation. |
| Nolde Bros. Inc. v. Bakery Workers, 430 US 243 (1977) | Collective bargaining context where arbitration obligations may continue after contract expiry. | Expressly held “not applicable” to the facts of the present commercial dispute. |
Court's Reasoning and Analysis
The Supreme Court examined the contractual landscape and emphasised that the 1-2-2011 Exit Paper is a “pure and simple novation” of the earlier franchise agreements. Because it contains no arbitration clause and expressly provides for legal (not arbitral) recourse in the event of trade-mark violations, any prior arbitration clause could not be invoked.
Applying the ratio in Kishorilal Gupta and the principle from Heyman v. Darwins, the Court reiterated that an arbitration agreement is not independent when the contract itself is superseded: both perish together unless the new contract preserves the clause—which was not the case here.
The Court rejected the appellant’s reliance on Magma Leasing, NAFED, and Nolde Bros. by observing that those cases dealt with unilateral termination or collective bargaining situations, whereas the present matter concerns a mutually executed novation depriving the earlier arbitration clause of efficacy.
Consequently, the Supreme Court upheld the High Court’s refusal to refer the dispute to arbitration.
Holding and Implications
APPEAL DISMISSED. The Supreme Court affirmed the Delhi High Court’s orders and declined to refer the dispute to arbitration; no order as to costs.
Implications: The decision reinforces the principle that an arbitration clause embedded in an earlier contract does not survive where the parties subsequently execute a fresh agreement that wholly supersedes the previous one and omits an arbitration mechanism. The ruling affects only the present parties and does not establish a new legal doctrine beyond reaffirming existing precedent.
K.S.P Radhakrishnan, J.— Leave granted. IMS Learning Resources (P) Ltd. the respondent herein, filed CS (OS) No. 2316 of 2011 in the High Court of Delhi at New Delhi for a permanent injunction restraining infringement of a registered trade mark, infringement of copyright, passing off of damages, rendition of accounts of profits and also for other consequential reliefs against the appellant herein. The appellant preferred IA No. 18 of 2012 under Section 8, read with Section 5 of the Arbitration and Conciliation Act, 1996 for rejecting the plaint and referring the dispute to arbitration and also for other consequential reliefs. The respondent-plaintiff raised objection to the said application stating that the suit is perfectly maintainable. The High Court rejected the application vide its order dated 16-4-2012 holding that the earlier agreements dated 1-4-2007 and 1-4-2010, which contained the arbitration clause stood superseded by a new contract dated 1-2-2011 arrived at between the parties by mutual consent. The defendant aggrieved by the said order filed FAO (OS) No. 290 of 2012 before the Division Bench of the Delhi High Court, which confirmed (2012) 191 DLT 378 the order of the learned Single Judge and dismissed the appeal against which this appeal has been preferred by special leave.
2. Mr Manu T. Ramachandran, learned counsel appearing for the appellant raised the following questions of law:
“(a) Whether an arbitration clause is a collateral term in the contract, which relates to resolution of disputes, and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, would the arbitration agreement survive for the purpose of resolution of disputes arising under or in connection with the contract?
(b) Whether the impugned judgment (2012) 191 DLT 378 is contrary to the law settled by this Hon'ble Court in Magma Leasing & Finance Ltd. v. Potluri Madhavilata (2009) 10 SCC 103 and National Agricultural Coop. Mktg. Federation India Ltd. v. Gains Trading Ltd. (2007) 5 SCC 692?
(c) Whether the Hon'ble High Court is correct in holding that the law settled by this Hon'ble Court in Magma Leasing & Finance Ltd. v. Potluri Madhavilata (2009) 10 SCC 103 and National Agricultural Coop. Mktg. Federation India Ltd. v. Gains Trading Ltd. (2007) 5 SCC 692 is applicable in case of unilateral termination of agreement by one of the parties and not in mutual termination for accord and satisfaction of the earlier contract?”
3. The learned counsel also submitted that arbitration clause is a collateral term in the contract, which relates to resolution of disputes and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract. The learned counsel also submitted that the Court has erroneously held that the case of the appellant is not a case involving the assertion by the respondent of accord and satisfaction in respect of earlier contracts, especially when the sole purpose of the exit paper dated 1-2-2011 was to put an end to the contractual relationship between them under the aforesaid earlier contracts. Apart from the decisions referred hereinbefore, reliance was also placed on the judgment of the US Court in Nolde Bros. Inc. v. Bakery Workers 430 US 243 (1977).
4. Mr Sai Krishna Rajgopal, learned counsel appearing for the respondent placing reliance on the detailed counter-affidavit filed on behalf of the respondent submitted that the arbitration clause in the agreements dated 1-4-2007 and 1-4-2010 cannot be invoked since both the abovementioned agreements were superseded and abrogated by the new agreement dated 1-2-2011. The learned counsel also submitted that in the new agreement it was mutually decided by the parties that any violation of the respondent's trade mark IMS would entitle the respondent to take legal recourse against the appellant. Reference was made to Clause 4 of the penultimate paragraph of the new agreement dated 1-2-2011. The learned counsel also submitted that Suit No. CS (OS) 2316 of 2011 was based on prior trade mark rights and not on the agreements dated 1-4-2007 and 1-4-2010. Further it was also pointed out that the new agreement dated 1-2-2011 records the mutual agreement between the parties that the appellant shall not be eligible to use the trade mark IMS in any form and any breach thereof entitles the respondent to seek legal recourse on violation of trade mark IMS.
5. We are of the view that survival of the arbitration clause, as sought by the appellant in the agreements dated 1-4-2007 and 1-4-2010 has to be seen in the light of the terms and conditions of the new agreement dated 1-2-2011. An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded/novated by a later agreement. The agreement dated 1-4-2010 contained the following arbitration clause:
“20. Arbitration.—All disputes and questions whatsoever which may arise, either during the substance (sic subsistence) of this agreement or afterwards, between the parties shall be referred to the arbitration of the Managing Director of IMS Learning Resources (P) Ltd. or his nominee and such arbitration shall be in the English language at Mumbai. The arbitration shall be governed by the provisions of the Arbitration and Conciliation Act, 1996 or any other statutory modification or re-enactment thereof for the time being in force and award or awards of such arbitrator shall be binding on all the parties to the said dispute.”
6. We have now to examine terms of the subsequent agreement titled “Exit Paper” dated 1-2-2011. It is the common case of the parties that the exit paper/agreement entered into between the parties does not contain any arbitration clause. It is useful to extract the relevant portion of the exit paper, which is as follows:
“With reference to your mail/letter dated 1-2-2011 on closing the centre, from the aforesaid date with mutual consent we have agreed on the following:
1. Enrolled students.—All enrolled students of IMS with you will be serviced by you with respect to their classes, workshops and conduct of test series, GD/PI and any other servicing required as per the product manual.
2. Premises.—IMS will reserve the first right of utilisation to occupy the premises. In an eventuality of IMS exercising the right to use the premises, then IMS will reimburse the monthly rent for the corresponding months before changing the rental agreement on to IMS name.
3. Marketing.—From the abovementioned date you are not eligible to do any marketing and promotional activities in the name of IMS.
4. Brand.—From the abovementioned date you are not eligible to use IMS brand in any form.
5. Monthly claims.—The partner abides to deposit all the course fees collected for any of IMS programs till now as per the deposit policy of IMS. All monthly claims will be settled till 31-1-2011 and the claims would be released after the date of termination of the partner agreement.
6. Security deposit.—The security deposit amount will be refunded back to you after the completion of servicing of all enrolled IMS students. In case of any due on partner to the Company (unsettled fees, loan or advance for centre activities, etc.), same amount will be deducted from the security deposit.
7. Non-compete clause.—The partner has averred that neither he, nor his family members are directly or indirectly interested in any business in direct competition with that of IMS and the partner agrees and undertakes to ensure that neither he nor his family members shall be involved in or connected to any business in direct competition with that of IMS at any time during the currency of this agreement and for a further period of six months thereafter.
8. Full and final settlement.—I/We accept all the abovementioned points and confirm that upon receipt of the sum stated hereinafter in full and final settlement of all my/our claims, neither me/we nor any person claiming by or through me/us shall have any further claims against IMS whatsoever.
Any violation of Points 1, 3, 4, 5 and 7 from the partner's end will attract legal course of action and penalties from IMS ranging from forfeiture of the security deposit and pending claims.
I hereby accept the above terms and conditions.”
7. The exit paper would clearly indicate that it is a mutually agreed document containing comprehensive terms and conditions which admittedly does not contain an arbitration clause. We are of the view that the High Court is right in taking the view that the case on hand, is not a case involving assertion by the respondent of accord a satisfaction in respect of the earlier contracts dated 1-4-2007 and 1-4-2010. If that be so, it could have referred to the arbitrator in terms of those two agreements going by the dictum in Union of India v. Kishorilal Gupta and Bros. AIR 1959 SC 1362 This Court in Kishorilal Gupta case AIR 1959 SC 1362 examined the question whether an arbitration clause can be invoked in the case of a dispute under a superseded contract. The principle laid down is that if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. But where the dispute is whether such contract is void ab intio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity. The various other observations were made by this Court in the abovementioned judgment in respect of “settlement of disputes arising under the original contract, including the dispute as to the breach of the contract and its consequences.” The principle laid down by the House of Lords in Heyman v. Darwins Ltd. 1942 AC 356, (1942) 1 All ER 337 (HL) was also relied on by this Court for its conclusion. The collective bargaining principle laid down by the US Supreme Court in Nolde Bros. case 430 US 243 (1977) would not apply to the facts of the present case.
8. We may indicate that so far as the present case is concerned, parties have entered into a fresh contract contained in the exit paper which does not even indicate any disputes arising under the original contract or about the settlement thereof, it is nothing but a pure and simple novation of the original contract by mutual consent. Above being the factual and legal position, we find no error in the view taken by the High Court. The appeal, therefore, lacks merit and stands dismissed, with no order as to costs.
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